In an attempt to negotiate a trade deal with China, President Trump has increased taxes on goods they import to the United States.  Here’s Deupree James Wealth Management’s hot-take on the winners and losers of a trade war with China.

Tariffs 101

Tariffs on foreign goods are ultimately a tax on U.S. businesses and consumers.  While Chinese exporters may shoulder part of the tariff burden, it is mostly U.S. importers and consumers who absorb those higher costs in the form of lower profits (businesses) and/or higher retail prices (consumers).  Look no further than last year’s 12% increase in washing machines/dryer prices as a case study for the prospective impact of the new, higher tariffs.

Unintended Consequences

Every action has an equal and opposite reaction.  2018 saw the Chinese Yuan decline over 9% against the U.S. Dollar after President Trump imposed tariffs on Chinese products.  These currency moves essentially negated the effects of U.S. tariffs on Chinese exporters by making their goods cheaper after the U.S. tariffs made them more expensive.

But a currency war is a rather benign reaction to a trade war.  Some historians point to rising tariffs as a contributing factor the U.S. Civil War.  After all, Fort Sumter, the first flash-point in the conflict, was a tariff collection point in Charleston Harbor!  We can only hope and pray the trade dispute with China is resolved quickly and peacefully.

Local Impact

Boasting a deep-water port in New Orleans, Louisiana’s export products represented 27.5% of the state’s total economic output in 2016.   Its $56.5 billion in exports translates to roughly $12,062.34 for every resident.  Top Louisiana exports include petroleum products and soy beans – a product China has been targeting in hopes of influencing the President’s base.  China is shrewdly working their primary advantage in a trade war with the United States: their leaders will not have to seek reelection.

Investment Implications

A protracted trade war could be bad news for U.S. retailers and consumers in the coming quarters.  It could lead to a stronger dollar should the Fed be forced to battle inflation.  A stronger dollar would, of course, hurt U.S. exporters, so we believe investors should be prepared for the possibility of higher headline inflation and slower earnings growth ahead.

However, investors should be careful in how they prepare for inflation.  Inflation in consumer goods coupled with slower growth is a recipe for stagflation.  Indeed, industrial commodities such as copper and agricultural commodities like soy have experienced deflation since the trade war with China intensified in 2018.

Beneficiaries of a trade war might include high-quality bonds, Utilities, and Real Estate holdings.  We are also keeping a close eye on Mexico.  President Trump is probably in a better negotiating position when dealing with Mexico as the U.S. accounts for more than 70% of Mexican exports and less than 20% of Chinese exports. Forbes recently noted that Mexico overtook China as our largest trading partner and their stock market has outperformed Chinese equities over the past 12 months.

 

About the Author: Ben James is the co-founder of Deupree James Wealth Management, a boutique investment firm in Shreveport, LA that strives to help busy people make wise financial decisions so they can feel confident about their future.  Email info@deupreejames.com if you’d be interested in learning how a trade war might impact your investments or financial goals.

 

 

The information contained herein is for informational purposes only and should not to be construed as a recommendation for any  particular security, sector or strategy to any individual person or entity. The decision to review or consider the purchase of any security, sector or strategy mentioned in this article should not be undertaken without consideration of your personal financial information and risk tolerance with your financial professional. Past performance should not be considered as an indicator of future results. Securities offered through Triad Advisors, LLC. Member FINRA/SIPC. Investment advice offered through Goss Advisors, a registered investment adviser. Goss Advisors and the Deupree James Group are separate entities from Triad Advisors, LLC.