America’s Vice President Mike Pence recently delivered a speech on US foreign policy, in which he accused China of meddling in the US mid-term elections, pursuing predatory economic practices and military aggression. We think this speech is underappreciated by market participants and should be seen as a roadmap for US foreign policy as it tries to resist the idea that the US is joined at the top by other powers, especially China.
The comments could escalate already-elevated trade tensions and even open the door to sanctions against the world’s second largest economy.
The speech offers a useful insight into why the Trump administration sees relations with China as “the great power competition” (from the US National Security Strategy) and Beijing’s foreign policy as “predatory economics” (from the National Defence Strategy).
The key bit of the speech is quite telling:
“Now, through the ‘Made in China 2025’ plan, the Communist Party has set its sights on controlling 90% of the world’s most advanced industries, including robotics, biotechnology, and artificial intelligence,” Pence said at the Hudson Institute on 4 October.
“To win the commanding heights of the 21st century economy, Beijing has directed its bureaucrats and businesses to obtain American intellectual property – the foundation of our economic leadership – by any means necessary.”
This is not about trade deficits and this is not negotiating tactics to get a better deal. This is critical for US hegemony.
The bad news first: the speech serves as a painful reminder that the sector is clearly exposed to ongoing China-US trade tensions, amid which the sector has underperformed the broader market of late.
Despite reports that the Trump administration promised to exclude iPhones from import tariffs, the sector’s globally integrated supply chains are easily disrupted. In the medium term, more production could be on-shored, but this would take time and increase inflationary pressure in the US.
The more extreme measure would be for the US to act to thwart any technology transfers to China, making it very difficult for companies to use the country in their supply chains for tech products.
The good news, however, is that the comments – and the report that China hacked US tech companies, including Amazon and Apple – highlight the geopolitical significance of a strong tech sector. Leadership here is likely to be crucial to US prospects of maintaining its pole position globally.
Indeed, with China closing the technology gap, is this really a time when US policymakers will want to weaken their own companies with further regulations? We are under no illusions that this argument will prevent greater regulatory scrutiny, but it may make regulatory overreach less likely.
The New York Times talks about a ‘New Cold War’. This title makes sense to us, as we see a classic Thucydides Trap emerging: Pence's speech indicates a broader shift across the US government towards a more confrontational stance towards China. No doubt we will blog more on this theme in the future.
In light of this new political paradigm, I would like to reiterate the mantra of LGIM’s multi-asset team – diversify portfolios, engage in proper stress-testing and scenario-planning while continuing to focus on the big picture: Macro Matters!