Just when it looked like a trade war between the United States and China was going to be averted, another skirmish flared up, inciting a chain reaction. On Monday, the White House identified $200 billion worth of annual imports from China as newly subject to relatively steep tariff. It was a heavy-handed response to new tariffs on U.S. goods shipped to China announced this weekend, which was in response to an announcement of new tariffs on a different $50 billion worth of goods shipped from China to the United States.
Maybe this thing won’t blow over after all.
That’s not to say the world wouldn’t survive such a geopolitical conflict. Capitalism always finds a way. But the trade war could put some high hurdles in place for all companies. The tech sector — and its stocks — are particularly vulnerable to the brewing headwind.
Caught in the Crossfire
It may be a product made for an American company with the logo of that American company on it, but if it uses electricity, there’s a good chance at least part of that product — if not the whole thing — was made in China.
It’s a nuance of the looming laws that, if nothing else, makes it difficult to gauge the impact on tech giants like Apple (NASDAQ:AAPL). While the iPhone is made in China, most of its components are made elsewhere; China simply does the assembly. Still, inasmuch as it’s a “completed good,” the iPhone could be (and arguably should be) taxed as they come into the United States, according to recently-proposed and impending tariffs.
Yet, President Donald Trump has explicitly said the iPhone wouldn’t be subject to the planned tariffs, without explicitly explaining why, or how other importers might be able to sidestep such duties. Meanwhile, White House trade advisor Peter Navarro denied any knownledge of this exemption.
Even if iPhones are exempt from this tariff, Apple could still become a victim of the trade war, as 20% of its business comes from an increasingly agitated China that may apply leverage however and wherever it can.
The scuttlebutt isn’t any easier for the likes of Qualcomm (NASDAQ:QCOM), which is a key supplier to Chinese smartphone outfit ZTE — the company that found itself in hot water back in April for doing business with sanction-banned North Korea and Iran. Qualcomm, an American maker of smartphone modems, was barred from doing business with ZTE then. This directly has nothing to do with the ballyhooed trade war, but indirectly has everything to do with it. In the meantime, Qualcomm’s planned — and seemingly approved — acquisition of China’s chipmaker NXP Semiconductors (NASDAQ:NXPI) has somehow since been dialed back to an unapproved status.
The step back miraculously materialized right around the time China and the U.S. began lobbing new threats of tariffs at one another.
The uncertainty surrounding Apple’s and Qualcomm’s vulnerability to the impending trade war is only a microcosm of a much bigger overhang. That is, nobody really knows how this is all going to shake out, because not even the White House has committed to the specifics yet. Never even mind the fact that new layers of tariffs never cease being added.
Credit Suisse analyst John Pitzer laments:
“We have been inundated with requests from clients to discuss our views on [semiconductors] as it relates to the escalating trade tensions between the U.S. and China. Predicating all the potential moves on a single Chess board is difficult — this feels more like 3-D chess.”
Further blurring the plausible outcomes of an escalated trade war is the fact that so many technology companies rely on components, software and IP made by fellow technology outfits. J.P. Morgan analysts have a “cautious stance on [the] tech sector, which has elaborate supply chains, is sensitive to consumer and corporate confidence, and where the adverse trade impact could be material.”
In that vein, also at risk is the sale of 5G technologies by American companies to Chinese buyers.
That’s another dent in Qualcomm’s outlook, though Texas Instruments (NASDAQ:TXN) is vulnerable on that front too. Both companies sell components that China’s ZTE and Huawei were counting on acquiring, with the latter looking to bid on helping to establish Australia’s burgeoning 5G ambitions. In light of the United States’ and the UK’s concerns that China may not be an entirely trustworthy trade partner though, Australia may not even allow Huawei to participate in that 5G bidding process by officially banning it as a trade partner.
The subsequent ripple effect could work against all technology companies. Or, it could distinctly favor the ones outside of China that can and will make 5G components. Or, it will inspire more Chinese companies to do what Huawei has begun to do — start working on its own 5G chips.
There’s the rub. It’s not clear who will be able (legally or logistically) to do business with who as long as the war of words wages on. The landscape continues to change.
Bottom Line on a Trade War
The good news for most U.S. investors and/or owners of U.S. stocks is, the United States is better positioned to win a trade war than China is.
That’s not necessarily the suggestion being made by politically-driven headlines. But, as Macro Research’s relatively unbiased, level-headed Jeffrey deGraff explains:
“If we compare the price action between Chinese equities and U.S. equities (particularly the Russell 2000), it’s pretty clear that the market is discounting the U.S. as a relative winner in the outcome. That’s not to say trade wars are bullish, but the S&P 500 has absorbed the threat and even body blows substantially better than China.”
Still, even without knowing exactly how all the chips will finally fall, investors know enough to recognize the technology sector will end up being the most disrupted sliver of the market. It’s the easiest to use as a pawn because its products are indisputably tangible, and because it’s each country’s biggest economic engine. It’s all about leverage.
Whatever’s in the cards, July 6th is when the next batch of new tariffs on goods imported into the United States will go into effect. Don’t be surprised if things start to pivot as that date approaches.
It just remains to be seen which direction that pivot will move.
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.