The U.S. may not be in a full-blown trade war with China yet. But, as the tit-for-tat tariffs continue to pile up, the stage is certainly set for one.
Contrary to popular belief, a trade war wouldn’t spark the beginning of an insurmountable global economic meltdown; capitalism always finds a way. On other hand, President Trump may be understating the impact when he says, “I’m not saying there won’t be a little pain.”
The truth is somewhere in the middle of the politicized rhetoric.
The problem is all the rhetoric is creating volatility most investors understandably struggle to navigate.
Taking a Toll on Stocks
The latest salvo: President Trump added another $100 billion worth of goods normally imported into the United States annually to the list, bringing the total dollar value of imports caught up in the face-off to at least $150 billion.
The last round of new tariffs was mostly in response to the 106 new American-made products China will now charge more to deliver to that country. That round of new import taxes includes things like soybeans, cars, and chemicals, and is in addition to the 128 kinds of U.S. exports China said it would now impose tariffs on just a couple of days prior.
That move was, of course, in response to other new tariffs the White House announced in late March. These focused primarily on steel and aluminum.
And if we’re being honest, it’s a big part of the reason stocks have fallen more than 9% from their January high.
And no name, regardless of its stature, has proven immune to the worry. Alphabet Inc (NASDAQ:GOOGL), which isn’t tremendously impacted by a trade war, has fallen 11% from its peak. Meanwhile, Apple Inc. (NASDAQ:AAPL) — which is smack dab in the middle of the war — is lucky to only be 5% lower.
The more obvious victims of a trade war with China, where tariffs are the weapon of choice, like Caterpillar Inc. (NYSE:CAT) and Boeing Co (NYSE:BA) are also losing ground. CAT is down 16% from its recent peak. BA stock has lost 11% of its value in just a few weeks.
But what if there’s more bark than bite to the fear-mongering?
There probably is.
More Bark Than Bite
Don’t misread the message. A full-scale trade war (and barring a stand-down soon, that’s what this is) won’t be fun. It should also be acknowledged, though, that Trump’s saber-rattling is a tactic that he’s used with the occasional success. The bulk of the worrying headlines ignores the truth that China needs the U.S. much more than the U.S. needs China.
For the record, the $500 billion trade deficit the United States suffers with trade partner China is tolerable. We as a nation of companies and consumers can afford to exchange our money for their goods. And, using our capital, the country can afford to invest in its own growth, lifting the standard of living for China’s citizens (who in turn may eventually enjoy enough wealth to start buying more American-made products).
Successfully redirecting that spending toward Made-in-the-USA products would bolster our economy, however.
And that’s not the typical Trump supporter saying so either. Democrat Bill Richardson, former governor of New Mexico and former U.S. Ambassador to the UN, conceded:
“I’m going to give the president my support on this one because I think we send a signal to China that needs to be sent, one that we expect you to stop playing around with intellectual property and dumping steel.”
Even Democratic leader Chuck Schumer, a usual critic of Trump, more or less cheered the tariffs. He explained early this month: “China will try to scare us but let me tell you something, they’re a bully and if we stay strong, they will back off,” adding, “they have far more to lose than we do.”
He’s right about China having more to lose than the U.S. does, even if China can’t admit it.
But why press the issue so publicly, and so fiercely? It may well be an effort to force China to the proverbial negotiating table, where both sides can give a little, and with neither side giving a lot. The end-goal for Trump, however, is likely China conceding a little more than the U.S.
Welcome to international political relations.
Irrational Fear is Still Fear
While all the tariffs and chatter about a brewing trade war are (ironically) a means to avoid one, they certainly don’t make things easy or fun for investors in the meantime. Regardless of how it all ends, bearish pressure continues to work against stocks. The biggest risk here is, if the stare-down lasts for too long, consumers and corporations just might talk themselves into kick-starting a recession.
That’s not the likely outcome. Most likely, everyone will come to their senses first, and investors will remember that capitalism always finds a way.
Capitalism can’t always stave off a fear-driven selloff in the meantime though, particularly when a full-blown market correction was and still is overdue. That’s a trading matter investors are still going to have to figure out on their own… deciding with the psychological bottom has been made.
But, everyone should put China and these tariffs and the never-ending discussion about a trade war in perspective. We don’t really want a trade war, and China certainly can’t afford to wage one.
This is little more than showmanship politics, as long both key parties eventually come to their senses…
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.