Capital Investment Advisors

The Trade War Is Not Just An Economic Fight: Capitalism Vs. Communism

The trade war with China continues; we’re now in month 20 of the dispute. While President Trump’s latest actions were “a step away from a solution,” it’s “unlikely” both sides would reach a deal by the end of this year, says Frank Lavin, a former US ambassador to Singapore.

Even one of my political research firms sees recent developments as a “digging-in” on both sides, likely with no resolution until after the election.

I have a new theory on the trade war. The trade war is not just an economic fight – it’s a fight about two different economic systems. On one side our US system of democracy and capitalism, and on the other, the Chinese dictatorial communist system.

Just last week, there was yet another escalation to add to the mix. On Friday, China announced a new round of tariffs on $75 billion on US goods, ranging from 5% to 10%. These hikes are slated to go into effect in waves beginning September 1 and December 15, according to reports from Beijing. On the same day, news on the issue came out of China’s state-run news agency, Xinhua. The publication quoted the country’s tariff commission, saying the penalties were in response to levies threatened by the US on $300 billion worth of Chinese goods.

“While we had previously assumed that President Trump would see making a deal as more advantageous to his 2020 re-election prospects, we are now less confident that this is his view,” said analysts at Goldman Sachs.

All indicators point to the trade war continuing much longer than we initially expected. And, the longer it goes on, the more it reminds me of the Cold War when tensions were arguably strained because of a difference in systems of governments.

Today, Russia is a democratic, law-based state with a republican form of government. But, it had its roots in communism for decades. This system did, however, fall in Russia in 1991.

It hasn’t fallen in China. It’s easy to forget this fact; Jack Ma and Alibaba are current Chinese billionaires. But, at its base, China remains a communist country. In fact, it’s the last powerful stronghold of communism in the world.

Take Cathay Pacific Airlines as an example. 

Cathay Pacific is the dominant airline in Hong Kong – it is to Hong Kong what Delta is to Atlanta. Earlier this month, the airline closed at a 10-year low. Part of the reason was because of a spate of protests about flight safety concerns.

This past Friday, China’s civil aviation regulator, the Civil Aviation Administration of China (CAAC), responded to the rallies. They commanded the airline to suspend all personnel who had engaged in or supported these “illegal” protests in Hong Kong.

What did Cathay Pacific do? They moved quickly to comply with the agency’s demands. One pilot arrested during anti-government protests in Hong Kong was suspended, while two airport employees were fired, citing misconduct.

This all happened on Saturday, just a day after the CAAC’s demands.

The CAAC went on to say that it would bar “overly radical” staff from crewing flights to the mainland. Analysts predict that the tightened oversight, mixed with the impact of the protests on air traffic, could affect the airline’s bottom line.

Want to know who owns Cathay Pacific? Their parent company is Air China, which is in turn owned by The State Council of the People’s Republic of China.

So, you see what’s at play here. There were protests followed by swift government intervention to extinguish them, with the Chinese government handing down the mandate to fire these “private sector” employees.

This action is the opposite of what happens in free-market capitalism. This action signals a communist regime at work.

I think that’s where we are, folks. The constant trade-talk that gets slapped on every business, money, and market headline every few hours of the day is becoming increasingly more about capitalism versus communism.

With a fight this deeply rooted in systems of government, it may indeed take a long time to settle.

Here’s our bottom line. While Trump may not make a “deal” with China anytime soon, it doesn’t mean he’s down for the count come voting season. I firmly believe the best platform for a reelection campaign is four years of a good economy and a strong stock market. The concept of “China as a shared economic enemy” is also a strong foothold. But I don’t think it carries the same heft as a positive, thriving economy during a presidential term.

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