The U.S.-China trade war has sent emerging markets and markets in Asia falling.
One month after the start of the trade war on March 22, 2018 (when the U.S. imposed tariffs on US$60 billion worth of Chinese exports), China’s market was down 5.3 percent.
Emerging markets and Asia (excluding Japan) fell 2.2 percent and 2 percent, respectively.
The Chinese market went on to see one if its worst years on record, losing 25 percent for 2018.
Meanwhile, the U.S. stock market gained 1.1 percent one month after the trade war, and only fell 6 percent in 2018.
The U.S. hasn’t seen as much pressure on its market because it’s a net importer – not a net exporter like China.
You see, tariffs (which are effectively a tax on goods from other countries) make imports more expensive. The added cost needs to be shouldered by either the seller, buyer or consumer – or a combination of the three.
This forces importing companies to find alternative sources to satisfy demand. Unless the exporting country is willing to shoulder the burden of the tariffs, it will lose business to other markets not subject to tariffs.
Since the start of 2019, many U.S. companies have held back on new orders for Chinese-made goods, as they wait for a resolution to the trade war.
Some Chinese companies are not waiting for a resolution and already laying down plans to shift production to countries not affected by President Trump’s tariffs, including Vietnam, Cambodia and Indonesia.
That’s resulted in a lot of lost business in China.
But something has changed now…
The U.S. market is getting hit just as bad as China
On May 5, Trump accused China of backtracking on commitments required to reach a trade deal, including clamping down on intellectual property theft and opening up more of its markets to U.S. companies.
He then raised tariffs on US$200 billion of Chinese exports to 25 percent effective immediately. That meant goods that arrived on U.S. shores by the start of June – after nearly a month in transit at sea – would already be taxed.
But instead of just China and the Asian markets taking a beating, the U.S. and Japan have fallen right alongside China.
There are three reasons why…
1. Tariffs are now likely to hit U.S. consumers
Trump says that China will pay the U.S. billions of dollars in tariffs until China agrees on his terms of trade and that U.S. consumers will not be affected.
One of the reasons he’s been right so far is the front-loading that took place in 2018. Buyers ordered more than their usual amount in order to avoid tariffs imposed at a later date.
Front-loading by U.S. buyers is why China’s exports to the U.S. grew nearly 7 percent to US$540 billion last year despite the trade war.
That means a large amount of goods on store shelves in Walmart, Costco and Target in early 2019 were still free from tariffs.
Look at it this way… In the nine full months (April 2018 to December 2018) after the trade war began, U.S. imports from China grew by US$19.6 billion – largely from front-loading.
In the first four months of this year, U.S. imports from China fell US$20.6 billion.
So the impact of front-loading is likely over.
And as of June 1, US$260 billion of Chinese exports are now subject to 25 percent tariffs. That will mean higher prices for the end consumer in the coming months.
2. China is retaliating beyond tariffs
The U.S. sells just US$120 billion of goods to China compared to the US$540 billion that it buys.
This means China cannot hope to match the U.S. when it comes to tariffs. It’ll run out of goods to tax long before the U.S. does.
But China has other ways of striking back.
That includes threating to cut off exports of rare earth elements (REEs). China supplies the U.S. with 80 percent of its REE needs.
Beijing is also warning its citizens about traveling to the U.S. in a clear attempt to retaliate against U.S. tariffs.
2.9 million Chinese traveled to the U.S. last year and they spent nearly US$19 billion.
3. Rising nationalism is bad for U.S. companies in China
The trade war is beginning to stoke nationalism among China’s consumers, who feel the U.S. is trying to prevent their country from achieving success.
This is a big problem for U.S. companies operating in China that have benefitted from the largest and fastest-growing consumer market in the world.
Companies like Yum China (Exchange: New York; ticker: YUM), which operates iconic U.S. branded fast-food chains like Kentucky Fried Chicken and Pizza Hut in China… Apple (Exchange: New York; ticker: AAPL), which sells 20 percent of its iPhones in China… and Starbucks (Exchange: New York; ticker: SBUX), which plans to have more stores in China that the U.S. in the next five years… are all at risk.
Growing calls to boycott Apple products in China have already hit iPhone sales there. The number of iPhones sold in China are estimated to have fallen 30 percent in the first quarter of 2019, according to market research firm Canalys.
Like Apple, Starbucks now generates 20 percent of its revenue from China. And while I didn’t notice any boycotts of Starbucks cafes in Beijing during a trip there last month, intensifying trade friction could start to hurt the company’s expansion plans.
With U.S. companies generating US$158 billion in revenues from China, there’s a lot at risk if Chinese consumers start buying non-U.S. products in support of local companies.
In short, the trade war is now beginning to hurt markets outside of China and Asia.
This means now, more than ever, it pays to make sure you’re properly diversified. That includes owning different types of assets, including hard assets (i.e. gold and silver), which have proven to hold their value during times of turmoil.
Editor, Stansberry Pacific Research