RoboStreet – March 15, 2018
Tariffs Could Be A Big Catalyst For Technology
President Trump is getting ready to crack down on China’s long history of intellectual property theft. The president told his top advisors and Cabinet secretaries at a meeting last week that he wanted to hit China with steep tariffs and investment restrictions in response to allegations of high-tech property theft. While addressing the situation is clearly taking the high road and a long overdue action, it smacks of a potential trade war, and the market initially pulled back on the news.
It is being reported that Mr. Trump is seeking to impose tariffs on up to $60 billion of Chinese imports and will target the technology and telecommunications sectors. While the tariffs would be chiefly targeted at information technology, consumer electronics and telecoms, they could be much broader. The White House declined to comment on the size or timing of any move. But rest assured, tariffs targeting technology are coming.
As can be expected, China is not taking these threats lightly. Chinese foreign ministry spokesman Lu Kang said Sino-U.S. trade relations should not be a zero-sum game, and that the two countries should use “constructive” means to manage tension. “We have said many times that China resolutely opposes any kind of unilateral protectionist trade measures,” Lu stated. “If the United States takes actions that harm China’s interests, China will have to take measures to firmly protect our legitimate rights.”
Trump’s team is targeting Chinese high technology companies to punish China for its investment policies that effectively force U.S. companies to give up their technology secrets in exchange for being allowed to operate in the country, as well as for other IP practices Trump and his advisors consider unfair.
China runs a $375 billion trade surplus with the United States and when President Xi Jinping’s top economic adviser visited Washington recently, the administration pressed him to come up with a way of reducing that number. Mr. Trump ran his campaign on many promises, one of which was to shield American workers from cheap imports, or dumping, and his first action as president was to pull the United States out of the 12-country Trans-Pacific Partnership trade deal.
In his second step to level the trading field, Trump’s administration is currently in the midst of negotiations to revamp the North American Free Trade Agreement (NAFTA) and just recently announced the imposition of tariffs on steel and aluminum imports. While the tariffs on steel and aluminum are viewed as relatively insignificant in terms of imports and exports, moves to target China directly risk a direct and harsh response from Beijing. How they would respond might involve applying reciprocal tariffs, which would likely impact the apparel market most, where the U.S. imports huge quantities of Chinese made clothing found in most U.S. department stores.
U.S. House Ways and Means Committee Chairman Kevin Brady stressed that Trump was serious about addressing the issue of intellectual property theft with China. “He’s serious about calling their hand on this, and my understanding is they are looking at a broad array of options to do that,” Brady said. Shortly after Trump took office, the Information Technology & Innovation Foundation (ITIF), a U.S. technology think tank whose board includes representatives from top companies such as Apple, Amazon, Cisco, Google, and Intel, called for coordinated international pressure on Beijing. So here comes the pressure, which shouldn’t be a surprise to anyone.
Software piracy is a lot more rampant in China (70%) than the U.S., but the value of unlicensed software in the U.S. is still the highest in the world. The chart above shows the global picture. The U.S. has such a huge economy, and uses so much software, that even though the rate of unlicensed software is only 17%, the value of that software is over $9 billion. Countries like China, India, Russia, and Indonesia have higher rates of unlicensed use but the value is a lot less.
The appointment this week of Larry Kudlow to replace Gary Cohn as the top economic advisor this week is a good move in that Kudlow holds an anti-tariff position and will likely act as a counter to Trump overdoing the imposition of tariffs. A more measured approach with Kudlow’s assistance will probably be the course of action and the markets are warming up to this notion after enduring a few days of tariff-related selling pressure. Plus, Larry Kudlow is a Reagan-era supply-side economist, which also favors stock market bulls.
It’s interesting that, during Wednesday’s session when the Dow closed down 244 points led lower by multinational companies, many leading tech stocks traded higher on the notion of the Chinese inability to live without American innovation. Breaking the cycle of having to divulge technological secrets and patents in order to do business in China has always been a bad idea, and now it appears that this structure is about to undergo a radical change – and tech stocks are ramping higher as a result.
Microsoft might be the clearest winner in the war on software piracy, being the biggest seller of software in the world. The stock is not only best-in-class within its space, it also registers like a champ within my AI model, sporting an “A” rating with a six-month price target of $119 being forecast, implying a 27% move to the upside. As far as investing goes for outperforming the market by a wide margin, I’m not sure it gets any easier than that. And the tailwinds of protecting Mr. Softie’s patents will only energize that move.
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