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US-China Trade Dispute: The Ultimate Stock Showdown!

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The tariff dispute, which has been playing spoilsport, has intensified with President Donald Trump’s latest rhetoric on a potential trade war with China. Trump is seeking a further tariff of $100 billion against China in addition to the already proposed $50 billion of tariffs on Chinese goods, targeting robotics, information technology, communication technology and aerospace.

Earlier this week, Washington planned to slap a 25% tariff on 1,300 China-made products, which include a wide array of products including raw materials, construction machinery, agricultural equipment, electronics, medical devices and consumer goods. These goods belong to industries, such as aerospace and agricultural equipment, which were the key growth areas of China over the next seven years.

The new taxes came a day after China hit back with likely 25% duties on 106 American goods including soybeans, corns, aircraft, and vehicles worth an estimated $50 billion, against Trump’s similar threat in response to alleged intellectual property theft. The second-largest economy has already imposed a duty on 128 American food products, including meat, fruit, pork, dried fruits, wine and aluminum scrap, worth $3 billion effective Apr 2, in retaliation against Trump’s severe tariff of 24% on steel and 10% on aluminum imports.

The round of sanctions and retaliation could trigger a global trade war, hurting worldwide economy and corporate profits at big U.S. exporters. As such, several corners of the broad market and various industries are in distress. In particular, large-caps stocks, which derive most of their revenues outside the United States especially China, appear vulnerable. On the other hand, small caps, which provide true domestic exposure, should be safe and better plays in case the tit-for-tat situation turns into a full-blown trade war.

So let’s pick a couple of stocks from industries on China’s hit list for a match up to see which one is in the line of fire and which is guarded well enough to survive the tariff onslaught.

The Boeing Company (BA - Free Report) versus Northrop Grumman Corporation (NOC - Free Report)

Boeing would be hit hard from the proposed Chinese tariff, as it is the top U.S. exporter to China and will buy about $1 trillion worth of its aircraft over the next 20 years. On the other hand, NOC would remain unscathed by the dispute. Boeing has shed 4.6% in a month while NOC has gained 4.4%. Both stocks have a Zacks Rank #2 (Buy).

Deere & Co. (DE - Free Report) versus Hormel Foods Corporation (HRL - Free Report)

Farming equipment maker Deere could be among the biggest losers as the proposed China tariff on agricultural products would reduce demand for the related machines while packaged food companies like Hormel could see a boost resulting from cheaper commodity prices, including soybeans and corns, on weak Chinese demand. Both stocks have a Zack Rank #2. Shares of DE are down 3.6% over the past month while HRL has climbed 6.8%.

DowDuPont Inc (DWDP - Free Report) versus Archer Daniels Midland Company (ADM - Free Report)

DowDuPont’s agriculture unit is expected to be hurt by price declines in soybeans. The stock has a Zacks Rank #3 (Hold). On the other hand, Archer Daniels Midland could benefit from reduced prices. American agricultural producers export about $20 billion worth of products to China each year. Of this, $14.6 billion comprises soybeans and the rest include cotton, wheat and corn. ADM has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Caterpillar Inc. (CAT - Free Report) versus H&E Equipment Services Inc. (HEES - Free Report)

Caterpillar is vulnerable to the trade dispute as it has heavy exposure to China. Meanwhile, H&E Equipment Services is a small-cap stock and does not do business in China. CAT has a Zacks Rank #4 (Sell), while HEES has a Zacks Rank #2. Both stocks were beaten down over the past month.

General Motors (GM - Free Report) ) versus Tesla (TSLA - Free Report)

American automakers would be the worst hit from the proposed tariff and a potential trade war. In particular, China has been General Motors’ largest retail market for six consecutive years as the automaker sold four million vehicles in 2017 for the first time ever. Meanwhile, Tesla also seems to be the biggest loser as China has threatened more import tariff on electric cars. Out of the two, GM still seems attractive with a Zacks Rank #1, while Tesla has a Zacks Rank #4.

Tyson Foods Inc. (TSN - Free Report) : A Wild Card

As Tyson Foods is the world's largest processor and marketer of chicken, beef, and pork, it is likely to be impacted by China’s 25% tariff on pork and pork products. Notably, China is the third-largest consumer of U.S. pork and bought about $1.1 billion worth of pork products from the United States last year, according to the U.S. Meat Export Federation. However, a possible duty on soybean would reduce the price of the commodity due to large supplies and thereby result in reduced cost for meat companies like Tyson. As such, Tyson is both a beneficiary and a loser in this series of tariff attack. The stock has a Zacks Rank #1 and a top VGM Score of A.

Bottom Line

All the buzz has resulted from the Trump administration, which is seeking to reduce the U.S. trade deficit with China by $100 billion. Last year, the United States had a record $375-billion trade deficit with China, while China reported a U.S. trade surplus of $276 billion.

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