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Market Not Prepared For Protracted Trade Dispute With China

Investors have been laboring under a dangerous illusion about the prospects for a trade deal

Investors have been operating under the delusion that the only sticking point in the ongoing trade dispute with China is to iron out some small differences, or for the other party to end the posturing or hard core negotiating tactics.

Trump’s threat to impose tariffs, should wake the market out of its slumber, because, should the Chinese not end their bad faith negotiations, he is going to impose them come Friday — as he should. Analysts and investors have believed that since the issue has been a continuing cloud over the stock market, Trump would bend a little in his negotiating posture, as every president before him, have not been paying attention and have failed to realize that Trump isn’t bluffing.

There is an excellent article in yesterday’s Wall Street Journal that does an exemplary job of explaining the substantive differences between the parties. It’s a must read regarding the economic, military and strategic divergences between the two countries that explains president Trump’s unyielding posture. Induced by the euphoria of an unbroken ten-year bull market, investors have been living in a dream world in their expectations that trade differences, at some point, will be resolved. What happened on Tuesday brings the entire matter into focus. The Chinese sent back a draft trade agreement deleting all major commitments it had previously made. As reported by Reuters,

The document was riddled with reversals by China that undermined core U.S.

demands, the sources told Reuters.

In each of the seven chapters of the draft trade deal, China had deleted its

commitments to change laws to resolve core complaints that caused the United States

to launch a trade war: Theft of U.S. intellectual property and trade secrets; forced

technology transfers; competition policy; access to financial services; and currency


U.S. President Donald Trump responded in a tweet on Sunday vowing to raise tariffs on

$200 billion worth of Chinese goods from 10 to 25 percent on Friday – timed to land in

the middle of a scheduled visit by China’s Vice Premier Liu He to Washington to

continue trade talks.

The United States said on Wednesday the higher tariffs would go into effect on Friday,

according to a notice posted on the Federal Register.

The Chinese have reneged on trade provisions and agreements since they entered the World Trade Organization; they have no intention now of giving up the unfair trade practices that have helped make them to the world’s second largest economy. And, why should they? The U.S. has encouraged such predatory behavior by looking the other way.

The reason the markets are jittery, is because Trump is unlike previous presidents, Republican and Democrat alike, who have capitulated when China blatantly refused to comply with preexisting trade protocols.

Undoubtedly, one of the reasons for China’s dilatory tactics, is that they are hoping the next president will buckle, as every other president has done in the past, and agree to China’s terms, as a precondition for conducting business in their country.

The Chinese have built up their economy, in part, by stealing U.S. intellectual property , deliberately hacking into the systems of U.S.defense contractors, stealing military secrets and refusing to end their practice of forced technology transfer. That is the way China does business. Trump wants to put an end to this chicanery.

China’s rapacious mercantilist practices, that it pursues with impunity, is noting more than economic warfare. In short, our political elites have given China the keys to the kingdom and now the consequences of such a manifestly suicidal trade policy are coming to the fore.

The stock market is not ready for the consequences.

The Chinese are our strategic, military and economic adversaries. The sooner investors’ are disabused of their illusion that mutual self-interest will prevail for a trade agreement, the better.

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