Strategic industries the motive behind US-China trade tensions?

Posted By Darren Winters on Dec 19, 2018

Strategic industries the motive behind US-China trade tensions?

What if protecting strategic industries were the real motive behind US-China trade tensions?

A strategic industry is defined as one that a country considers vital for its economic development. Strategic industries cover a wide spectrum, they include the steel industry, important commodities and the techno-driven sector, particularly those active in next-generation technology.

So strategic industries are a valuable piece in the game of global dominance which is currently being played out between the two economic heavyweights US-China.

Some have likened the deteriorating US-Sino relations to a new Cold War, although few prominent mainstream voices have yet to come out and admit that publicly.

Chip makers play a central role in strategic industries of the 21 century

Strategic Industries

The clue came when China’s president, Xi Jinping visited a memory chip plant in the city of Wuhan earlier this year. Wearing a white lab coat China’s president, Xi compared a computer chip to a human heart: “No matter how big a person is, he or she can never be strong without a sound and strong heart”.

Computer chips have become the latest battleground in the trade war between the US and China, writes the FT.

Chip makers have been targeted as being on the list of strategic industries and are therefore most likely to be impacted by an escalating US-China trade war

“Caught in the crossfires is China chip maker, Fujian Jinhua. The US has charged the Chinese chip maker with conspiracy to steal trade secrets from US rival Micron.

Moreover, Fujian Jinhua has been added to US export ban by the US Department of Commerce.

“Effective October 30, 2018, the Department of Commerce has taken action to restrict exports to Fujian Jinhua Integrated Circuit Company, Ltd. (Jinhua) by adding them to the Entity List (Supplement No. 4 to Part 744 of the Export Administration Regulations (EAR)), because Jinhua poses a significant risk of becoming involved in activities that are contrary to the national security interests of the United States.”

Despite, the “truce war truth” recently signed by both sides then Huawei CFO’s arrest the US Department of Commerce is scheduled to ramp up export controls next year on so-called foundational technologies. That is bad news for exports but equally good news for domestic foundational technologies a subset of strategic industries.

Investing in strategic industries is likely to provide investors with higher returns

The reasoning is based on the simple fact that when foreign supplies are choked off that is going to give a boost to the domestic suppliers.

For example, if China’s Fujian Jinhua has been banned from exporting their chips to the US market that will force suppliers to source local chip markers giving them a boost in demand and revenue.

It is no surprise that George Soros’s 2018 stock picks for strategic industry stocks included Advanced Micro Devices Inc.

The infamous inventor boosted his holding by 1,390% in the first quarter and by 90.15% in the second quarter. Advanced Micro Devices Inc. is an American multinational semiconductor company based in Santa Clara, California, that develops computer processors and related technologies for business and consumer markets.

AMD is the second-largest supplier and only significant rival to Intel in the market for x86-based microprocessors. AMD’s stock price rose significantly in the second quarter of 2018. Moreover, in keeping with the theme of investing in strategic industries active in the next generation of technology the billionaire investor also increased his stock holdings in NXP Semiconductors NV, a hardware company, from 54.16% in the first quarter to 138.28% in the second quarter.

So hardware computer companies, microprocessors, semiconductors, and advanced microdevices all come within the umbrella of strategic industries.

Strategic industries stocks are likely to experience positive capital flows which could also fuel higher prices going forward.

The US steel sector also has strategic industries status so it too will be shielded from foreign competition

Assuming the worst-case scenario, that the US-China trade war truce is merely a temporary pause in a long-term escalating trade war which leads the two economic heavyweights pointing their canon turrets at each other.

With recent events unfolding one can not discount the possibility that the US-China trade war truce could have been sabotaged by the “Deep State” with Huawei CFO’s arrest (a high profile character in China)? Not everyone wants the Trump administration to succeed and make peace with China. So in this worst-case scenario, the stage could be set for a showdown with China with Trump playing a leading role as Commander in Chief.

The trade war within China has less to about creating jobs and more to do about protecting strategic industries, like steel

Steel tariffs could cost American households $2,400 each and shed 400,000. But steel is a strategic industry in this New Cold War so it has been deemed worthy of protecting whatever the cost. Put another way, steel stocks are likely to outperform going forward.

The energy sector also fall within the strategic industries umbrella

The Trump administration has invoked emergency powers granted under Cold War-era legislation to order regional grid operators to buy electricity from ailing coal and nuclear power plants. Furthermore, Energy Secretary Rick Perry has been ordered to stop the shutdown coal and nuclear power plants.

“Unfortunately, impending retirements of fuel-secure power facilities are leading to a rapid depletion of a critical part of our nation’s energy mix, and impacting the resilience of our power grid,” the White House said in a statement.

So investing in strategic industries could pay off in this current geopolitical environment.

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