We cannot very well discuss economic volatility without addressing the elephant in the room: ongoing trade tensions between the United States and China. Regardless of where you stand in terms of U.S. foreign and trade policies, these tensions are affecting your investments. In some cases, those investments may well be generating higher returns. In others, you may be experiencing less welcome fallout from this “trade war,” which is as often a war of words as is it of actual actions.
SDI has a list of basic truths about the trade war that every self-directed investor must know. We make that list available below:
1. Tariffs often have an extended timeline.
When President Trump or Chinese president Xi announce billions of dollars in new tariffs on the opposing country’s goods, it can seem like a financial catastrophe. However, it is important to remember that not every tariff actually will go into effect.
For example, in mid-August, the U.S. announced that tariffs on Chinese imports including mobile phones, laptops, video game consoles, computer monitors, and certain toys, footwear, and clothing that had been planned for September 1, 2019, would be delayed until December 15, 2019. The official explanation for the delay was that the move would help insulate retailers during the 2019 holiday season, but the Chinese Vice Premier’s call to U.S. trade officials might have had something to do with this as well. The Chinese also postponed some threatened tariffs on U.S. goods at the same time.
Lesson Learned: Just because a tariff is announced does not mean it will go into effect immediately or at all.
2. Trade wars are often won and lost with words.
If you are like most self-directed investors, you monitor how both parties in the current trade situation are describing the situation and, in light of that, how your investments might be affected. You have probably noticed that both parties in today’s conflict are behaving with a lot of public aggression, but about the time things seem set to explode, they counter that rhetoric with public statements about how they are sure they will work things out.
A good example of this is both parties’ behavior in the wake of the G-7 Summit in August. While both engaged in inflammatory language leading up to the event, after its close, they toned things down, talked on the phone, and even indicated they might return to negotiations.
Lesson Learned: Pay attention to what the parties in a trade war say, but do not neglect to observe what they actually do. Both words and actions will affect your investments.
3. Trade policy success and failure hinges largely on public and consumer perceptions.
Probably the most significant effect that a trade war has in real time is the effects on the engaged nations’ financial markets. Trade tensions make investors nervous. When investors are nervous, financial markets become volatile because investors respond to the tariff threats and promises in real time and hedge funds and other large investment firms take on defensive stances, which can be bad for conventionally strong performers in the markets.
In the case of the U.S.-China trade war, U.S. investors have avoided certain tech stocks with outsized exposure in China and industries that China is presently threatening with heavy tariffs, such as automotive companies like Tesla and Ford. Investors are drawing back on these companies even though the threatened tariffs are not set to go into effect until mid-December.
Lesson Learned: The fallout from the threat of a trade war could be enough to force countries into negotiations, and the severity of the fallout will affect how each country is positioned during those negotiations.
4. The actual stakes in trade policy are likely intellectual, not strictly financial.
When you read about the ongoing battle of wills between the U.S. and China during the present trade war, it is easy to get caught up in the present-day drama associated with the tensions. After all, tariffs are certainly affecting U.S. industry sectors in many negative ways. U.S. oil exports to China have already fallen, and analysts warn that an extended conflict could erode U.S. dollar dominance.
However, the bigger issue, according to the supporters of U.S. tariffs on China and the proponents of moving U.S. companies out of China, is the ongoing intellectual theft associated with manufacturing in China. While Chinese labor is exponentially less expensive than comparable options, it comes at the price of either having to hand over trade secrets in return for permission to operate a plant in the country or overt theft of intellectual property once the company is up and running inside Chinese borders. Proponents of the current U.S. policies say they are essential to keeping intellectual property out of the Chinese public domain.
Lesson Learned: Always look for the greater benefit of “winning” a trade war. The “W” does not come from getting the other country to lift tariffs but from enacting permanent, enforceable policy changes that protect a country’s interests.
5. Diversification is a key factor to watch.
There is a saying about what happens when superpowers fight that certainly applies to the current U.S.-China trade conflict: “When elephants fight, it’s the grass that gets trampled.” Essentially, the fallout from the trade war will likely have a much bigger effect on other countries even than on either primary participant. The “winners” in the trade war will likely be the secondary players who are able to move forward in the ranks and attract more manufacturing presence and international investment capital while China and the U.S. scuffle. The “losers” will be the primary players and those other secondary players who fail to adapt to changing conditions.
For example, Mexico and Vietnam both are experiencing surges in manufacturing growth as companies seek to remove at least some of their operations from Chinese soil. If the countries can handle the new volume of manufacturing, they could “win” far more than the U.S. or China. As we mentioned above, some analysts believe the U.S. dollar could decline in dominance as a global currency, making room for another national currency or possibly a cryptocurrency in the newly vacant space. When two major powers are tied up in a trade conflict, diversification of the markets is a nearly inevitable result.
Lesson Learned: Self-directed investors can benefit from watching where and how diversification is occurring in the national and global economies, then leveraging that information to the benefit of their portfolios.