How to Play a U.S. Trade War With China

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China and the United States are heading for a trade war. At least, that's the apparent consensus among investors. But how will that play out in the markets? 

In this story, I'll give some ideas as to how to position a portfolio if the rhetoric about getting tough on trade finally translates into outright hostility.

China currently looks a lot like Japan did in the 1980s in terms of its relationship on exports and imports with the United States. Trade frictions then resulted in Ronald Reagan's administration imposing first a 45% duty on Japanese motorbikes, to protect Harley-Davidson (HOG) , then a 100% duty on Japanese computers, televisions and power tools.

China has not got off to a good start under the administration of Donald J. Trump. Despite word that Trump will host Xi at his Mar-a-Largo resort on April 6 and 7, relations appear frosty between the two leaders. Trump didn't call Xi until three weeks into his presidency as he worked out his stance on Taiwan, finally acceding to China's "One China" policy. Tellingly, there's no golf on the scorecard at the April "working session."

That's in stark contrast to the chummy summit in mid-February when Trump met Japanese Prime Minister Shinzo Abe, an apparent "fast friend" and the first world leader to congratulate Trump in person after his election. I outlined a roster of Japanese stocks that could get a boost from tighter ties between the United States and Japan, a key economic and political ally to counter China's rising influence in Asia.

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