Trump revive the Trade War (with a tweet)
Last week, Donald Trump shocked the market when he sent a tweet saying that the US would impose additional tariffs on Chinese goods worth $300 billion. In response to the news, global stocks tanked and ‘safe-haven’ assets like bonds, Swiss Franc, and Japanese yen soared.
Our representatives have just returned from China where they had constructive talks having to do with a future Trade Deal. We thought we had a deal with China three months ago, but sadly, China decided to re-negotiate the deal prior to signing. More recently, China agreed to…
— Donald J. Trump (@realDonaldTrump) 1 agosto 2019
The new tariffs will include products like iPhones, toys, and consumer goods products like diapers and cosmetics. As such, consumers will start seeing an increase in price of these products as the new tariffs set in.
Donald Trump has been critical of China and the European Union for more than 30 years. In the 1980s, he used to pay full-page ads on key newspapers like the New York Times and New York Post to criticize the deals the US was making with the rest of the world. He continued the criticism in the 90s and in the past decades.
His main point of criticism is that the US made deals that decimated the US economy. For example, he said that NAFTA, the deal between the US, Canada, and Mexico was disadvantageous because it led to the decimation of the auto sector in the US.
He blamed the inclusion of China to the World Trade Organization for the ever-increasing US deficit. Indeed, the US trade deficit with the rest of the world has been increasing.
However, experts agree that trade deficit is not a good measure of the success or weakness of a country’s economy. This is because of how a deficit is calculated: it is calculated by subtracting a country’s imports from the exports.
Because of the high-cost of doing business in the U.S, most companies manufacture goods overseas and bring them to the US. The U.S on the other hand tends to export advanced goods like military equipment and commercial jets. It also exports loads of services such as Google and Facebook. In fact, the country has a service surplus with the rest of the world.
→ Trade War Explained: Where we are and where we are headed
How China will respond?
In response to the new tariffs announcement by Trump, China announced that it will respond accordingly. However, since the US imports more goods from China, the latter will lack options to retaliate.
Still, the country has a number of options that are available.
First, it can decide to wait until the next election. By this, it will hope that Donald Trump will lose the election. The risk is that a democrat in the White House does not guarantee a trade deal.
Second, China can decide to punish American companies that are doing business in the country. In fact, American companies do business worth hundreds of billions of dollars in China. As such, the country can do a few things like increase their regulations, steal their intellectual property, and even boycott them.
In fact, the sales of products like iPhones have been dropping while that of products like Huawei has been on an upward trend.
Third, the country can use the nuclear option. This is where it announces that it will stop buying US debt and even sell the existing ones. This would be the worst scenario because China is the biggest buyer of American debt. With the US budget deficit increasing, this measure would lead to a major problem in the country.
Companies to Watch
As the trade war continue, investors should continue focusing on companies that are mostly exposed to China. These are companies like Apple and Microsoft. Discount retailers like Family Dollar and JC Penney will be at risk because they will be forced to either increase their prices or ‘take the hit’. This comes at a time when these companies are fighting for survival.
→ 5 Key Assets to Watch as China and US Trade War Continue