Why Ending the Trade War May End Global Trade

China doesn’t like genetically modified organisms (GMOs).

And I find that incredibly strange.

They house a fifth of the world’s population and have just 7% of the world’s arable land.

Not only is China feeding more than a billion people. They’re feeding billions more pigs, cows and chickens.

But why not import less grain and use that 7% of land more efficiently? Use GMOs to boost crop yields…use them for pests and weather resistance…

That way you don’t have to import mountains of soybeans from the US.

Yet China refuses. They’ve put a blanket ban on cultivating GMOs, although some find ways to get around it.

Importation of GMOs also isn’t China’s bag.

They do import some GMOs. But it takes a very long time for approval of any new GMOs for import.

And it makes American producers angry to no end. China has the biggest potential for GMOs. Most US producers wait until China approves a GMO for import before even starting production.

Recently, however, China approved five GMOs for import. Around the same time, Trump tweeted that trade negotiations were ‘going very well’.

Are we finally about to see the tail end of this war?

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Why an agreement between the US and China won’t matter

A full-blown trade war is just like any other. War is easy to start and very hard to end.

What you’re seeing now are trade tensions. The US and China are giving each other a taste of what war might be like. And it tastes bitter on both sides.

On Tuesday, I talked about the effect already gripping China. Here’s a snippet…

If you needed any more proof that China is hurting, the red nation is about to flood their economy with cash.

According to South China Morning Post (SCMP), China’s central bank is going to cut required reserves. This is the level of cash which banks are mandated to hold.

The idea behind these reserves is to make sure banks have enough cash when times get tough. Playing with this ratio can also be a relatively quick way to increase or reduce the amount of cash circulating in an economy.

Lower reserves are very similar to lower interest rates. Lenders are encouraged to lend. More money circulates the economy. And China hopes it will lead to the creation of new goods and services: growth.

Many expect the same for the US. Economists think the economy will slow down in 2019. They may even see a recession in 2020.

It’s why both nations want an agreement as quick as possible.

Xi doesn’t want China to slip below 6% growth. So now he has to manage this balancing act: keeping business production up while the US buys less.

And Trump wants the stock market to return to its former glory, while keeping his voter base happy. To do both, he needs China to start buying more American goods, including grain in bulk.

So far Trump is getting his wish. US stocks are up almost 3% as we kick off 2019. And they’ll probably continue rising if more good news comes from Trump and Xi’s negotiations.

But it won’t matter. This is not the big event that will change things for investors. No, there’s something that’s been quietly working in the background. Sooner or later it will come to the forefront.

But then, it will be too late.

What can you expect to see?

For the longest time, production of goods has been ratcheting up year after year.

We’re getting more efficient at making things. We still need some humans to work the machines and man the factories. But each year labour requirements are getting fewer and fewer.

Automation and robotics are making these jobs redundant.

It’s going to cause big problems for countries like China, Japan and South Korea. All three are export powerhouses.

They’re all great at producing stuff because of a few key advantages. For China, that advantage is labour. They’ve got a lot of it and it’s cheap.

But what happens when efficiency gains eliminate that advantage? What happens when the US no longer needs China to make cheap goods?

They’ll have automated factories with robot arms doing all the work. And these factories will be in-house.

When this happens, global trade will be thrown into reverse.

Once automated processes and robotics take over, cheap labour will be redundant. Producers will set up shop in the West.

It will soon be China (if they don’t catch up) begging US manufacturers to ship over higher value goods. Stuff like aeroplanes and specialised industrial equipment.

Instead of globalism, you’ll be living in a world with a local focus. Producers will be local, service providers will be local.

Companies will race to build local dominance. And it will likely be the local leaders that generate a bulk of the profits.

Leading up to this reality won’t be pretty. There will be a lot of uncertainty and fear. Unemployment could pick up. Asset prices might fall hard. Investors will think the world is about to an end.

Sure, we’ll all be better off in the end. But it’s going to be a harrowing journey getting there.

Prepare yourself,

Harje Ronngard,
Editor, Money Morning

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Harje Ronngard is the lead Editor at Money Morning. With an academic background in finance and investments, Harje knows how simple, yet difficult investing can be. He has worked with a range of assets classes, from futures to equities. But he’s found his niche in equity valuation. There are two questions Harje likes to ask of any investment. What is it worth? And how much does it cost? These two questions alone open up a world of investment opportunities which Harje shares with Money Morning readers 5 days a week.. Harje also contributes his insights in Total Income, headed by income specialist Matt Hibbard. Harje loves cash-rich businesses, so he feels right at home among Matt’s incredibly exciting income plays.


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