Win the Trade War and Lose on Your Investments

Win the Trade War and
Lose on Your Investments
By www.ProfitableInvestingTips.com

http://profitableinvestingtips.com/investing-trading/win-the-trade-war-and-lose-on-your-investments
The trade negotiations
between the USA and China
are coming to a head.

Will there be genuine gains for
the USA?

We have written how both the
USA and China have issues
that they see as crucial to
their national prosperity and
security in our article about if
the trade war becomes
permanent.

However, neither side wants to
suffer the economic pain that
could come out of a protracted
trade war.

China, especially, is seeing
economic difficulties on the
horizon and needs to do
something sooner rather than
later.

So, there may well be a deal
forthcoming.

However, from the USA point
of view, it is probably possible
to win the trade war and lose
on your investments. How is
that possible?

Win the Trade War
and Lose on Your
Investments

An article in Market
Watch caught our eye.

They note that a trade-war
win might not be a victory for
the stock market!

Sometimes losing can pay
dividends in unexpected ways,
and that seems particularly
true in the case of stocks and
trade.

For the past five decades, the
U.S. stock market has
comparatively outperformed
when the trade deficit widened
and vice versa

suggesting that even if the
U.S. emerges victorious from
its trade war with China,
investors may have few
reasons to rejoice.

At face value, it may seem
counterintuitive, but for the
U.S., which relies on trade to
fuel its economic juggernaut,
a deficit can actually be a sign
that all is well.

They provide a graph that
demonstrates how this has
worked since 1970.

Trade Deficit versus U.S. Stock Price Index

How Will a Trade War
Win Relate to the
Stock Market?

We have no reason to dispute
the figures provided by Market
Watch.

It would indeed appear that
when the trade deficit goes up
that the stock market rises
too.

And the opposite seems also
to be true, at least for the last
half of a century.

But, a relationship does not
prove cause and effect.

In the Market Watch article
they note that when the rest
of the world is doing well
economically and the U.S.A.

is not doing so well, US
exports may rise but US
imports will fall off because
people have less money and
buy less.

So, the balance of trade is
better but the stock market
suffers.

And, when the USA is doing
well economically, people buy
more foreign products and the
balance of trade worsens.

Thus the balance of trade
worsens but the stock market
goes up.

The point is that in the past
both the stock market and the
U.S.A. balance of payments
have been driven by consumer
spending in the U.S.A. albeit
in different directions.

Will this be the case with a
new trade deal?

What Kind of Trade
Deal Can We Expect?

Many believe that as pressure
mounts on both sides to make
a deal, that a deal will happen,
but it will not be as
comprehensive as the U.S.A.
wants or needs.

Both China and the U.S.A. see
trade, intellectual property,
and control of whole economic
sectors as existential issues.

Thus both sides want more
than the other can give.

This especially applies to the
Chinese Communist Party
which fears for its survival if it
gives up its heavy-handed
control of the Chinese
economy and Chinese society.

Thus, there will likely be a
deal and continued wrangling
over issues into the distant
future.

And, to the extent that a trade
deal results in a better balance
of payments for the U.S.A.
that may not be a good thing
for your investments.

But, the reasons might be
different than what Market
Watch describes.

A bone of contention on the
US side is that China makes
promises regarding access to
its markets and protection of
intellectual property and does
not follow through.

The US negotiators want to
build in automatic increases in
tariffs that will kick in when
the Chinese continue with
their old tricks of promising
and not delivering.

It could be that higher tariffs
on Chinese goods may
become a permanent part of
the equation.

Either Trump will raise tariffs
because there is no deal or
tariffs will be triggered by
non-compliance on the
Chinese side.

Tariffs and the
Balance of Trade

Tariffs by themselves do not
affect the balance of trade.

Rather, the consumer’s choice
to pick another product due to
the high tariff-added cost of a
foreign product my result in
purchasing from a domestic
producer.

That is the ideal solution for
the U.S.A. if it wants to bring
more manufacturing back into
the USA.

However, the Chinese have
taken over whole sections of
industry.

For example, 70% of
electronic production capacity
is now in China.

The bad end result of high
tariffs for US consumers is
that they simply pay more for
imports from China because
nobody else is producing what
the consumer wants!

When that happens, it raises
prices for consumers in the
USA but does not help the
balance of payments.

And, because consumer
dollars are now going to pay
for tariffs, it hurts the
economy as well.

If that turns out to be the
case, there will no longer be a
better stock market when
people are buying more
foreign products.

What Can You Do?

One can always hope for the
best, but smart investors will
look for better opportunities.

Those opportunities may lie
offshore from the USA.

Then the issue is how to find
value investments
offshore.

We recently wrote
about investing offshore in
Brazil and in our most recent
article about job cutbacks in
China we mentioned using
foreign direct investment data
from the World Bank as a
guide to where offshore to
invest.

On the other hand, if the
China give ground and really
let US and other foreign
companies into the Chinese
market and if they really turn
around and protect intellectual
property

and if they finally loosen
controls on private industry,
there could be an economic
boom in China that would
benefit any number of US
multinationals.

But, while you are waiting for
an outcome of trade talks, a
little re-balancing of your
portfolio to include a few
offshore stocks might well be
in order.

Foreign Direct Investment in Brazil

Win the Trade War and Lose on Your Investments

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Win the Trade War and Lose on Your Investments