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The Art of Trade War: Lessons for Investors

David Bailin

By David Bailin

Chief Investment Officer

February 25, 2019Posted InInvestments and Equities

Is Donald Trump a disciple of Sun Tzu? Over the past year, various commentators have drawn parallels between the US leader’s trade war strategy and the writings of the ancient Chinese general and philosopher of warfare. In line with Sun Tzu’s classic treatise ‘The Art of War,’ President Trump moved to ‘impose his will upon the opponent first’ by triggering the trade war with China. He has deployed ‘overwhelming numerical strength’ via the threat of tariffs on more than $250bn of Chinese imports. And, he has tried to ‘confuse as to his real intent’ by tweeting his unpredictable commentary upon the progress of talks, and sometimes even contradicting his own negotiators.

Whether or not the US president is indeed a follower of Sun Tzu, his trade war’s early results would surely have made the fifth century BC general proud. China appeared wrong-footed by Trump’s opening onslaught, which came as its own economy was slowing, and while that of the US was still growing robustly. As international trade uncertainty persisted through 2018, China’s growth lost further momentum, with particular signs of weakness in the country’s demand for cars and iPhones.

In recent months, however, the trade battlefield has evened out. President Trump has seemingly suffered from fighting wars on too many fronts. He first lost control of the US House of Representatives in November, became embroiled in a bruising tussle with domestic opponents over his Mexican border wall, and lately backed down over the government shutdown dispute. Following the nasty sell-off in US equities at the end of 2018, there is now a perception that the US is equally vulnerable to a failure to a constructive resolution of the trade war.

At the same time, China’s leadership itself appears to have been acting upon Sun Tzu’s advice, specifically by ‘keeping its own state intact.’ To strengthen the domestic economy, the Chinese authorities have cut taxes and have increased funding for various businesses. In 2019, they may well cut business taxes and fees further, and borrow more in order to fund key projects and mitigate credit risk. We believe that these stimulus measures may provide a potential cushion should the US impose further tariffs on Chinese imports from 1 March. And, unless the US too pursues stimulus measures, the US and other Western economies could suffer more than China from any further tariff escalation.

What should investors do amid these conditions? We believe that many may be underestimating the potential impact of China’s stimulus measures. In our view, trade-sensitive emerging market equities – which suffered heavily from the trade war in 2018 – could benefit most. The same goes for German equities, which have strong linkages to Chinese growth. While the effects may prove strongest in these markets, we believe global equities as a whole could continue to rally in the likely scenario of low US rates and Chinese stimulus. In the words of Sun Tzu, we recommend investors ‘boldly seize the initiative.’

To read CIO Insights: Trading Opportunities amidst the Trade War in full, click here.