In a U.S.-China Trade War, China Loses

 | Jan 17, 2017 | 3:00 PM EST
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Based on inquiries I've received concerning the rhetoric coming from China's government and Donald Trump concerning the relationship between the two countries it appears that there is a lot of angst concerning possible market repercussions if the rhetoric keeps ratcheting up. 

Some of this is probably due to the comments from Chinese President Xi Jinping at the World Economic Forum this week.

I last addressed the relationship between China and the U.S. a few weeks ago in the column "China Needs U.S. More Than U.S. Needs China," but I've written many columns about it over the past several years, some of which are no longer in the Real Money archives.

One in particular from 2010, "China: We've Been Here Before," outlines the history of the relationship the West has had with China since the early 1800s. If you would like a copy of it please send me an email to rogerarnold@gmail.com and I'll forward it to you.

The point of the column was to show that the pattern of that relationship is and has been repetitious, and although I did not deal with it in that column the pattern predates the 1800s as well.

The most fundamental part of that repeating pattern is that as China's trade with the West increases a trade imbalance develops that leads to political and economic tensions. That, in turn, has traditionally resulted in a military conflict that China loses.

That pattern has again been developing over the past several years and long predates Trump's comments.

It's also not as simple as just bilateral trade between China and the U.S., as I addressed in the column "Assessing Afghanistan in 2011," "Putin's Endgame Begins in 2014" and "Greece, China, Russia: The Games Countries Play in 2015."

I urge you to read all of those columns again.

The George W. Bush administration chose not to challenge the trade and other developing imbalances, as did the Obama administration.

The responsibility, and now necessity, for doing so has fallen to Trump and it appears as though he is going to engage strongly on the subject.

I think it's terribly disheartening that the majority of the U.S. media coverage of his doing so has evidenced politicization of the subject that is clearly predicated on anti-Trump proclivities, regardless of reality. I assume that that coverage is one of the principal drivers of the angst expressed by subscribers sending me inquiries concerning it.

So, I'll be very clear here. If China engages in a trade war with the U.S., China loses and potentially with catastrophic domestic economic consequences for the country and its leadership.

One of the reasons for that is that if such a situation were to arise the rest of the world would side with the U.S. because China has been treating foreign investors from Europe and their trading partners in the Asian arena the same way they've been treating the U.S., with all of them acquiescing to the situation because the U.S. has.

If, however, such a trade war is to materialize it is politically prudent for the U.S. to nurture a stronger relationship with Russia simultaneously in order to encourage the Russians to pursue U.S. relations versus those with China.

Helping to encourage the Russians in making that decision is the potentially deleterious impact on their economy of the U.S. alternative oil producers becoming the global marginal producer and thus price setters for oil. I discussed this in my column "If Oil Prices Don't Rise, the Middle East Will Sink."

On the subject of China selling U.S. treasuries I would suggest watching a video in which I discussed the issue over four years ago when speaking to the Entrepreneur's Organization.

It's just the first 10 minutes or so of the video and the situation remains the same today.

Having said all of this, I am hopeful that the Chinese and other U.S. trading partners will realize that the largess in political and economic relationships the U.S. has had with them cannot only not be afforded by the U.S. any longer, but that they are also harmful to the economic ambitions of those countries.

For now, investors need to be mindful of all of this as the situation continues to evolve, and to not be distracted by the media's doomsday scenarios with respect to the Trump agenda.

Although I've repeatedly advised avoiding China, if you want speculate on the subject of this column I suggest considering again the Chinese inverse ETFs I discussed in the column. If You must invest in Chinese stocks (a bad idea), try these ETFs: ProShares Short FTSE China 50 (YXI) , ProShares UltraShort FTSE China 50 (FXP) and Direxion Daily FTSE China Bear 3X ETF (YANG) .

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