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Are Trump's China Tariffs Bad for U.S. Companies?

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President Donald Trump has announced tariffs on $60 billion worth of Chinese imports, kicking off what may turn into a trade war between the two countries. This, it should be mentioned, is a fraction of the $500 billion worth of goods the U.S. imports from China.

The President’s action is based on findings that forced transfer (by theft and otherwise) of American intellectual property by the Chinese is now valued at $48 billion a year, up from earlier estimates of around $30 billion a year. It also takes into consideration the fact that China blocks a large number of U.S. companies, including technology firms and credit card companies, from operating in the country.

Citing Section 301 of the Trade Act of 1974, the President’s memorandum directed the government to take action. These actions are higher tariffs on items that the government will specify in 15 days and U.S. industry will have another 15 days to submit comments on before they go into effect.

The list of products to be impacted hasn’t been named yet, but they will reportedly cover 1,300 product categories that will be subject to a 25% tariff. Informal comments from government officials indicate that they will target the high tech industries China is trying to build (China earlier named 10 industries including information technology, advanced industrial equipment, biopharmaceuticals, green energy and aerospace as focus areas for its ‘Made in China 2025’ initiative). Yahoo Finance columnist Rick Newman speculates that the Trump tariffs could follow the same blueprint for maximum effect.

Trump wants China to cut the country’s $375 billion merchandise trade deficit with China by $100 billion.

Chinese Ambassador to the U.S. Cui Tiankai says that the U.S hasn’t specified what it wants and has instead suspended formal trade talks. And while China doesn’t “want a trade war,” it “is not afraid of it. If somebody tries to impose a trade war on us, we will certainly fight back and retaliate.”

What China Could Do in Retaliation

The Chinese could do a lot of damage, both to certain industries and to Trump’s position at the White House, as he contests the mid-terms later this year. On the other hand, Chinese President Xi Jinping has avoided the election process and has got no one to please but the communist party he represents. So while he can take actions that will be temporarily difficult on Chinese people, Trump may be able to do it only at the cost of his own office. Which wouldn’t solve the problem.

So when Trump announced the tariffs on steel and aluminum (and America largely doesn’t even buy steel from China), the Chinese Commerce Ministry responded within a week with increased tariffs on $3 billion of U.S. goods including a 25% tariff on U.S. pork imports and 15% tariff on American steel pipes, fruit and wine. China has said it will go through the World Trade Organization (WTO) process, which could mean trouble for the U.S. because some industry experts think that the U.S. doesn’t have the right to take such action.

The stakes are obviously much higher this time, so the sanctions could hit soybeans, sorghum, live hogs and Boeing planes, which are also major Chinese imports.

The non-diversified farming states where Trump scored most of his victories (reportedly eight of the top 10 soy and hog-producing states, and seven of the top 10 sorghum states) will be the worst affected, which can also tip the scales against him.

China has also hinted that the trade deficit problem can be fixed with U.S. export of high tech equipment, which of course isn’t a solution because it will lead to even more theft and strengthening of China versus the U.S.   

U.S. Markets to Face the Backlash

The technology supply chain that will be affected by the trade war won’t just affect China and the United States. There will be implications for South Korea, Japan, Taiwan and others. And the U.S. may be able to rally support from Canada and Mexico by softening its stand on NAFTA and also with the EU and Australia because all are affected by Chinese steel overcapacity.

Live Hogs: As far as the live hog market is concerned, China has been preparing for this contingency. It has for some time been the largest importer of hogs, especially from the U.S.

But of late, record high hog prices have enabled Chinese companies to build very large farms with state of the art machinery and disease control and waste management systems. Last year, the government also cracked down on small farmers that couldn’t invest adequately in waste disposal systems. This sent many of the small farmers out of business while strengthening the position for larger farmers. China has been using superior genes from British, French and American breeds and building its large farms on U.S. prototypes.

It’s expected that in the next few years, China will be able to meet its own pork requirement and also export surplus. So while the live hog market in the U.S. could face some backlash from these sanctions, it won’t be long before they see a drop in demand anyway. This may in fact be the last time that this is used as leverage in negotiations.

Soybeans: The hog market is closely linked with the soy market because soybeans being high in protein are widely used to feed the pigs.

This is probably why Bunge Ltd (BG - Free Report) , the largest dealer in soybeans for animal feed, saw its shares plunge 5.2% so far in March.

For soybean farmers in the U.S., things don’t look so good. Not only will they be affected by weak hog production in the U.S., but if China doesn’t buy from them to feed their own pigs (or make edible oil), there will be weak demand all round.

The Chinese are in conversations with Argentina and Brazil for soybean imports that they might supplement or replace U.S. production with. Notably, both these countries have been granted temporary exemption from Trump’s recently-announced steel and aluminum tariffs. A prolonged drought in soybean producing areas of Argentina may further support U.S. actions.

Sorghum: Chinese customs data reportedly shows that 4.76 million tons of the total 5 million tons of sorghum imported by China in 2017 came from the U.S. This is another grain used as cattle feed in China that farmers can get relatively cheap. It is also used to make a popular Chinese liquor.

Possibly in reaction to the Trump administration’s tariff on Chinese solar panels and washing machines, last month, the Chinese government initiated an investigation into sorghum imports to see if there was “dumping” at subsidized rates. The investigation will be carried out for the period from November 1, 2016 to October 31, 2017. An investigation of industrial injury will be for the period from January 1, 2013 to October 31, 2017, according to a statement from the Chinese commerce ministry.

This isn’t the first time that China has tried taking action against U.S. agricultural products. Last year, it levied anti-dumping and countervailing duties on distiller grain imports of 42.2%-53.7% and 11.2%-12.0% from January 12, 2017 for 5 years.

Aerospace-Defense: The broader defense-aerospace market may not be as affected as Boeing (BA - Free Report) because of its growing dependence on China and the fact that China is currently its largest customer. Last year, during the President’s visit to China, the company announced a $37 billion order for 300 aircraft.

Last September, Boeing forecasted that China would buy a trillion dollars’ worth of planes over the next 20 years. Boeing has admitted that China is growing into the largest market for aircraft and that one in every four planes it produces goes to China.

Technology: Some have argued that Apple (AAPL - Free Report) , because its phones are assembled in China, alone accounts for a large chunk of the $ trade deficit with China. But IHS Markit estimates its total components cost at $370.25, of which $110 goes to South Korea’s Samsung Electronics for displays, $44.45 goes to Japan's Toshiba Corp and South Korea's SK Hynix for memory chips with the remaining split between various suppliers inTaiwan, Europe and the U.S. and China’s labor contractors, which account for only around 3-6% of the value.

As Adam Jourdan of Reuters points out, “Using a rough calculation…the iPhone 7 series added $15.7 billion to the U.S. trade deficit with China last year, about 4.4 percent of the total. That's also about 22 percent of the $70 billion in cell phones and household goods the U.S. imported from China.”

HP (HPQ - Free Report) , Microsoft (MSFT - Free Report) and Cisco (CSCO - Free Report) are other technology companies likely to be affected by a trade war. Qualcomm (QCOM - Free Report) has even more to lose than just trade as Chinese regulators are the only ones remaining to approve its NXP Semiconductor (NXPI - Free Report) buyout.

Last Word

Americans will of course see rising prices on any items that include components from China (the government is increasing tariffs on 1,300 items after all!). So anything from shoes to electronics to furniture could soon be more expensive.

There is this huge argument about the wisdom of using tariffs that increase hardships for your own people and there’s some merit in that too. But one does wonder what else can be done under the circumstances, when previous administrations have done what they could without changing anything with respect to Chinese intellectual property theft, blocking of U.S. companies like Facebook, Twitter and Google in China and reducing its dependence on the U.S. all the while.

China’s communist government is building a capitalist state. It will do everything possible to get there so the Chinese can compete effectively with everyone else. Until that happens, it will continue to use its population as leverage in negotiations. It’s time to call their bluff.

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