Trading Places


Jefferson V. DeAngelis

Jefferson V. DeAngelis

Trading Places

December 20, 2019

Although likely not the first movie on your list of holiday favorites, Trading Places has developed a Christmas cult following. Though not strictly a Christmas movie, much of the story unfolds around the holidays, and it does deliver on holiday-appropriate themes of inclusiveness, forgiveness, redemption and friendship. The comedy, starring Dan Aykroyd and Eddie Murphy, tells a fish out of water story of the wealthy Duke brothers making a bet, for $1, premised on nature versus nurture. They bet whether stripping their stuffy, elitist trader Louis Winthorpe III (Aykroyd) of his material possessions and giving them to homeless criminal Billy Ray Valentine (Murphy) would indeed alter the ability of the men to succeed. Once aware of the bet, Louis and Billy Ray team-up to turn the tables on the Dukes and, in the end, give them a fitting comeuppance.

While worth a watch this time of year, the broad theme of the film – literally trading places – seems to be occurring across the global economy. In some cases, countries are being much more forceful in bringing about this change. A notable example is the “Made in China 2025” strategic initiative passed by the Chinese government to direct its manufacturing capabilities to higher value-added products and services in direct competition with the United States. China intends to produce products and services to directly service its internal consumption at the expense of foreign competition. Given the magnitude of its population and the potential consumer demand of its markets, China could easily surpass the United States as the dominant economic power during the next Century.

This future reality is not lost on the Trump Administration, and other U.S. China hawks, as they attempt to stall China’s progress in reaching its goals through trade policy and punitive tariffs. The Chinese need access to foreign technology to achieve their goals. Their disregard for intellectual property rights is critical to the success of their goals and a source of great frustration to foreign governments wanting to do business in China. Foreign companies seeking short-term market penetration have been too willing to surrender intellectual property as a condition of gaining access to these lucrative markets. Foreign governments are particularly worried about the transfer of technology and the theft of intellectual property rights. The Chinese hold a strategic advantage given their ability to focus on a longer-term horizon. Furthermore, the Communist Party has autonomous control of the political and legal systems and can regulate the means of production.

Markets are said to climb a wall of worry. So why not create a wall of worry so that the markets have something to climb. The U.S. engaged China in a trade war to create fair and balanced bilateral trade between the two countries. At its outset, the U.S. initiated tariffs on Chinese imports. The Chinese retaliated with a reduction in agricultural purchases. The U.S. mission intended to be comprehensive in its approach, with U.S. negotiators intent to go beyond mere trade surpluses and deficits. They sought a much more structural agreement covering intellectual property, technology transfer, financial services, foreign exchange, and an enforcement mechanism. The Chinese motives were clear too. They aimed to negotiate a partial deal restoring a previous relationship in which the Chinese would purchase agricultural goods voluntarily and there would be no tariffs. The Chinese sought to protect their sovereignty and their 2025 plan for economic development from U.S. interference.

Despite months of false hope, failed negotiations and name-calling, the two countries have arrived at a phase one trade deal. Or have they? Publicly, they have at least agreed to agree even if details have yet to emerge. News reporting suggests the phase one deal is at best a reduction of tariffs by the U.S. to procure Chinese purchases of agricultural products. But even that is subject to interpretation. The U.S. says it will not implement the tariffs scheduled for December 15. The Chinese announced that the U.S. will “step by step” further reduce tariffs. The U.S. has reported numerous times that the Chinese agreed to purchase $50 billion of agricultural products. The Chinese have not publicly committed to any numerical targets.

Why were the U.S. and China so anxious to reach a deal? Politically, the China trade war was a positive for the Trump Administration. The policy of punishing China for past transgressions has bi-partisan support from a very divided political system. The economic fallout domestically in terms of GDP was minimal. Trump’s favorite barometer, the U.S. stock market, is at record highs. Perhaps, the Administration feared, for good reasons, that further escalation of trade tensions would prove untimely for the election. Signs of slowing global growth and a decline in business investment were starting to appear. The next round of tariffs could jeopardize Trump’s reelection chances if economic conditions worsened or stocks retreated. The negotiators likely all came to the same conclusion. They were not going to get anything else from the Chinese now and sought a partial win.

Meanwhile, the Chinese were always willing to trade tariffs for agricultural purchases. From the beginning, they sought a partial deal. The economic pressures on the Chinese were somewhat greater. President Xi did not welcome the distraction of the trade war in concert with the uprisings in Hong Kong and domestic tensions. By giving Trump a deal of little strategic consequence, Xi can postpone negotiations into the more complicated issues. Remarkably, Trump’s euphoria in reaching a partial deal may delay or eliminate the need for further talks. China can afford to play the waiting game given the political reality that the political winds within the U.S. change so frequently.

There is a better chance that the deal falls apart in the first quarter of next year than of both parties reaching the comprehensive trade deal that the Trump Administration seeks. China is unwilling to surrender its plans for economic dominance. It is going to take far more pressure from the U.S. than tariffs to undermine China’s potential to upgrade its manufacturing capabilities and better service its domestic demand.

The world needs to adjust to the reality that the markets of the developed world are mature. Emerging markets, and particularly China, hold the potential to be the fastest-growing markets in the world as standards of living improve and vast populations expand their knowledge and wealth. We must get used to the idea that we are trading places. The developing world is no longer the means of production fueling the consumption engine of the developed world.



To download the PDF version, click here: 2019-12 Trading Places

©2019 Northwest Passage Capital Advisors LLC. All rights reserved.

2019-12-20T13:36:38+00:00 By |