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The Dow Jones dropped 3% on Thursday on news of President Trump’s trade sanctions against China, which might seem understandable, except that there aren’t any sanctions yet and the whole thing was well-flagged anyway. The headline in the Financial Times, and just about every other news outlet said: “Trump to impose 25% tariffs on $60bn of Chinese imports”, which is obviously pretty alarming. A trade war between America and China would seem inevitable, as well as very bad indeed. The venerable Economist even reported: “President Trump announces tariffs on Chinese goods”. Well, that’s not quite true. I’ve read all the actual material coming out of the White House and tariffs have not been announced, and there’s no mention of $60 billion. There’s no announcement of tariffs of 25% in the memorandum that trump signed either – that figure is contained in a “Fact Sheet” published later, which says: “President Trump’s Administration will propose for public comment adding 25% additional tariffs on certain products that are supported by China’s unfair industrial policy”. “Will propose for public comment” is not exactly an announcement. I presume the $60 billion number comes from the next paragraph of the Fact Sheet: “Sectors subject to the proposed tariffs will include aerospace, information communication technology, and machinery”. I suppose journalists have added up all the Chinese imports in those sectors and come up with $60 billion, but that’s not clear in any of the articles I have read on the subject. That is, all the articles quote tariffs on $50 billion or $60 billion worth of imports without saying where that number comes from. You might think I’m nitpicking and that both the reporting and the market reaction are fair enough given the gravity of what’s happening. But I reckon investment decisions need to be made on facts rather than headlines that are, after all, designed to sell newspapers and generate ratings and clicks rather than to inform. Will there be a trade war? Maybe, but we’re a long way from the US actually taking action and even further from some kind of retaliation by China. It’s worth listing what the Section 301 investigation of China (unfair trade practices) that Trump commissioned last August has actually found, since this what this week’s announcements were based on and also because it also applies to Australia. This is an edited extract from the memo that Trump signed on Thursday:
- “First, China uses foreign ownership restrictions, including joint venture requirements, equity limitations, and other investment restrictions, to require or pressure technology transfer from U.S. companies to Chinese entities. China also uses administrative review and licensing procedures to require or pressure technology transfer…
- “Second, China imposes substantial restrictions on, and intervenes in, U.S. firms’ investments and activities, including through restrictions on technology licensing terms…
- “Third, China directs and facilitates the systematic investment in, and acquisition of, U.S. companies and assets by Chinese companies to obtain cutting-edge technologies and intellectual property and to generate large-scale technology transfer in industries deemed important by Chinese government industrial plans.
- “Fourth, China conducts and supports unauthorized intrusions into, and theft from, the computer networks of U.S. companies. These actions provide the Chinese government with unauthorized access to intellectual property, trade secrets, or confidential business information, including technical data, negotiating positions, and sensitive and proprietary internal business communications, and they also support China’s strategic development goals, including its science and technology advancement, military modernization, and economic development.”
My view: numbers 1 and 2 are pretty obvious and unarguable. I’m not sure there’s anything wrong with number 3 – isn’t that what everyone does? Beijing will protest most about number 4 – they have to really. IP theft is a serious charge. We all know it’s going on and it’s well organised, but this is going to be the flashpoint for the trade war. If Beijing gets outraged about being accused of IP theft but then quietly stops doing it, even for a while, then no trade war. If they get outraged and keep doing it, and the Trump Administration moves from proposing tariffs for public comment to actually imposing them … well, then all bets may be off. The most important thing for investors in the meantime is to not mistake headlines for truth. *This blog is from Alan Kohler's 'The Constant Investor' weekly overview. A website I'd encourage everyone to subscribe too for a good, well balanced read on all things financial.
