The Most Dangerous Setup

By necessity, today’s topic will venture into the world of politics, so I warn you now – you might be offended. Actually, I have decided to cut jabs at all politicians, so if you feel like your team has been maligned, just read on, I will probably be even worse to the other side.

I want to speak about the recent “trade wars” that the Trump administration has set in motion. There can be no denying that America has ventured down a road of adversarial trade renegotiations not seen in decades. I am not making any judgments about this policy – it is what it is. But to think it doesn’t have profound implications for your portfolio would be naive.

What I used to think

Previously, I believed America’s trade stance was just Trump doing his “Art of the Deal” negotiations. You know – insult your opponent, be belligerent and take extreme stances right until the very end, at which point you just cut the best deal available.

It seemed to me that Trump was simply renegotiating all the trade deals to gain the maximum advantage. He was elected on a populist platform and he considers himself quite the deal-maker, so I thought it would be a little rocky, but that at the end of the day, deals would be reached and the result would be a slight shift a little more in America’s favor.

Yet I am rethinking that viewpoint and let me tell you why.

Collision course with China

Let’s start with the obvious. Trump can insult Canadian leader Justin Trudeau all he wants, but it won’t stop us Canadians from making a deal. Sure, we won’t like it, but we will bite our lip and negotiate the best agreement possible.

Yet Trump’s tactics don’t play as well in China. In Asia, saving face is much more important, and it is foolish to believe the Chinese government will be anywhere near as accepting to Trump’s insults and antagonistic behavior. Don’t forget that Chinese leader Xi has proclaimed himself “paramount leader” and can plan in decades instead of worrying about the next election cycle. For China, sitting through a couple of years more of a Trump administration without cutting a deal so that “face is saved” is completely acceptable. Especially when Trump continues to behave so disrespectfully.