By Michael Brush, MarketWatch
With Chinese trade negotiator Liu He in Washington, D.C., this week, trade talks can pop up again as a key factor for the markets at any moment.
This matters if you have money in stocks, because temporary setbacks on trade have hammered the S&P 500 Index /zigman2/quotes/210599714/realtime SPX +0.41% and the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.60% in a heartbeat. Progress has sparked meaningful rallies.
The good news is that ultimately it’s pretty much a “no brainer” we will see a trade deal (see below). The real question is whether we get a fake deal, or enough of a deal to satisfy inventors that trade wars won’t keep coming back like Zombies to spook the markets and darken the global growth outlook.
You’d be a fool to look to any of the negotiation participants for guidance. They are not exactly disinterested parties. It’s a given President Donald Trump will turn whatever happens into a tweetable victory. Discount that because he’s got such a penchant for stretching the truth.
Last week, for example, in a Michigan speech boasting about his accomplishments, Trump actually claimed the U.S. has the strongest economy in the world. Seriously? China and India have much higher growth rates, for starters — while many economists now worry the U.S. economy could tip into recession, given the weak fourth quarter. (I think they are wrong, but who knows.)
So to help you decode the political propaganda, here’s a four-point guide to determining whether any finalized trade deal — which could hit by the end of this month — will do the trick and calm investors. After that, I offer several companies and stocks that should benefit when a believable trade deal hits the tape.
1. Soy beans and natural gas won’t be enough
Trump has railed for years that China needs to buy more stuff from the U.S. to close the trade gap. He’ll get what he wants. After all, China needs food and energy from outside its borders. So it’s pretty clear China will agree to buy some large amount of soybeans and natural gas from the U.S.
But this alone won’t dispel the trade-war demons. “We have to have a deal that goes beyond China buying agricultural products or energy,” says Chad Oviatt, director of investments for Huntington Private Bank.
2. Progress on intellectual-property protection is a must
This is where the rubber hits the road. U.S. companies have complained for years that China has little respect for intellectual property (IP) and that it forces companies to give up technology secrets to do business there. This is a big deal for Trump, who insists on a level playing field. So progress here is crucial. “If these issues are addressed, it would be well-received by the market,” says Charles Shriver, who manages the T. Rowe Price Global Allocation Fund /zigman2/quotes/210492736/realtime RPGAX -0.74% .
Hudson Institute senior fellow Tom Duesterberg is hopeful that China will make adequate concessions on forced technology transfer, since it is already moving in that direction. China also appears open to setting up greater protections for intellectual property.
3. Enforcement provisions are also key
But concessions on IP and tech transfer alone won’t be enough. Believable enforcement mechanisms are crucial. Without them, there’s always the risk the companies cry foul and we go back to the drawing board on tariffs and trade wars. “Even if China accepts all the terms, it becomes an issue of enforcement,” says Oviatt.
4. China’s love of ‘national champions’ won’t be a deal breaker
The Chinese government regularly singles out domestic companies to favor by giving them subsidies, “loans” they’ll never have to pay back and trade secrets culled from government spying operations, says China expert Michael Pillsbury. He’s another Hudson Institute fellow who Trump describes as the “leading expert” on China. “They have succeeded marvelously,” says Pillsbury, citing Huawei’s credible challenge to Apple /zigman2/quotes/202934861/composite AAPL -0.51% in the smartphone market.