Trade Policy with China

Susan Jung |

With a new administration poised to begin on January 20th, it's understandable that many wonder how trade will be affected with China in a new administration. We've been giving this a lot of thought as it does impact investment strategy going forward into 2021.
Tariffs and Record Trade Deficit

It's important to recognize that the trade tariffs that were implemented by the current administration did result in some tangible adjustments to China-U.S. trade policy. While there is no doubt this does have some negative affect on the United States (increased prices as costs are passed on to consumers and businesses), they have led to additional concessions from China to help balance trade between the two countries. 
Still, there is lots of work to be done. Evidence of that was a recent announcement by China that they have a record trade surplus.

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"China’s global trade surplus for the first 11 months of 2020 is $460 billion, up 21.4% from this time last year, already one of the highest ever recorded. Exports to the United States rose to $51.9 billion while imports of American goods gained 33% to $14.6 billion. The trade surplus with the United States swelled 52% over a year earlier to $37.3 billion."

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Source: December 6, 2020, AP News
By Joe McDonald   
Remember the reason that trade deficits exist is because of the fundamental differences between the US and Chinese economy. Labor costs are dramatically lower in China coupled with much looser regulations (including environmental and worker protections).  The consequence is costs are lower to produce assets in China. This doesn't mean this is a good thing as there are patriotic reasons why we would like more manufacturing to happen in the United States.  Still, the reality is businesses go where costs are cheap. China is cheaper.
Next Phase

The recent pick for the top US trade representative, who will work directly with China, is a noted critic of China trade policy. I do not expect a rollover by this new administration regarding China policy. It's also been announced the tariffs initially will not be removed.  
"Biden picks longtime China critic Katherine Tai as top U.S. trade official"
Source: December 10, 2020,
By: Thomas Franck   
In the end, we will just have to watch and see what the administration does and what China's responses will be to new policies and pressures. In our view, it is imperative that the United States continues to do all it can to level the playing field in terms of trade between China and the United States.

Trade Policy and Portfolio Strategy

We monitor trade issues very carefully because it does affect investment strategy. Growing China affluence tends to positively impact US exports particularly for assets that are perceived to have high quality brand value. We also believe trade policy can affect certain industries based on higher import costs related to tariffs and there are other economic consequences related to trade. 
One of the reasons why we are underweight in emerging markets relative to our usual allocation targets is our belief there will be headwinds for some emerging market economies as the United States and Europe seek to rebalance trade relative to low-cost production countries. This rebalancing will have a GDP impact which means economic growth will be impacted which can influence the value of assets in capital markets.
We will continue to monitor and assess conditions as they morph. We will watch the posture of the new administration as they engage with China on a variety of issues. This will give us indications of where trade policy is headed and what impact that might have on investment portfolios and portfolio strategy.

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