Trade Wars -- 2 Empires Strike Back: What You Need to Know as the U.S.-China Conflict Heats Up

For this episode of Motley Fool Answers, Robert Brokamp and Alison Southwick wanted to consider one of the biggest macroeconomic dangers facing Americans today: the full-blown trade war President Trump seems determined to heat up with China. To help, they brought in an outside expert: Scott Kennedy, the director of the Project on Chinese Business and Political Economy for the Center for Strategic and International Studies -- a nonpartisan, foreign-policy think tank.

He digs into the history of U.S. economic protectionism and the causes of today's trade deficit, lays out some real facts -- in contrast to what you might have read on certain Twitter feeds -- and considers the recent changes in Chinese politics and policy that brought us to this point. He also talks about what consumers and investors should expect and the ways we're going to pay the price for this conflict. But first, in this week's "What's Up, Bro" segment, they take a look back at a pair of early icons of the "Financial Independence Retire Early" movement: Vicki Robin and Joe Dominguez, authors of the personal finance/lifestyle classic "Your Money or Your Life."

A full transcript follows the video.

This video was recorded on April 24, 2018.

Alison Southwick: This is Motley Fool Answers. I'm Alison Southwick and I'm joined, as always, by Robert Brokamp, personal finance expert here at The Motley Fool.

Robert Brokamp: Greetings, Alison!

Southwick: In this week's episode, we're going to focus on China and learn more about what's behind the fears of a trade war and the possible impact on us as consumers and investors. And we've got help from Scott Kennedy from the Center for Strategic & International Studies. All that and more on this week's episode of Motley Fool Answers.

So, Bro, what's up?

Brokamp: Well, Alison, way back in 2015 we did an episode about summer reading recommendations and I suggested one of my all-time favorite personal finance books called Your Money or Your Life by Vicki Robin and Joe Dominguez which came out in 1992, so it was a while ago. And I knew that Joe Dominguez died in 1997 but that Vicki Robin was still alive, and about once every year I felt like I should contact her, maybe interview her, and see how her life has turned out.

Well, fortunately Money Magazine did the work for me because they just published a profile about Robin and it was entitled, A Growing Cult of Millennials is Obsessed with Early Retirement. This 72-Year-Old is Their Unlikely Inspiration.

The article tells how Robin was laid up in bed with some sort of injury relatively recently, surfing the internet, and finding out that she's actually become this sort of icon to the FIRE community [FIRE meaning "financial independence, retire early"]. The other good news is that she's working on a new edition of the book, which is coming out later this month, so that's very exciting.

In terms of the profile, it turns out that she currently lives alone in Washington above two tenants whose rent more than covers her housing expenses. That's one of the principles of the book -- is to find some way to cover your living expenses through real estate.

It all started out back in her early twenties [back in the '70s] living very frugally with this what they called "intentional community." Very groovy. She had a little bit of an inheritance and she was also doing some acting work. She met Joe Dominguez who quit his job in Wall Street at age 30 and was able to do it by just living very cheaply and very simply.

And the foundation of the book and the philosophy is that basically you're trading a portion of your life away to earn money and you then use that money to buy things. And you think of your spending that way. So, if you earn, let's say, $500 a day and you go out and buy something that's $250, was that worth half of your day for that? There are nine steps in the book. A big part of it is tracking all of your spending, lining it up with what they call your life energy [so it does get a little groovy here and there], but basically saying if you look at, for example, how much you spend on going out to eat, how much you had to work to do that. Was it worth it to you?

The article in Money Magazine then goes on to talk a lot about the FIRE community and I realized this when I did my class for financial health day, which is about tips, tricks, and life hacks on how to cut down your spending. And there really is this growing cult of people who are trying to retire by their 30s or 40s. But while they're working they earn a lot of money. A lot of these people tend to be engineers and computer science folks, so they are making a good living, but they're saving a lot of it, living very simply, and then they "retire," and I put the quotes because they're often still doing some sort of part-time work, but it's work that they enjoy.

The article is also fascinating talking about that whole community, because there are all kinds of varieties of it, but when I taught my class, I came across literally hundreds of blogs and websites of people who have decided to do this. Probably the most well-known is MrMoneyMustache. There are plenty of others like RetireEarlyHomepage.com, DistilledDollar, MillennialMoneyMan, RetireBy40, and TheMinimalists, and I highlight them because they have a great documentary on Netflix that everyone should check out. But these are two guys who were also engaged in the rat race in their twenties and then they realized it just wasn't worth it and they decided to completely simplify their lives. It's a pretty cool story.

Southwick: So, are you going to quit your job at The Motley Fool and go join this cult and retire?

Brokamp: No, but it's very interesting. They had some good quotes in there about how some people basically flame out from it, because they love this idea of "I'm going to quit my job and then I'm going to home brew my own beer and work on a farm." And then they do it for like a year or a year and a half and they realize it's kind of lonely work. So, they go back to their jobs. We talked about this before. For me, I'm the type of guy who's probably always going to be working. Whether I work full-time forever, I don't know; but, I do love the idea of being very intentional with your spending because you are giving up some time that you spend to earn that money. Was it worth that time?

Southwick: With a job like this, why would you want to retire, Bro? You get to sit in a room with me once a week.

Brokamp: That is so true. It's so true. Sixty years from now we'll be sitting here...

Southwick: Well, when you put it that way, ugh!

[...]

Southwick: The threat of a trade war with China has been dominating the headlines, and we wanted to dig into the topic a bit more and understand what exactly is going on, here. The possible impact [of] a trade war -- what [would the impact be] on us as investors and consumers. And we also wanted to get an expert opinion on investing in China and business in China, as well.

Well, we went outside The Fool for it and we have brought into the studio today Scott Kennedy. He is the director of the Project on Chinese Business and Political Economy for the Center for Strategic & International Studies, which is a nonpartisan, foreign policy think tank here in D.C. Scott, thanks so much for joining us!

Scott Kennedy: Happy to be here!

Southwick: I am a little bit out of my depth, here, in talking about global foreign policy and trade, so I'm going to caveat that my questions may not be great.

Brokamp: I think they'll be fine.

Southwick: Thanks. Well, we're going to try our best at Alison pretending she knows what she's talking about. Scott, before we get into [Chinese foreign] policy, can you tell us a little bit more about your background?

Kennedy: Sure. I've been working on China for 30 years, now. I first went there as a college student in the late 1980s and have stuck with it ever since. Once you get addicted to China, it's hard to give it up. And most of the rest of my family is in business and I decided that the thing I would focus on is the intersection of politics and business in China, which I've been doing since. For me the part of my job that I like the most is talking to people. Interviewing people. Usually I'm on the other side of the microphone and I'm doing it in China with Chinese companies, engineers, lawyers, investors, the government officials they lobby. Sometimes foreign companies. Luckily, I get to keep doing that.

Now, I was a professor for 15 years at Indiana University in the Midwest, but I am from D.C. I grew up here and so came back to D.C. just a few years ago and nothing's changed in the time I left.

Southwick: We're going to get into investing more generally in Chinese businesses and companies and what the climate is like out there. Learn from what you've learned over there interviewing businesses. But for now, let's focus on what's been in the headlines and that's, of course, been the threat of a trade war. For a brief history should we talk about Smoot-Hawley? That was in the 1930s, so I can't tell if that was the last trade war, or if people just like to talk about it because it has such a fun name? Is it relevant for us to talk about?

Brokamp: Wasn't it in Ferris Bueller's Day Off, too?

Southwick: It was. "Bueller. Beuller."

Brokamp: There you go.

Southwick: Is it relevant for us to talk about this in light of what we're going through now, or is it not a history-repeating-itself sort of situation?

Kennedy: I think we've got something that's a little bit different. I think people like to talk about Smoot-Hawley because it came in the early 1930s just after the stock market crashed. We were looking for ways to revive the economy, and so we had the very smart idea of restricting government spending [along with a monetary policy of] putting up trade barriers to help us against trading partners, and the combination of those things didn't help. Quite the opposite.

This situation is a little bit different because we're in a moment when the American economy and the global economy is growing relatively fast, partly because we've had tax cuts, but generally because we've figured out how to get beyond the global financial crisis of a decade ago.

But we've got other challenges. We've got the challenge of globalization and the effect that it's had on manufacturing, on income gaps between rich and poor, and the rise of China at the same time [and the thought that China's rise is a factor affecting the gap between rich and poor, and manufacturing]. The reason that we're talking about [and perhaps going to launch into a trade war] has a different type of origins than we had in the 1930s and I'm happy that it's a different environment.

Southwick: Trump is saying that Chinese companies have an unfair advantage over Americans. A trade deficit of $500 billion a year. Intellectual property theft of $300 billion a year. Can you explain exactly what he's accusing China of doing?

Kennedy: It's probably not going to surprise most listeners that occasionally the president engages in some hyperbole, and so the specific numbers you just mentioned [which he has mentioned on occasion] aren't exactly true...

Southwick: But I read it on Twitter!

Kennedy: ... and so it must be true.

Southwick: I read it on the internet!

Kennedy: Let's take the listeners of the podcast down a crazy road of some alternative facts that they might want to listen to and then weigh it against what they see on Twitter. I would say yes, largely the president is right in spirit that we have an unfair relationship with China.

It hasn't always been that way. I think when China joined the WTO [World Trade Organization] it made a genuine effort to adapt and modify its tariffs, reduce non-tariff barriers, and it spent about a decade trying to do that. It didn't do it perfectly, of course. It tried to learn the rules of the system [both the good ones and the bad ones] that help you game the system, but since Xi Jinping came into power in late 2012 [five and a half years ago], China's been on a path to figure out a way around these rules.

[Xi] is a very nationalistic leader. Chinese people don't have a middle name, but if they did "control" would be Xi Jinping's middle name. He's very much interested in controlling domestic political environment, China's economy, increasing Chinese global influence, and he's not really interested in what the existing rules of the game are.

The Chinese have very loyally moved away from their commitments and, given the size of China and the size of their financial system, they have gone headlong into industrial policy focused exactly on the areas in which the U.S. has comparative advantage; in high tech and the most important parts of our economy that provide productivity growth.

The two economies used to be primarily complementary. Now they're increasingly competitive, and China's competing using unfair practices. President Obama and others tried to use an approach of patiently pulling China into a rules-based order in hoping that they would be socialized into that system. It hadn't really worked out as planned and Trump ran on the campaign promise that he'd be a lot tougher. We are seeing him implement that campaign pledge and it's, of course, generating a lot of anxiety among everybody.

Southwick: It sounds like you're saying his concerns are legitimate, but is he going about this the right way? Economists hate tariffs. That's what I've been reading in everything. Right in principle, wrong in execution?

Kennedy: Sure. I think he's got the general picture right that things have been unfair, and that there are consequences for the American economy and the global economy because they have been unfair. We have a bilateral deficit with China that's not $500 billion. It's about $375 billion in trade and goods. If you count services, the U.S. has a big surplus in services with China, so the deficit would be closer to about $335 billion a year. It's still a big number. It's been getting bigger and this year it's been getting even larger.

Now the source of that deficit isn't really unfair practices. It's primarily the fact that the U.S. consumes a lot more than it saves and it's got to consume from abroad when that's out of balance. We consume a lot internationally and China's a big provider. Also, manufacturers have all moved to China. Many things are assembled in China. All of the value of those products -- even if only part of the value was created in China -- are counted in China's export column. In our imports, as well.

Nevertheless, things are genuinely unfair because China uses industrial policy that promotes domestic Chinese companies ahead of foreign companies that are exporting to China or that are investing in China, and the scale of China's effort means that it has effects not only on individual companies that are competing for market share in China, but on global markets.

A great example would be the solar industry. A little over a decade ago China decided that it wanted to go into the sector and threw scads of money at the sector. The result of its bottomless pit of money being invested is that no one else could survive, so it destroyed the rest of the global supply chain in solar and dumped solar on the global market.

This, for some consumers who want cheap solar panels on their roofs was good, but for the rest of the competition it was highly destructive, and we ended up locking in a type of solar energy system which wasn't ideal. Actually, there's much better types of ways you could translate sun power into electricity than the type that is commercialized now.

And there's a chance that China could do that in many other industries: in semiconductors, in electric cars, in robotics and AI; all the things that we are betting our future on, the Chinese also could use that bottomless well of money and protectionism to crowd out good investors. That's what I'm worried about. I'm not worried about so much any individual company, although I know investors are, but I'm worried about the health of those business sectors and the vibrancy of the business models, which everyone depends on.

So, using pressure to try and get China back into the fold is definitely risky, because China's strong. China's got lots of resources. Their president, Xi Jinping, does not have protesters out on the street telling him or lobbying him to say, "You know, gee, this trade war is really going to hurt us if you retaliate against the United States." There's no Motley Fool podcast equivalent in China..

Southwick: Not yet. I should really get on that!

Kennedy: ... raising worries and concerns about how China might respond. Media is very controlled in China, now, particularly compared to before Xi Jinping came into power. So, Xi Jinping's domestic political situation allows him, basically, to whack back without major consequence.

That's a big challenge for the U.S., and so taking China head-on like this is quite risky, but I guess I just wanted to emphasize not doing anything is also risky. We know if we end up in a world dominated by the China model [where state funding replaces private sector funding and these business models are deeply damaged], that's not good for anybody, either. So, we are in a very difficult position.

Southwick: What are some other options outside of a potential trade war? I imagine this could lead to a 14-hour discussion, so in the simplest terms possible, are there other options available? What can we do, here?

Kennedy: I think it's important for everyone to know that there are multiple elements to what the Trump administration is planning. This trade action that the president has started is based on an investigation into China's misappropriation of intellectual property, the so-called "Section 301 investigation," which refers to a 1974 trade law the U.S. passed. That investigation found that China was unfairly acquiring technology through coercion of foreign investors in China. Not letting foreign companies gain the proper fees for licensing. Through cybertheft. Through unfair investments in the United States that were state-backed.

The first of the penalties the president has put forward that he's in the process of potentially implementing [that everyone is talking about], are the tariffs on $50 billion or $100 billion of Chinese goods. Who knows? The number keeps evolving, but it's a lot. $50 billion is a lot for me. I don't know about for you guys, here, but that's usually above what we get at CSIS on an annual basis.

But the other parts are equally of concern, and they should be to listeners. The second part is potentially banning or deeply restricting Chinese investment in the United States. In 2016, when it was at its peak, it was $46 billion that year in the United States. Last year it dropped a lot because of China's own financial challenges and a little bit because of American blocking. That's a lot of money, and the U.S. might deeply restrict that investment and basically say that the Chinese can only invest in the United States where the U.S. can invest in China. The president's favorite word -- "reciprocity."

That would have a big effect on specific companies in the U.S. and China and everyone that does business with them, and that could end up actually being bigger than the trade tariff. In addition to that, the president's also talked about restricting visas for Chinese that are in STEM [graduate students, undergraduates, and workers], and visa restrictions would also have a huge effect on companies here and in China.

Besides whacking China in these different ways, there's other things that we definitely can do. First, we can get the rules better. The WTO's rules are pretty good but they're not great. We should upgrade those, and the U.S. has been in conversations over the last decade plus to try and make those rules better, first with all the other WTO members. There was something called the Doha Round that was started in 2001, but basically collapsed in 2008.

We have been in conversation with the WTO about rules related to trade facilitation and harmonization just to make trade easier. To get a lot of the bureaucracy and red tape out of the way. An agreement on trade and services. We have talked with regional actors about agreements with Europe over a free trade deal. We started negotiation in the Bush administration and carried forward in the Obama administration on an Asia-Pacific agreement called the Trans-Pacific Partnership [TPP], which the U.S. finished negotiating in 2015. Both candidates for the presidency in 2016 [Trump and Clinton] opposed TPP when they were campaigning, and President Trump withdrew soon after coming into office.

Those types of agreements would level the playing field, upgrade the quality of the rules of the game [not just in trade, but investment in how state-owned enterprises are operating e-commerce]. Many different places. I think in addition to potentially needing to push hard on China unilaterally, [we need to] improve the rules of the game and then the last part of this is to take care of things at home.

The American infrastructure needs a big upgrade. Anyone who lives in the Washington, D.C. area and has been on the subway knows that.

Southwick: Or 295.

Kennedy: Yes. Or the drive in today. Your tires will tell you. Healthcare. We're not finished in any stretch of the imagination in making healthcare more widely affordable. Making it portable. Making it more accessible to everybody. Investing in education. Not just for universities but K-12 for apprenticeship programs and things like Germany has that provides opportunities for those folks who want to go beyond high school but perhaps college isn't the right avenue for them.

There's so many different things that we could do at home to make our economy stronger and more productive, and not just to compete with China. Even if China didn't exist, we need to do those things. Those are the three areas I focus on.

Brokamp: To what degree is the rest of the world worried about China? Are there other countries that are just as concerned about what China is doing?

Kennedy: Sure. On the trade and commercial front, this is a universal concern. China's neighbors -- Europe, Latin America, Africa -- everybody has concerns about China. China's often their No. 1 trading partner [often a big source or target for investment], and everyone has the same stories, of course. Technology transfer. Or Chinese companies coming in and taking your resources and not caring too much about your workers. Or other types of bullying and unfair practices.

But, at the same time, their level of willingness to directly confront China isn't the same as the Trump administration's, because China's got a lot of leverage. When China is your No. 1 trading partner and the fastest part of growth for many of your companies, even if it's an unfair slice of the cake, it's still a big slice of the cake. So, folks don't really want to confront China head-on like this. What they'd prefer is to use WTO consistent-like measures to ask the Chinese more politely to change what they do.

But even then, the record is that very few countries sue China at the WTO. Many countries sue the U.S. In fact, the U.S. is the No. 1 target. But countries big and small take the U.S. to the WTO. Essentially only the U.S. and EU take China to the WTO. Everybody else is too scared to do it.

In some ways, what the U.S. is doing is representing the globe [by] taking one for the team if they do it right. Of course, the U.S. could cut a side deal which just benefits the American economy but, really, they're standing up for global institutions. Now, it's ironic to say that President Trump, who has criticized the WTO and multilateral system is standing up for the rest of the world and this multilateral system; but, nevertheless, it could have that constructive benefit.

Southwick: Let's talk more about, selfishly, the impact that a trade war could have on us. First let's start as consumers. How concerned should I be about the price of bacon? I don't know. People really love bacon. How concerned should I be as a consumer about rising prices?

Kennedy: Bacon may face problems, but turkey bacon is going to be OK.

Southwick: And turkey bacon is totally fine. Just get used to it.

Rick Engdahl: Sorry, no. No! Turkey bacon is not the same.

Brokamp: Of everything, Rick is going to weigh in on turkey bacon.

Southwick: You've been here this whole time and that's when you speak up.

Kennedy: Soy bacon is OK, but not...

Southwick: Oh, OK. I may draw the line, there.

Kennedy: In terms of the direct hit that industries are going to face, which then will affect consumers, at least in the first cut of products identified for higher tariffs [that the U.S. first laid out and then the Chinese laid out], most of these aren't direct consumer-facing products. The U.S. primarily picked machinery, electrical equipment, and stuff like that that is part of China's industrial policy in areas of high tech, and that primarily involved Chinese domestic suppliers.

For those of your audience that buy construction equipment to build large buildings -- or maybe they use that in their backyard -- it'll be more expensive for them. Chinese cars will be more expensive for folks, here, but we don't import a lot of Chinese cars. I don't know if we import any.

There's some things which are minor; but, if this expands, then I think that we and the Chinese will then start targeting consumer goods, so there will be more things, potentially at Walmart and elsewhere [clothing, shoes, computers]. Dell assembles lots of their computers in China. The final assembly of most iPhones is in China. So, there could be some of those products which eventually face higher tariffs and the prices of them go up; but those aren't the ones that are scheduled at the moment to face these problems.

Southwick: In an interview you gave to The Atlantic, you said that the pain for Americans isn't necessarily going to be felt on the shelves, just yet, like you just said, but it could be felt in our portfolios. As investors, that really hits home for us. How worried do we need to be about our portfolios?

Kennedy: I think you need to be very worried about your portfolios.

Southwick: Oh, no! I didn't want to hear that!

Kennedy: Yeah, sorry!

Southwick: That is not the answer I wanted to hear.

Kennedy: It's not going to be a world where you just need to go short, but you do need to be super careful in a couple of ways. First of all, there are going to be individual companies that are going to be targeted. The Chinese are going to pick companies in a variety of different industries. Many are publicly listed companies.

The Chinese haven't said [they'll stop importing any] Boeing aircraft, but they've identified that they're not going to import the older 737s. Currently there are about 27 of those planes still on order to be delivered. There are 250 larger 737s that haven't been blocked, but if the Chinese move that number a little bit, then Boeing's business in the short term will be affected and all the companies that supply parts that go into 737s could end up [as part of] the Dreamliner.

You could also look at semiconductor companies and then agricultural firms -- not just the farmers, but the processors that take agricultural products and export them to China. Many of those companies are listed. For that, you just need to see specifically which companies and sectors are going to face penalties and then make your choices accordingly.

But the bigger challenge for most folks -- because not everyone just invests in individual companies and needs to step carefully and avoid those landmines -- is my expectation that the market, overall, is affected by talk of a trade war and implementation of a trade war, and the sort of contagion effect which takes down all stocks, good and bad, regardless of whether they're specifically targeted. That's the bigger effect. That means that folks want to look for options where there are industries, businesses that are so far out of the line of fire that are safer long term in a broader economic downturn.

Southwick: You talked about the potential hit to our portfolios as being short term. We're very long-term investors here at The Motley Fool. Do I get to sleep a little better?

Kennedy: Sure, if you've got a really good mattress you can put that money under for a while you're going to be fine. No, you don't have to do that, but you do need to think about how your grandmother would invest. How would others who really need to depend on this income long term and need to protect themselves [invest], just because in addition to the markets potentially going down, it's just volatility. There's going to be a lot of volatility and it's [about] how much heartburn you can take. Do you want to have to pay attention every single day?

So, looking for things that are safer, whether it's bonds or mutual funds, or other types of instruments or currency. It might be gold. Who knows? That doesn't fit under your bed really well; but safer things. There will never be a siren that says "all clear" as long as we've got leaders in both the U.S. and China who are relatively nationalistic. Who are somewhat unpredictable. Who themselves have high tolerance for risk. That means everyone else has to have a high tolerance for risk or ways to avoid risk.

Southwick: I also want to talk a little bit about investing in Chinese companies, because here at The Motley Fool we have a few recommendations that we've made to our members that are Chinese companies. Baidu, Tencent, and JD.com are just a few of them. But Chinese companies don't necessarily have the best reputation for honesty or transparency. Misrepresentation and outright fraud is a risk to some extent when you're investing in China. I'd like you to speak to that a little bit. How concerned should our members be when they are looking at investing specifically in Chinese companies outside of the context of a trade war or within the context of a potential trade war?

Kennedy: I think you want to be very careful, particularly if there's an opportunity for you to invest in Chinese companies that are listed in China or in Hong Kong. The corporate governance rules and regulations for China's domestic exchanges are a lot weaker. It's not a casino. A casino would be fairer. At a casino you know the rules and they don't change while you're at the table.

In China, the rules for investing change depending on the day, and the levels and anxieties of investors and regulators in companies, and what's in the news. It's really dangerous to invest directly in China. Luckily, there's lots of obstacles to doing that because China primarily allows foreigners through large institutions to invest.

There are some other ways around that for your very savvy investors, but for the most part, the way you're going to invest directly in Chinese companies are going to be perhaps in Hong Kong, but most likely companies that are listed on NASDAQ or the New York Stock Exchange.

I think the corporate governance requirements [or] transparency requirements of our markets aren't perfect. They didn't stop what happened in 2008 to even your best companies. Nevertheless, it gives you a little bit more information and outright fraud and deception is more likely to emerge through Chinese companies that are listed outside of China. That's a general rule.

Because China is growing so fast and in so many different sectors, there's obviously lots of huge opportunities. Companies are profitable. They have long-term chances of success, so it's a smart thing to pay attention to, but there are other ways in which you can invest in, like ETFs, or mutual funds, or American companies that are deeply exposed to China like Qualcomm. Over half of the sales for this company are in China. So, there's other ways, if you're worried about whether a Chinese company's profit and loss statement is accurate, to still be exposed to China, but reducing your risk against any individual Chinese company.

Southwick: If I am thinking about whether I invest in Google or Baidu, should I be able to trust the financials that Baidu is putting out as much as I should be able to trust what Google is putting out?

Kennedy: Well, they both use the same accounting firms...

Southwick: You're like, "Sure. There are crooked people everywhere."

Kennedy: And I don't want to just pick on Baidu.

Southwick: I did for no particular reason, here.

Kennedy: I'll just give you an example of a new company that people might want to pay attention to [not because I necessarily think it's going to be super successful, or profitable, or that the stock's going up]. I never give stock advice.

Southwick: No, we're not asking you to.

Kennedy: That's really bad. Just ask my mom. I stopped doing that about 25 years ago. Knowing something about China doesn't mean you know anything about how to invest in Chinese companies. Just as an example, China's got the fastest-growing electric car market. Now, there's never been an electric car company on the face of the world that's been profitable from selling electric cars. They might sell other stuff that helps the company be profitable overall, but usually the electric car business isn't profitable.

Components for electric cars can be quite profitable, including the battery. Right now, the biggest, most successful, advanced electric battery companies are Panasonic, LG Chem, and Samsung. There's others in the supply chain that are doing well, and even some American companies, but those are the biggest sellers right now in Asia.

But China's blocked its market to foreign car battery makers and has been promoting domestic ones. People have heard of BYD, the company that Warren Buffett invested in a long time ago, which is profitable largely for things other than electric cars. They also make batteries and many other things -- buses and stuff -- that they sell in the United States.

There's another company that has come on the scene called CATL. It's in Fujian Province. It's in a town called Ningde. And CATL originally was a joint venture with a Japanese company called TDK. Everyone knows TDK because you have the cassettes that were made by TDK. But they also were a chemical company and did other things and helped CATL get off the ground. They make pretty good car batteries, now, and they don't have that foreign competition to face. China's pushing electric cars as hard as anybody. This is currently a non-listed company that is exploring listing.

And if you don't have any foreign competitors, and you make a pretty good battery, and just by coincidence, Xi Jinping's first job as a party secretary was as the party secretary of the County of Ningde where this company is from; is there a coincidence? It could be a coincidence. I honestly can't say for sure. Nevertheless, the stars are aligning for this company. Again, that depends on Chinese industrial policy, it depends on the corporate governance of this company, and many other things that could take it in one direction or another.

But there's so many different companies like that in China, whether you're talking in e-commerce, or in healthcare, and drug manufacturing, and elsewhere. Things that look like they're super rising stars and then suddenly they go in a different direction. That's why China is exciting, but it also means folks need to be careful, too.

Southwick: Let's end on a super, happy, positive note, because trade war isn't super, happy, and positive. What would you say is one of the best stories you've heard coming out of China, lately, that people should keep an eye on? Something we can get excited about in a positive way?

Kennedy: I think CATL is a really interesting company that excites me to look at and learn about, and I have no idea what its commercial performance will be down the road. I've met so many different companies in the internet space. China's got 700-800 million internet users. Entrepreneurship there is so cool. I can't write code, but just about everybody else can and you don't need a lot of money to create an app. And when you've got anything times 700 million [users], that's a lot of money.

WeChat, the communication app which is by Tencent, has so many other things. I think that's pretty cool and I think Tencent is a really interesting company. But there's so many small, garage-like companies in the internet space. Many of them will disappear, as they should, through creative destruction. I just love meeting these investors and what they're doing.

Let me give you one example of a really neat technology. I have no idea what it's going to mean for this specific company I met that's developing it. But I went to the Microsoft Incubator facility in Beijing, and they support this one company that makes a piece of equipment that you put in the soil, or up against the plant, and it tells you the moisture of the plant and the soil. But it also can tell you what's going on in terms of the nutrients in the soil, pesticides, and other things. That's cool.

But cooler, and why they're cooperating with Microsoft, is because you take that technology and you connect wireless equipment to it that can transmit the data up to a satellite and down to the cloud. Now, if you're the farmer, then through your phone you can see what's going on, on your farm.

Now, let's say you're the county party secretary, and you want to know what the yield is going to be for soybeans in your county. Now you have a better sense of where things are going to go because you know the weather and you know what's going on. You know how it's affecting the crops. Let's say you're the head of the province or you're the head of the country and you want to know what the wheat yield is going to be for this year. You've got more information.

Now, let's say you're sitting in your apartment in Little Rock, Arkansas and you invest in commodities. China's a big commodity producer and you now have a lot more information and it's going to tell you what's going to happen with futures.

That's a really cool technology that's being worked on by this company that I met that's in the Microsoft Incubator. I have no idea how long it's going to take for it to really have all the different technologies connect, but those are the type of really cool things that even in China folks are working on. Even though you have all that top state-down stuff, which is depressing, you have all this bottom-up stuff at the same time where you can get excited by what people are really doing.

And that's the benefit of China. It's such a big place. You've got all these crazy stories and deep concerns about the state, but there's also lots of really cool, smart-thinking people.

Southwick: Scott, thank you so much for coming into the studio and joining us. This has been a really great chat!

Kennedy: Happy to do so! Thanks!

Southwick: As always, The Motley Fool may have formal recommendations for or against the stocks we talked about here. Do not buy and sell stocks based solely on what you heard on the show. Scott, thank you! Please don't!

Kennedy: Do not!

Southwick: But it's still fun to talk about. Thanks again for joining us!

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Southwick: Well, that's the show. I want to thank Heather Horton for pitching in today behind the glass. The show will still be edited diplomatically by Rick Engdahl. Our email is [email protected]. For Robert Brokamp, I'm Alison Southwick. Stay Foolish, everybody!