National Security is More Important than Free Trade

National Security is More Important than Free Trade

Much has been written on the proposed tariff increase President Trump announced last week, but substantial changes in trade policy are occurring across many areas of government policy.  The most recent being the Trump Administration’s blocking of the merger between Singapore-based Broadcom and US company Qualcomm.  Broadcom is Chinese-owned, and the specific reason for the blocked merger was not a secret – the Trump Administration publicly stated it was for national security reasons, to prevent US technology from being transferred into Chinese control.

It was the second such tech cancellation of the Trump Presidency and it was a clear signal that Chinese companies will not easily merge, or purchase, US corporate interests.  Intellectual property will be protected … US technology will be protected … and national security will be the principal reason behind those decisions.

This has roused the free-traders on the right.  Some have referred to the collective actions taken by the Trump Administration as bumbling into a “Trade War”. Others have reminded the pundit-class that this is the antithesis of conservative policy making – free trade, not protectionism, is the preferred Republican practice.  Let the market determine these deals, they say.

But is this the beginnings of a trade war, or the actions of a President who believes in fair trade?  Can free trade exist without such trades being fair to both sides, and is a trade war necessary to protect US national security and national interests?  Preventing the sale or merger of US companies and their proprietary technology may result in retaliation, but does national security trump international mergers and acquisitions?

This is not a new question for US Presidents …


 Top 7 Global Business Transactions Which Put US National Security at Risk:

  1.  Loral Satellite technology – 1995. When thinking of former President Bill Clinton, and his wife and former candidate herself Hilary Clinton, the only words that can ever come to mind is corrupt.  So, it was in 1995 – while investigating the illegal sale of stolen US nuclear warhead designs by a US scientist known as Wen Ho Lee – a Chinese national who had become a naturalized US citizen, the FBI stumbled upon the case of Loral Technology.  The Chinese had illegally obtained control chips from Loral earlier in the year, and this was discovered during the Wen Ho Lee investigation.  Indictments?  Jail time?  Nope, the Clinton Administration approved the sale of Loral Satellite technology to the Chinese later that year.  Within a few short years, buried in the pages beneath the Lewinsky scandal and impeachment, Chinese money was discovered flowing into both Clinton’s 1996 campaign and Al Gore’s 2000 Presidential campaign.  Gore at least gave the money back.  Key Result:  We failed to protect US interests.
  2.  Uranium One sends US uranium to Russia – 2013. Well, they claim it hasn’t gone to Russia yet.  Books can be written – and have – detailing the levels of technology transfer to our enemies which have occurred under Democratic administrations, but nothing takes the cake like a Clinton scandal.  While the issue has been polarized through social media, the known facts are, by themselves, damnable.  After receiving a $500,000 donation to the Clinton Foundation from the CEO of Uranium-One, the State Department and the Obama White House finally signed off on the sale of 20% of the mining company’s assets to Russian state-owned interests in the form of the ROSATOM corporation.  It technically precludes the transfer of uranium out of the US, and only allows for 20% of the profits from the company’s ongoing business.  Few believe that allowing Russian access to US uranium mines was a reasonable, nor wise, decision.  Key Result:  We failed to protect US interests.
  3. Obama blocks sale of German chip maker Aixtron – 2016. In one of the rare instances of protecting US interests, the Obama Administration blocked the sale of Aixtron, a German company with majority US shareholders and assets, which made computer chips with military applications.  As the Treasury Department said at the time:   “The national security risk posed by the transaction relates, among other things, to the military applications of the overall technical body of knowledge and experience of Aixtron, a producer and innovator of semiconductor manufacturing equipment and technology, and the contribution of Aixtron’s US business to that body of knowledge and experience.”  In other words – it’s our stuff, and to allow the Chinese to get it would put us at risk.  Key Result:  We protected US National Security.
  4.  George H.W. Bush unwinds sale of Seattle aircraft company MAMCO – 1990. This was a rare event and unprecedented, as the sale had already gone through.  Once the Committee on Foreign Investment in the United States (CFIUS) made their ruling, the Chinese International Trust and Investment Corporation (CITIC) had already completed their purchase of MAMCO – a US airplane manufacturer.  The Bush Administration ordered the divestiture of the company on national security grounds, and reversed the transaction.  Key Result:  We protected US National Security.
  5.  Bush 43 prevents takeover of Dubai Ports World – 2005. At the height of the war on terror, there was grave concern over another attack occurring, and one of the major points of interest appeared to be US ports.  Dubai Ports World was the winning bid to serve as the primary Port management company through the US and abroad.  While the Bush Administration initially approved the purchase rights, political pressure began to mount as the deal became public.  Eventually, Bush rescinded the approval and the deal fell through.  Key Result:  We protected US National Security.
  6.  3com purchase by Huawei – financed by Bain capital – 2008. Huawei – a Chinese company – is the 3rd largest smartphone maker in the world, behind Apple and Samsung.  There attempts to buy US based 3com in 2008 was shot down by the Bush administration for fear of US tech falling into the hands of the Chinese military.  Huawei also had a recent attempt to purchase AT&T fall through (2017).  While the deal was not prevented by the US government, there was rumors of a great deal of political pressure being applied to AT&T behind the scenes to cancel the talks.  Huawei apparently had an indirect impact on the Qualcomm deal the Trump Administration just blocked:  Huawei is the leading competitor with Qualcomm to be the first into the market with 5G technology.  If Qualcomm had been bought by Broadcom, it was believed this would have reduced R&D expenditure on 5G tech, leaving the US without a domestic supply and market dominance to the Chinese through Huawei.  Key Result:  We protected US National Security.
  7.  Trump stops Broadcom-Qualcomm merger – 2018. A critical national security decision, as seen above, the Trump Administration signaled to China that US technology will no longer be so readily available in the market place – and virtually all US technology could have a “dual-use” military purpose.  Key Result:  We protected US National Security.

Combined with Trump’s tough trade rhetoric and increased tariffs, it is clear the Administration is taking a more confrontational course with our largest trading partner, and largest economic competitor – China.  While free trade purists and China’s government spokesmen warn of a looming trade war, Trump properly protects US national security interests.  It is also quite possible that the man many in the mainstream media make fun of as not a very smart or forward thinking could just be playing on a bigger chessboard than our journalists.  Tough trade action is long over-due; stopping technology transfers is a fair warning regarding intellectual property … these could be the moves that brings about a trade deal which protects US companies, and forces China to the table on national security issues like North Korea.

The “Art of the Deal” never looked so good.

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Tariffs Are Bad … Not So Fast

Tariffs Are Bad … Not So Fast

One year and a few weeks ago we discussed the pros and cons of Trump’s trade deals and proposed trade policies which conservatives complained would be the end of free trade.

But … will it really be the end of “free” trade?  And was it all that “free” to begin with?

Free trade as an economic theory is the bedrock of conservatism, because it is the only economic theory that reflects the rights of man – the right to be free to pursue life, liberty and happiness.  It drives down costs for the regular person because more product is available in the market, and producers have to reduce prices to gain or keep market share.  It is the grease for the wheels of free market capitalism, and the cornerstone of Republican trade policy since the end of World War II.  Countries that do commerce with one another are less likely to fire their guns at one another.

Raising tariffs has been, more often than not, bad for the US economy, and no greater example is the Smoot-Hawley Tariff Act which helped kick off the decade-long Great Depression.  But are they always bad?  We have over 100 tariffs right now on thousands of goods and products that enter the US, and our competitors have even more on our products entering their country.

 And let us not forget – tariffs were one of the principal means of raising revenue by the federal government before the imposition of the income tax.  In fact, the tariff was a Constitutional authority granted to the Congress in the Constitution itself:

                Article I, Section 8:  …The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defense[note 1] and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States …[and to] regulate commerce with foreign nations …

 For free trade to work, it must be fair.  Fair Trade is a better description of what serves the long-term interest of our economy.  Pundits and TV commentators can say all day long that Trump is a protectionist, and that we are going to end up in a trade war and this will be bad for the economy.  Yet how is it not already bad for an economy whose manufacturing industries have simply disappeared, and many domestic producers across numerous business models have simply vanished.  When a foreign country provides subsidies for their domestic industry, and we do not, that is NOT free trade.

Trump’s initial call for steel and aluminum tariffs are aimed at China, but there may be collateral damage. Allies such as Canada could be hit harder by the proposed rule changes. Is it fair to say that tariffs are not always a bad thing? Here are the pros and cons of applying tariffs to foreign goods coming into the US:


I. What are the pros of applying tariffs against foreign producers?

  1. Protects existing US industries. By making imported goods cost more, domestic companies can hire more local employees, increase wages for US citizens, and create more jobs locally which benefits the lives of local workers.  It is not just for economic reasons – the Pentagon has signed off on the steel tariff plan as ensuring a domestic source for national security reasons.  The US already suffers from Obama-era EPA regulations which destroyed the US domestic “rare earths” market, allowing China to control 95% of all rare earth minerals.  These make up our TV’s, smart phones, computer chips……you name it.  Lastly, it is important to remember that China, among others, subsidizes industries with state support.  tariffs are simply making the playing field level.  Therefore, and quite obviously, tariffs can have a domestic benefit.
  2. Can protect infant industries from more mature foreign competition. Tariffs make imports more expensive to buy – this means new domestic companies can price their products and services in a more competitive fashion, allowing them to survive against a foreign import monopoly.
  3. Trump tariff only hits 2% of US imports. It is possible we avoid a trade war since the tariff is only 2% of the entire US import market.  The steel and aluminum tariff is a curious choice, given that most of our steel and aluminum comes from our ally to the north, Canada.  The Chinese have been the rhetorical target, but they will not suffer too much from a US tariff, since 40% of their steel production goes to Japan.


II. What are the cons of applying tariffs against foreign producers?

  1. In the long-run, they don’t work. You cannot make a rival nation conduct trade in a free and fair fashion.  If country “X” subsidizes their steel industry, and we do not, then they will have an advantage.  Over time, their domestic industry will expect this advantage.  If country “Y” then tries to level the playing field, creating “fairer” trade, then country “X” will have political fallout, forcing them to respond in kind.  This precipitates a trade war, and leads to less trade, contracting GDP, and lower standards of living for all concerned.  As an example, George W. Bush (43) enacted 30% steel tariffs against Japan and the EU.  Both threatened to respond by imposing stiff tariffs on Florida citrus growers and motorcycles … the US backed off rather that start a trade war.
  2. Tariffs will reduce innovation. As industries are protected through tariff (or subsidy), they lose the motivation and desire to innovate.  Wages stagnate, jobs are not created, because this form of government intervention freezes the existing market in place.  It can also lead to much higher prices for consumers, since the price signal sent to the market is that there will not be competitive pricing between competing products.
  3. Once foreign competition retaliates, domestic exporters will begin laying off workers. Domestic industry which relies heavily on exporting will come under direct assault once foreign competition begins levying their own tariffs.

Ronald Reagan successfully implemented a tariff regime which forced Japanese electronics and automakers to change their pricing and, in the end – build plants in the US and employ US workers.  That is one of the few examples of a tariff strategy that did not prompt a trade war.  BUT … it was a different time and an era of dollar strength and American preeminence.  Recovering from the last 8 years, do we have the same bargaining strength as we once did?  Further still – American leadership is often predicated on being the only country that ever does follow the rules … will we be seen as breaking the rules this time?  (World Trade Organization treaty obligations).

Ensuring we maintain a domestic capacity for steel and aluminum production is a reasonable national security expectation.  And most tariffs are a political, not necessarily economic, decision.  Politics matter … the productive lives of US blue collar workers matter … and to be successful, free trade must be trade between countries that is considered fair.

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5 Reasons Market Volatility is Just Getting Started

5 Reasons Market Volatility is Just Getting Started

By most measurements, the economy has recovered from the “malaise” of the last 8 years.  Real growth driven by earnings, profits, wage increases, and economic development seems to be spurring the rise in real GDP numbers over the last 3 quarters.

That does not change what we have witnessed in the last decade – a decoupling of Wall Street from Main Street.  Real economic growth does not necessarily come from advances on Wall Street anymore, and vice versa.  Having become tethered to federal reserve policy making and global markets, Wall Street gains are no longer dependent on the same gains on Main Street.  Both used to move in concert, but now the Federal intervention into the free market starting in 2008 has seemingly changed the equation.

This is seen in a little data point known as the “Personal Consumption Expenditure” indicator (PCE).  It is the main variant of data that determines the CPI but then compares it to the upward and downward movement in stocks.  The history of the PCE shows a range of 0.2 and 1% in prices, individual consumption power, and the market.  This remained outside the mean during the market run-ups during and the 2008 banking crisis.  but today, the PCE is in the 25-30% range … meaning stock prices have outpaced income by that high of a percentage.  These are historic numbers, and obviously, suggest a very dangerous position for the market and the investor’s portfolio.

This is nothing new to our followers and has been a common refrain from our blog posts over the years – the most recent market downturn is yet another example of this “decoupling.”  While unemployment is low, tax reform is in place, and GDP is up, Wall Street swung wildly over the last two weeks.  We may be in the eye of the storm, or the calm before the storm, but the data suggests the volatility is not over with yet.

5 Reasons Market Volatility is Just Getting Started:

  1. Interest rates are going up. Bond yields on the benchmark 10-year treasury note have been near 3% for the last 6 months.  Investors move to treasuries and out of stocks when you can get that safe of a return.  While the Fed Funds rate remains historically low, it began inching back up under Janet Yellen and remains signaling an upward trajectory.  Interest rates in the real world have already been heading upward for a few years now.  Rising interest rates typically slows economic growth, and in turn, this hurts corporate earnings.  All in all, while a healthy sign and evidence of a normalizing economy, it can and will make stock market decisions more volatile.
  2. Inflation is back. The US Bureau of Labor Statistics set January inflation in the US at 2.1%, the same for December 2017.  Year over year that is down (2.5% January 2017).  But the annual trend is unnerving – 2015 was less than 1% … 2016 was 1.28% … last year inflation was at 2.65%.  Those numbers are jumping, and rapidly.  Most economists have been wrong about inflation, expecting a huge rise thanks to the gargantuan US debt profile.  That has not happened.  Some inflation is reflected in a growing economy, as more wealth chases more goods and services to purchase.  Bottom line, the annual data reflects a worrisome trend which suggests rising stock prices may out-strip the investors’ ability to purchase.
  3. 3. VIX is showing wild swings. From 2/1 through 2/5, the VIX jumped 300%.  As most of our readers know, the CBOE Volatility Index – known by its ticker symbol VIX – “….is a popular measure of the stock market’s expectation of volatility implied by S&P 500 index options.”   It is elevated for the year and shows signs of continued market turmoil.  Some recent headlines suggest the VIX is fixed, pardon the pun, but it seems to have functioned right on cue as the markets plunged over a 2-week period.
  4. Stocks are over-priced. While firm believers in our own theory of market performance, based upon our 2017 blog regarding the rise of the “Non-Fundamentals”, it is still hard to escape some basic market history.  Utilizing the tried and true method of measuring price to earnings ratios (P/E ratio), the gold standard being the Case-Shiller Index, we see some troubling signs.  The average P/E ratio since 1885 has been 17.  The current P/E ratio is 32.  On Black Tuesday in 1929?  30.  2088 Banking crisis?  32. bubble?  45.  As we see from those numbers, we have a way to go before we reach the collapse.  But … we are already in the same territory as the Great Depression and the 2008 crash.
  5. Government debt. Never in history has a country run up debts equivalent to the current US debt load.  We doubled our debt twice, from 2001-2009, and then, in unprecedented fashion, again from 2009-2017, from $10 trillion to $20 trillion.  The current government needs to spend on defense after what we have done to the military for the last 8 years, and of course, there are needed infrastructure projects that require funding.  But combined with a huge tax cut, we have essentially decided to deficit finance these major projects (this is not a debate over conservative beliefs in tax cuts creating more revenue – they do as the historical record suggests.  But you can’t add more spending above the increase in revenue and still get the books to balance).  Government debt, the borrowing needed to sustain these levels of spending, the interest on the debt which will inevitably rise over time … this will crowd out private investment and cause great volatility in US markets.

Most of our clients and blog readers have done well in the market, and their principal protection products have participated in those market gains as well.  But, if you still have a sizable portion of your portfolio exposed to market risk, or have gains from the last several years you would like to move into protected vehicles, now is the time.  Call now to speak with our expert advisors to learn more! 877-912-1919