Market Watch: Nothing To Fear, Trade Is Still Here

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Last week, the Trump administration formally imposed 25 percent tariff across more than a thousand categories in Chinese imports. The U.S. Trade Representative details that products such as pharmaceuticals and mechanical equipment are included, as well as TVs, auto parts and similar consumer goods. This comes about a month after the administration signed a bill imposing 10 percent and 25 percent tariffs on aluminum and steel, respectively, which China retaliated against with their own tariffs on U.S. agricultural imports. Investors and consumers alike are nervous that this trade tension between the two powerful economies will result in a trade war. But even as trade tension intensifies, there is still time left for negotiations to smooth over this friction between them. While it’s important to know what a potential trade war holds at stake, it’s also important to understand why these nations’ openness toward trade negotiations should keep you from fearing an event that might not occur.

To give some context on how trade tensions between the U.S. and China have gotten to this point, the administration has reasoned that proposing tariffs directly on China will incentivize them to reduce their trade surplus with the U.S. and their restrictions on U.S. companies for accessing Chinese markets. Based on China’s trade surplus on merchandise exported to the U.S., valued at $375 billion, the administration seeks to cut that surplus by $100 billion as part of their trade policy to reduce the U.S. trade deficit. The Trump administration has found additional evidence to support that China’s pressures on U.S. companies entering their markets is a ploy to access technological advancements that comes out of U.S. corporations.

As such, the Treasury Department has recently announced plans to propose laws against China for their licensing requirements, joint-venture stipulation, pressure to transfer technology and other practices China levels at U.S. technology firms in order for them to access their markets. These laws would only take away some of the value of the tariffs the U.S. plans to impose on China that leads many to assume with confidence that China will continue to retaliate with their own tariffs, which would further increase tensions into a full out trade war.

If you’re unfamiliar with the term, a trade war occurs when two countries go back and forth imposing tariffs on each other. In the case of the U.S. and China, a trade war would be instigated due to unfair trading practices the U.S. perceives China to be doing to U.S. companies. Trade wars can affect one industry but then go on to affect other industries and even other countries besides the two involved in the trade war. As a reference, tariffs typically mean one of two things for U.S. corporations. Either they help domestic products look more attractive for consumption or they increase production costs for these companies, leaving them to cut back some of their capital – their labor force, for instance – to offset these costs. This can make spending more expensive to laborers and consumers, especially in the short-run. It’s no wonder, then, why investors and consumers are justifiably nervous of what these changes might mean for their funds.

Stocks in the steel and aluminum industries dealt with renewed volatility after the Trump administration first announced its tariffs on these industries at the beginning of March. However, it seems unlikely for stocks in the technology and communications industries to face the same severity of volatility. According to Thomson Reuters Lipper data from mid-March, stocks in these industries have received $5 billion from investment funds this year. As these gains in the S&P 500 index is heavily supported by Microsoft, Apple, Netflix and other large technology companies, the dependency investors have on these industries are within the boundaries of what are reasonably safe investments notwithstanding current trade war fears.

Unfortunately, agricultural stocks that specifically deal with pork and fruits are not spared from this line of safety. On March 28th, China enacted tariffs on U.S. pork and fruit imports at 25 percent and 15 percent, respectively, in retaliation to the steel and aluminum tariffs that went into effect a few days before. This followed a week after Chinese officials said they were preparing their own tariffs should the U.S. proceed with their tariffs on steel and aluminum imports. In the month it took the tariffs on these metals to officially take effect, China’s Commerce Ministry was devising which agricultural imports (specifically from states that aided Trump’s election) could they choose to impose tariffs on that wouldn’t impact them greatly. Using their market power as the second-largest consumer of U.S. agricultural products, China plans to impose these tariffs on pork and fruit, as well as over a hundred types of U.S. commodities, that value close to $3 billion.

Farmers, whose livelihoods depends on the unpredictable nature of their industry, are reasonably concerned with recent developments in the administration’s trade policy. According to the U.S. Department of Agriculture, China’s agricultural consumption accounted for a sizeable 15 percent of all U.S. agricultural exports last year – totaled at $140.5 billion. From these tariffs on agricultural products, it’s very probable that businesses in the industry will be dealt increased production costs. Wanda Patsche, a Minnesotan hog farmer, said in an interview with the Wall Street Journal that she’s preparing to sell half of her pigs to avoid driving down the prices for farmers from a potential domestic pork surplus. Her concern is more than credible as data from the U.S. Meat Export Federation shows China is the biggest consumer in the pork market, which was valued at $1.17 billion within the last year. While this was just 5 percent of the $22 billion in U.S. agricultural imports China received, you must also consider the near $460 million in U.S. fruit and tree nuts they’ve consumed as well. As China remains the largest importer of U.S. agricultural goods, all actors in the industry have reason to look at recent trade policies with trepidation.  

Despite this dilemma, both countries are open to negotiating fairer trade terms. In the interest of avoiding consequences of trade wars, discussions led by China’s Economic Czar Liu He, U.S. Treasury Secretary Steven Mnuchin and U.S. Trade Representative Robert Lighthizer cover potential solutions to improve U.S. access to Chinese markets and reduce trade imbalances. Yet, the Trump administration’s impatience with the Chinese government’s gradual process has caused them to impose an additional $100 billion in tariffs on Chinese merchandise. As expected, China retaliated with more tariffs, valued around $50 billion, on U.S. goods from soybeans to commercial passenger planes.

After heeding concerns from a petition by 45 trade associations, the administration has also agreed to give companies until May 22 to bring forth objections to these direct tariffs on China. In the letter from the petitioning trade associations, they implore the administration to work on ending restrictions on foreign companies rather than impose more tariffs that would stifle growth in U.S. exports and raise supply costs that would lead to labor cuts or higher consumer prices. Hopefully, U.S. companies will be able to rally up enough evidence to move the administration from further escalating trade tensions. Consumers should closely follow recent trade policy news to see how these decisions will turn out.