For those of you shaking your heads about what is currently happening with China and how it is affecting the market, let me offer you perhaps a more global perspective courtesy of one of my favorite sources, George Friedman. I am currently in Dallas at the Strategic Investment Conference. Many of you know that this is my favorite investing event of the year and I have been a perennial attendee for 10 years now. Not only do I get to listen to some of the greatest minds in global finance but I get to talk to them over a glass of wine and pick their brain. So let’s talk Trade Wars.
I am going to remain politically agnostic on this because this is not about our current President or his tactics, this is about a fundamental change in US Foreign Policy. Between 1989-1992 a whole lot of things happened. We saw the Cinderella story of a country (Japan) who would try to take over the world, end in grand fashion. We had operation Desert Storm from which Al Qaeda was created, we had Tiananmen Square, we had the Maastricht Treaty creating the EU, but most of all, we had the fall of the Soviet Union. For the first time in 500 years, Europe did not emerge as a global super power and the US stood alone on that stage. We became a de-facto Empire and inherited all of the responsibilities thereof. It mattered to the rest of the world what we did, and this changed the geopolitical architecture of the world. We didn’t necessarily want the role but we were okay with the benefits.
We have the greatest military might on the face of the planet and yet although involved in many wars, we have not won a war since WWII. Why is this? Well, as the world police, we need to be virtually everywhere and we got spread too thin. The problem with wars is that they then become dictated by the enemy wherever they may be. They poke us and we have to respond in some way. The essence of global power survival is based on military might, economic dominance and humanitarian principals. There are two forms of war, military and economic. I think given the track record of Korea, Vietnam and the Middle East, where we certainly had abundant military might, we can see that this has been a rather ineffective method of keeping the peace.
The United States represents about 25% of the global economy. That is HUGE! Further, we have become a horrible exporter which has worked in our favor. Currently the US exports account for about 12% of GDP and half of that is exported to our neighbors, Mexico and Canada so that leaves about 6%. Compare that to Germany whose exports account for over 50% of their GDP. China has the same problem. When you are an exporter, you are at the mercy of your customers to keep buying your goods and this is a very vulnerable position.
The US is also the largest importer of goods. Bottom line, we can do a lot to mess with our suppliers ability to have economic stability by messing with their trade. Hence, this is indeed a “trade war.” While it may hurt to pay more for some of our goods, we can sustain it and it is cheaper and more palatable than sending our men and woman off to war. China is desperate to take control of the South China Sea. They have been aggressively at this for some years and we must keep control of the Atlantic and Pacific Oceans to maintain our safety as a nation. A blockade of any kind in the South China Sea cripples China’s ability to trade with the rest of the world. The South China Sea is not only their life blood, but the development of the Silk Road and other projects has been their plan for decades. Bottom line, China exports just under 5% of their GDP to the US. They need us more than we need them.
While it is true that Xi Jinping has essentially made himself emperor for life and our elected President gets a max of 8 years, this is a policy shift more than a presidential edict. In effect this renegotiation of trade treaties that was essentially put in place following WWII is potentially crippling to the plans of the Chinese. Such trade wars also hold our military in reserve and gives us more options. The same is true in Iran. The economic sanctions are crippling them while we have our allies in the region standing by with their troops and we have the option to help if needed.
While this may be unsettling to watch with regard to stock market volatility, it is probably not only in the best interest of the country but arguable a coherent sustainable policy. Sometimes it’s good to be king.