US vs. China: Trade War or Just a Scrimmage?

E*TRADE Securities2

Prepping for potential tariffs

The backstory

As you may have noticed, things are heating up between the US and China. After President Trump followed through on his promise to implement tariffs on imported steel and aluminum in early March, several countries including China made it clear that the tariffs would not go without a response. In the weeks since, a flurry of proposed duties from the US and China has more than a few pundits saying we have a trade war on our hands.

But perhaps not so fast.  For investors concerned about the tariff talk, here’s a quick summary of what many are noting is—and is not—at stake, at least for now.

Market reactions

In the immediate aftermath of China’s announcement on April 4 of a 25% tariff on over 100 US products, US stock futures plunged more than 1.5% and the S&P 500® opened down more than 1%.1 However, these declines were quickly erased, with the S&P entering positive territory by mid-afternoon that day.

The market has been increasingly resilient to successive tariff discussions over the last few weeks (See some of our market commentary on the subject here). Given that neither the US nor China has announced implementation dates for the latest rounds of tariffs, investors may have concluded that a solution will be negotiated before any tariffs take effect. The White House’s National Economic Council Director Larry Kudlow emphasized the importance of prolonged negotiations, noting that “[N]one of the tariffs have been put in place yet. These are all proposals …there’s at least two months before any actions are taken.”2

What products are involved?

All this being said, it is arguably wise to keep tabs on those sectors that could take a hit should negotiations break down. So far, tariffs proposed by the US focus largely on China’s manufacturing and aerospace industries, including products such as industrial dryers, textile printing machinery, and airplane parts. China’s list of US products that would be affected by proposed tariffs threatens the chemical and plastics sectors, along with US agricultural products including wine and pork exports.      

A number of industries have avoided the hot seat. Of the sizable list of Chinese-made products subject to the Trump administration’s proposed tariffs, cellphones, computers, and clothing would be largely unaffected. For their part, China has not yet announced any tariffs on American-made shoes, upholstery, and animal hides.3

And this is key, because it suggests negotiation is the preferred outcome: First, it would be challenging for either country to sufficiently replace these products with a separate partner. It also indicates that both nations hope to avoid compromising their own business interests by implementing tariffs that could cause self-inflicted damage, choosing instead to keep certain global value chains intact. Finally, tariffs on these items could signal a point-of-no-return in trade relations between the two nations. Keeping high-volume imports on the table may be a bargaining chip that could ultimately be used in negotiations between the US and China.

The bottom line

One thing is for certain: This isn’t over yet. This ping pong game will likely continue, and more potential tariffs on additional industries could be added to the mix.

Should tariff talk turn to tariff walk, domestic small cap stocks, funds, or ETFs may be worth a look as they tend to derive a smaller percentage of revenues overseas. Small cap funds also tend to have less exposure to tech stocks than large cap indexes, which can provide further insulation from the effects of a trade war. 

But this being said, it’s also important to remember that the market’s bull run is a staggering nine years old, and economic fundamentals remain strong.4 The market will not always go in one direction, and it can be rattled by geopolitical tensions like we’re seeing between the US and China. In these instances, a prudent course of action is to take a long-term view. Focus less on the headlines, and more on one’s goals, time-horizon, and risk tolerance. 

1. E*TRADE Securities. “Beyond the breakout.” 5 April 2018.

2. Mayeda, Andrew. “U.S., China Push Time-to-Talk Message as Trade Tensions Rise,” Bloomberg News,4 April 2018.

3. Durbin, Dee-Ann, “US and China both omit key products from tariff threats,” Associated Press, 9 April 2018.

4. Otani, Akane, “Stocks Still Have Momentum as Aging Bull Market Turns Nine,” Wall Street Journal, 9 Marc. 2018.