You f…g Americans. Who are you to tell us, the rest of the world, that we’re not going to deal with Iranians?
Richard Meddings, Standard Chartered’s Finance Director, said in 2012
America under Donald Trump is emerging as the global bully. Canada, Japan, the United Kingdom, the rest of the EU and for that matter, Mexico – they need to be punished with tariffs. Still, when all is said and done, the spats with these traditional allies likely will be put behind us. That is, after those traditional allies are sufficiently cowed, trade flows are sufficiently disrupted and the world will be somewhat poorer for it.
But the conflict with China may be a permanent one. In my opinion, Trump and his base have an animus toward China that is fundamentally race-based, derived from a fear that the Chinese yellow peril, because of its size and the intellectual abilities of the Chinese population, will eventually replace the US as number one in the world. And a resentment of a China that has supposedly stolen so many American jobs. It’s possible that the number one Trump objective is to hurt China. It’s not really about trade. Trade disputes with China are a smokescreen. Otherwise, for example, why are visas for Chinese students in the United States being restricted when these students pay full tuition and help reduce the trade deficit with China?
The United States wasn’t always a bully. In 1945, the world in so many places was a smoldering wreck. The United States stepped up and put the world back together. No revenge was imposed upon Japan and Germany, the Marshall Plan was rolled out, the international monetary system under Bretton Woods was restored to reasonably working order, and the expansion of Soviet communism was halted without a nuclear war. Global prosperity defined the post-WWII era. Domestically, American immigration policy was reformed in 1965 to allow global immigration and full civil rights were explicitly accorded to all Americans of all races. Yes, there were some American missteps notably in the Vietnamese and the Korean civil wars. But nonetheless, the period from the end of WWII until the fall of the Berlin Wall was overall America’s finest moment, one of which Americans can be proud of and the world should be grateful for.
Those were the good old days.
Actually, the post-Berlin Wall days have not been bad at all. Technology and its offspring, globalization, have driven world prosperity despite the scourge of Islamic terrorism and corporations around the world having to endure the hairshirt of creeping government regulations. I believe objective studies of the income distribution would show that in the US, on an absolute basis everyone benefited in the last twenty-five years although, on a relative basis those benefitting from globalization and tech clearly did a lot better.
Trump’s base is tech illiterate and at least so far doesn’t hate robots, AI, the cloud and all the other tech goodies that are disrupting industries and eliminating some jobs (while creating new ones). In fact, parts of the American Midwest have made extraordinary recoveries and rejoined the global economy. The base isn’t as dumb as Hilary made it out to be. But supposedly the base is convinced they are the losers to globalization, in particular to the Chinese. They want to get even. Even if the US is now at full employment and there are no missing jobs.
China and the World Beware—America Is To Be Feared
It has been fashionable in some circles to opine on a long-term decline of the US. Maybe so but in global affairs, it’s the short run that counts. The United States, which has benefitted enormously from technology and globalization, still has the world’s largest and strongest economy. America’s strong economy gives it several advantages in particular. If it wants to assume a bully role instead of its traditional role as benign keeper of the globe, this should inspire fear.
First, America spends far more than any other country on the military. This has allowed American military bases to circle the world. Senator Ron Paul says the US has military personnel in 130 nations and 900 overseas bases. Some would say these numbers are an exaggeration. But just about everyone would agree that the real numbers, even if lower, are staggering. Some might argue (including President Trump in some moments) that the US will eventually go broke supporting these bases. But “eventually” isn’t tomorrow. For now, whether it’s on the Korean peninsula, the Taiwan Straits, the Middle East or most of Africa, the US military is there or can be there in short order. World leaders can’t forget this.
Second, the US dollar is the main currency used in global investment and world trade. That means all countries and companies have to obey US rules on sanctions and related measures. Or else. Quoted above is an inelegant utterance by an executive from a respected British bank who in 2012 hadn’t quite grasped that his bank cleared all of its dollar transactions through the US and that the f…g Americans could shut the bank down if they so wished. There are no serious rivals for the dollar at this moment. Sometimes the euro is mentioned but given the political instability in the Eurozone, the euro falls short. China several years ago talked about the renminbi replacing the dollar on the world stage but as long as China maintains exchange controls, that can’t happen. (Chinese exchange controls are why for now the Hong Kong dollar will remain pegged to the US dollar.) Yes, perhaps one day some magic cryptocurrency will come along and replace the dollar. But don’t hold your breath.
Third, the US has a near monopoly on semiconductor technology including the design of chips and equipment to manufacture semiconductors. No chips, no mobile phones, no computers. Not only that, Google’s (GOOG) Android operating system runs about 70% of all mobile phones, with Apple’s system running the rest (its iPhones). As the Chinese firm ZTE discovered, if the US companies are not allowed to sell ZTE chips and the operating system doesn’t get updated, ZTE is out of business. Were it to initiate a total embargo on the sale of chips to China, the US could literally shut down the Chinese mobile phone system and indeed the entire Chinese economy. And all those economies in Southeast Asia and India which use Chinese equipment. Of course, then China could shut down production of Apple phones which are all assembled in China. And maybe invade Taiwan where so many chips are actually made. And the US tech industry would be seriously hurt. And the world could descend into depression hell. Or worse.
So What Will Trump Do Next?
Trying to figure out what the American President will do on the international front is an impossible task. Surely being world bully cannot be his true goal. Hopefully, we cannot judge him by the odious anti-Chinese writings of his trade advisor Peter Navarro or the views of his National Security Advisor John Bolton who comes off as an aspiring war criminal.
President Trump has done some great things on the domestic front including the tax bill, appointing conservative judges and department heads and rolling back Obama’s ill-advised net neutrality. He presides over a country with full employment, reasonable growth and low inflation. And now he has his Korean summit triumph. So why does he want to declare a trade war with the world when everything is going so great at home? Why does he want to snatch defeat from the jaws of victory?
In retrospect, China would have been better off not publishing its Made in China 2025 manifesto (just like Amazon (AMZN) shareholders would have been better off if its CEO had not bought the anti-Trump Washington Post). This was waving a red flag (no pun) in front of the Trump people. Actually, even some Obama bureaucrats got worked up over this. China could have proceeded with the same program without the publicity. Get rich but get rich quietly, Deng Xiaoping is reported to have said. Made in China 2025 states goals which would make China the number one tech power in the world and bring the standard of living of its people up to prosperous first world standards. Not unreasonable goals for a country of 1.4 billion (on average) intelligent people and a country which historically for many periods was the most advanced civilization in the world.
Most objective Western economists and tech execs have some doubts about Made in China 2025, not because of its goals but because it is a top-down state-directed program. Such programs don’t have a great track record. Still, in Asia, some top companies, notably Taiwan Semiconductor (TSM) and Samsung (KRX: 005930), began with considerable state help. We’ll see. Meanwhile, China has no choice but to proceed with a crash program to develop its own chip industry. The American companies have proved to be unreliable suppliers because of American government policy. No doubt if successful the Chinese program will bring about oversupply and global inefficiencies but America leaves China no choice.
So What is the Investor to Do?
My advice is to keep investing in tech stocks. Tech is driving the world economy and evolution itself. My preference for US investors would be three-quarters US, one-quarter Asian with Chinese being the focus. No doubt stupid actions by American or Chinese politicians can cause temporary setbacks. No doubt the apparent desire of Chinese and American politicians to separate their counties’ tech industries into separate kingdoms is a negative. But unless the politicians’ lust for stupidity exceeds all rational bounds and the world plunges into depression, the setbacks will be buying opportunities.
However, near term it looks like things may be getting worse, not better in terms of US China relations. It might be prudent to hold off any tech stock buying, especially those with dealings with China ,until this temporary setback is overcome.