Why the Trade War Might not Be Ruinous

Tariffs don’t involve a major part of the US economy and this may all be a negotiating tactic, say some market strategists.

After President Donald Trump threatened to slap additional tariffs on a broader range of Chinese goods, stock markets dipped worldwide this week. But numerous financial experts are cautioning that the damage to the US economy and investors might not be too bad.

Although the S&P 500 slid starting last Friday with the first news of the levies, a lot of the losses were recouped during the week’s first three trading days, and the overall loss was just 0.7%—perhaps showing that traders and investors were only slightly concerned, and hardly panicking.

The look-on-the-bright-side approach rests on assessments that:

It’s just a negotiation tactic. Trump has said as much, and his background as a real estate magnate suggests he likes to go into making a deal with a hardline initial approach. As Chris Zaccarelli, CIO of the Independent Advisor Alliance, pointed out: “Tariffs can be walked back at any time.”

China has fewer targets for retaliation. The White House first imposed $50 billion in duties on Chinese imports last week, and now is looking at an additional $200 billion, charging 10%. But the trade imbalance between the two nations is so lopsided that China may soon deplete available US imports to penalize, and Washington has plenty more Chinese goods to wallop.

Last year, the US sent $130 billion in exports to China, and now Beijing has placed tariffs on $50 billion of it, to match the US’s first salvo. The Chinese, though, shipped almost four times as much to American consumers, $505 billion. “China is going to run out of direct reprisals quickly,” an LPL Financial report concluded.

The money involved is not that major. The latest round of Trump retaliation is worth just $20 billion (10% of the $200 billion in Chinese imports). “The dollar amounts are not that large,” said Brian Nick, Nuveen’s chief investment strategist. “We can import the goods from someplace else” to substitute for the targeted Chinese merchandise, and the replacements will cost a little more than normal.

That’s just a small ripple in the $19 trillion American economy. And the upshot will be that US “business will be marginally less competitive,” Nick said, because it is paying more for Chinese wares.

On the other hand, things could spiral out of control, as they did in the trade war of the 1930s, which helped to deepen the Great Depression. There are other ways China can strike back, such as by limiting operations of American companies on its soil, such as Apple, which has large sales to the Chinese.

UBS researchers said that the top five US companies doing business in China, in terms of revenue exposure, are Skyworks Solutions, Qualcomm, Qorvo, Micron, and Broadcom, all of them tech outfits.

The good thing, from an American standpoint, is that the US economy is doing well and interest rates are low, a situation that is far more healthy than in the 1930s.

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