The China-US trade war began almost one year ago, with both sides initiating levies on $34 billion worth of goods beginning July 6th, 2018. Today the US has tariffs on $250 billion worth of Chinese products with the remaining $325 billion worth of goods (cover the rest of China’s total exports to the US) being threatened, taunting China.
Chinese regulators have retaliated with tariffs on $110 billion worth of US goods, nearly all of the US’s exported goods to China. For perspective in 2018 the US exported $120 billion in goods to China while importing $540 billion in Chinese products.
G-20 summit could make or break a potential deal between Trump and Xi. The markets are betting on break. Investors and traders have completely priced in a rate cut for the Federal Reserve’s July meeting. If progress and concessions are made at the G-20 summit this conviction will likely do a 180.
The trade war has been weighing heavy on both economies and now it is a question of which side will make compromises first as both economies will undoubtedly experience growing turmoil if this trade war ensues.
Why Xi Might Cave on Trade Deal
China is a net export country meaning that they rely on export growth to maintain its recent prolific GDP expansion and the US consumes over 20% of those exports. If 20% of China’s total exports are being threatened, the entire economy comes under fire. This trade war has been uncovering the cracks in China’s economy as it begins to slow.
Chinese interbank lending rate fell to its lowest level in a decade due to concerns over banks’ liquidity with the recent government takeover of a bank in financial distress last month. This move to an easy money policy further exemplifies the fragile economic condition that China is beginning to face.
Xi knows that China’s economy is coming closer and closer to the end of its proliferating growth period that they have experience for the last decade or so. This trade war might be the feather that tips China’s GDP scale to negative growth.
Xi and his Beijing officials are just hoping that their economy can withstand further trade escalation long enough for the US stock market to tank and Trump to be forced to cooperate.
Some Chinese companies have been attempting to avoid US tariffs by shipping products through countries Vietnam and Taiwan which have both seen a significant increase in both Chinese imports and US exports.
Stocks to Buy If Beijing Compromises
Boeing (BA - Free Report)
Boeing is the single largest US exporter and China is a crucial buyer of their commercial airplanes. Boeing has been facing other headwinds with significant issues concerning their 737 MAX. If China were to reduce its tariffs this should reignited order volume from Chinese airlines pushing the stock price with it.
Archer Daniels Midland (ADM - Free Report)
ADM relies heavily on exported agricultural products with 55% of its revenue coming from international sales. The trade war with China has significantly hurt this business’s bottom-line as razor-thin margins cause negative revenue impacts to be amplified in earnings. ADM has fallen over 12% in the last year but could see a considerable upside if their business with China is able to resume as usual.
Tesla (TSLA - Free Report)
Tesla has a significant level of Chinese exposure as they are the number one international buyer of Tesla vehicles. The firm is in the process of building Gigafactory in Shanghai to keep up with the anticipated Chinese demand for Tesla products. Analysts are projecting that the demand for Tesla’s may be cut in half this year if the trade war continues. If Xi is willing to make compromises, TSLA could see a surge as the much-needed demand is revitalized.
Why Trump Might Cave
The US is a net import country meaning that they operate at a trade deficit. A huge portion of US companies rely on Chinese imported components to create finished products in the US. These tariffs will force these firms to either eat the tariff cost or produce these components elsewhere at a deepened expense. Either way, a considerable amount of consumer products will become more costly to make, and businesses will more than likely push this expense to the consumer. This will slow consumer demand and probably take a hit on the US’s total GDP.
The import expenses are only one side of the equation. Chinese demand for US goods has been reduced significantly because of Beijing’s levies, hurting American exporters.
Trump is confident that the US economy can sustain prolonged tariffs with China. He says the government will be collecting billions in tariffs and the US will just be doing less business with China.
If the trade war does escalate the effects will be larger than president Trump is anticipating. Prices for goods across the board will raise as US corporations scramble to either produce components in-house or find another outsourcing partner. Further escalation of tariffs will have a materially negative effect on the US economy.
Trump is coming up on the 2020 election and he can’t afford to have the equity market tumble before this. Most of his credibility is hinged on the market’s success since he has taken office. As I mentioned above, Beijing is hoping that Trump backs down to save the markets from turning bearish before he is up for reelection.
Stocks to Buy if Washington Compromises
Apple (AAPL - Free Report)
It is widely known that the majority of an Apple products are made overseas, primarily China, in order to cut costs. Apple is now evaluating options to move production from China to Southeast Asia for somewhere between 15 and 30% of its production capacity. This trade war has hit Apple’s top and bottom-line and will continue to increase costs and hamper demand as the trade war ensues. If Washington backs down and Apple resumes operations as they were before the trade conflict, AAPL should see a solid lift.
Nike (NKE - Free Report)
Nike produces almost all of its products overseas with the largest portion of this outsourcing coming from China. The US tariffs on these Chinese made shoes will cause the cost to increase and in turn inflate the price for consumers. This will slow demand for the shoes if the US-China trade conflict heightens. Consider buying NKE if progress is made in trade discussions, look primarily for Trump to give concessions to Chinese made products.
The US-China trade war has gone beyond what most economists and investors had anticipated but the markets still aren’t pricing in the full impact. If Washington adds the remaining tariff schedule the economy and markets will feel its effect.
I am hoping that both president Trump and Xi come to their senses before this occurs and work together in order to make a trade agreement that both sides can stomach. This result isn’t guaranteed and further escalation will likely cause one side to fold to the others demands. If this does occur look to buy some of the stock I mentioned above.
Keep in mind that further escalation of the trade war will likely cause these stocks further pain. Wait till the time is right before putting a position on.
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