Soooo… What’s This Trade War Even About?

We’ve all seen the headlines that dominate much of today’s financial media.

Trump’s trade war THIS… Trump’s trade war THAT…

The saga with China has been going on for more than two years now! And even though a “Phase One” deal is reportedly in the works, nobody seems too confident that a final deal will get inked anytime soon.

So what exactly does the White House want from China in order to end the madness?

Today, I’m explaining the four key points that U.S. negotiators are pressing for. Hint: none of them have anything to do with soybeans…

#1: Stop Stealing Intellectual Property

For decades, Chinese firms have stolen trade secrets, design likeness, and proprietary software from U.S. companies.

In turn, they used this stolen property to create counterfeit goods and competing software products that undercut U.S. companies — without having to spend a dime themselves on research and development.

The problem is so rampant that a 2015 paper by the Federal Reserve Bank of Minneapolis concluded that more than HALF of all technology owned by Chinese firms was obtained from foreign companies.1

They’ve accomplished this feat in several ways.

First, China has a long-standing law in which any international company that wishes to do business in the country must form a joint venture with a Chinese company.

When the partnership is formed, the international company then shares its technology, which is then shared with the Chinese government and spread throughout the country.

This is madness and would be highly illegal in any other country. Yet companies are forced to comply in order to gain access to China’s massive consumer base.

Second, Chinese hackers are notorious for stealing valuable intellectual property via cyber attacks.

In fact, one in five North American-based corporations on the CNBC Global CFO Council says Chinese companies have stolen their intellectual property within the last year, and nearly one in three companies surveyed say that Chinese firms have stolen from them over the past decade.2

And it’s not just U.S. companies that are the target of Chinese hackers…

China has stolen top secret data on submarine warfare, sensitive data on the F-35 Joint Strike Fighter, and data from numerous other U.S. weapons systems, making the U.S. government one of China’s primary targets in its quest for advanced technology.

All in all, intellectual property theft by China currently costs the United States between $225 billion and $600 billion annually, according to the Office of the United States Trade Representative, which is why President Trump is finally putting his foot down on this ongoing issue.

#2: Stop Unfairly Subsidizing Chinese Industries

Aside from cyber attacks targeting the proprietary software and trade secrets of U.S. companies, there’s another way the Chinese government unfairly turns the tables in their favor: by subsidizing Chinese industries.

Chinese steel and aluminum industries are the big two that come to mind here.

For years the Chinese government has thrown billions of dollars at Chinese metal producers in the form of free or low-cost loans, artificially cheap raw materials, and support for R&D and technology acquisitions.

This has allowed them to operate at a loss while dumping massive amounts of cheap metal onto the global market to gain market share.

And it’s worked out in their favor…

Since 2000, China has gone from producing just 16% of the world’s steel to now producing more than 50%.3

And it’s not just the metals market that is being impacted by these subsidies.

Chinese paper companies, chip makers, auto companies, solar panel manufacturers, airlines, electronics manufacturers, you name it, receive subsidies in one form or another from the communist government, which allows them to produce goods and services at artificially low prices.

Couple these subsidies with China’s cheap cost of labor, and it’s no wonder why U.S. manufacturers can’t compete anymore!

#3: Stop Manipulating the Chinese Yuan

We’ve already talked about two ways that the Chinese unfairly turn the tables in their favor on the company and industry level. Now let’s talk about how the government can benefit the entire Chinese economy in one fell swoop: by devaluing their currency.

Here at The Daily Edge, we’ve talked about the benefits of a weaker dollar for U.S.-based companies that sell goods abroad.

A weaker dollar makes U.S. products more attractive to international buyers because it takes less (let’s say) euros to buy the same amount of goods in dollars.

The same goes for the Chinese yuan…

The weaker the yuan, the more attractive Chinese goods become to foreign buyers. That’s because they can now buy the same amount of goods for less of whatever base currency they’re using.

Now, the value of the U.S. dollar is determined by supply and demand. But the Chinese yuan, on the other hand, is subject to constant manipulation by the Chinese government in order to make Chinese goods more competitive globally.

The Chinese have a long history of manipulating their currency. And if you think back, you’ll remember that “labeling China a currency manipulator” was a big topic of discussion around the 2016 election.

Fast forward to today, and China last devalued their currency in April, and I bet they won’t think twice to act again if tariffs keep slowing their economy.

#4: Crack Down on Fentanyl Shipments to the U.S.

This is probably the easiest to solve as it doesn’t run the risk of crippling China’s artificially-inflated economy.

Fentanyl is a cheap, opioid painkiller 50 times more potent than heroin. And it’s rising in popularity in America. Whereas a full day’s worth of heroin could cost hundreds of dollars to the average user, a day’s worth of fentanyl can cost less than $20.4

Last year alone, Customs and Border Protection agents intercepted 985 kilos of fentanyl being smuggled into our country — enough to make nearly 500 million pills.

U.S. officials have labeled China as the main source of illicit fentanyl, and proof of this isn’t hard to find.

However, the Chinese government continues to reject the idea that China has played any role in America’s fentanyl crisis. Chinese officials have claimed that the United States’ problem is “liberalism,” because “some people link drug consumption with freedom, individuality and liberation.”

Fortunately, this viewpoint isn’t flying with the Trump Administration.

Fentanyl is a growing problem in our nation and Trump wants action.

And like all the points listed above, Trump doesn’t want just a verbal agreement that will allow China to get off the hook without taking action.

Trump wants verifiable change that will level the economic playing field between our two countries and stop cheap opioids from being dumped onto our shores.

Until this happens, I do not foresee a final deal getting signed anytime soon.

Here’s to keeping your edge,

Davis Ruzicka

Davis Ruzicka
Managing Editor, The Daily Edge

1 What Is Intellectual Property, and Does China Steal It? WaPo
2 1 in 5 corporations say China has stolen their IP within the last year: CNBC CFO survey, CNBC
3 Global crude steel output increases by 4.6% in 2018, World Steel Association
4 The China Connection: How One D.E.A. Agent Cracked a Global Fentanyl Ring, NYT

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Davis Ruzicka

Davis Ruzicka is the Managing Editor of The Daily Edge. Davis is an experienced value investor with a degree in Finance from The University of Maryland. Today, Davis is pursuing his Chartered Financial Analyst (CFA) designation in his spare time while continuing to learn from seasoned investors Zach Scheidt and Alan Knuckman.

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