|Investors have a lot to worry about right now. In April, US retail sales suffered their biggest decline on record, down 16.4%. Deflation scares are running rampant with producer and consumer prices plunging. Manufacturing and industrial production dropped precipitously last month, and we have a record rise in unemployment. And to top it off, it appears tensions with China are rising. How big of a problem is this? Potentially, huge. The US Commerce Department on Friday denied Chinese tech firm Huawei Technologies access to semiconductors that use U.S. technology. Will there be a response? Some analysts expect that China could retaliate against U.S. companies such as Qualcomm or Cisco Systems. And to add to that, the Trump administration has ordered the federal employee retirement fund not to invest in indexes that have Chinese companies included. The U.S. government said that China could be sanctioned for “culpable actions of the Chinese government” regarding the coronavirus’ spread across the globe. And sentiment against China within the US Congress appears bipartisan, despite the fact that China owns over $1 trillion in US Treasury Bonds.
This is a significant problem because the U.S. and China are dependent upon each other for economic growth – unlike the cold war between the U.S. and Russia in past decades. If the US-China trade war escalates, we may be in for a severe economic contraction – something no one wants. The reality is that point-counterpoint is the new normal. Given recent rhetoric, the view of most within the U.S. government is that Beijing is seemingly an “evil empire”.
For its part, China’s state-controlled media is claiming the communist regime is superior to democracies by pointing out that the West is struggling to control the outbreak, while China contained the virus. De-globalization could accelerate an unwelcome economic break between the two countries. According to Reuters, the U.S. government is considering measures to cut dependence on Chinese supplies. Moreover, the Trump administration plans to use tax breaks and state subsidies to provide the impetus for U.S. companies to relocate production and procurement operations back home.
Is there a solution to the impasse? One hopes. On the one hand, China appears “dead set” on becoming a global superpower. One solution is that they back down from this desire to change the world order. On the other hand, the US is clearly fighting the rise of Chinese power. Another solution is that the US accepts that China’s rise is inevitable. This appears unlikely.
Like with most “negotiations”, the result will hopefully fall somewhere in the middle. This would be a positive outcome to ensure continued global economic growth. We will keep you posted as events unfold.