Trade relations between the U.S. and China are flaring up again and while it has had some impact on stocks, the tensions haven’t yet sent the market into a tailspin, as has been the case during the current presidency.
But one China expert sees the recent tensions as “just getting started.”
Jonathan Ward, Oxford PHD and founder of Atlas Organization, a business and government consultancy concerning U.S.-China relations. Ward has traced China’s quest for dominance over its history and sees the current trade conflict between the two counties as indicative of a new relationship, which would have wide-ranging implications for American corporations and financial markets.
“The entire U.S.-China relationship is going to be revised,” Ward said.
Recently, President Trump has blamed the global outbreak of COVID-19 on China, saying the country mishandled the outbreak. Trump is reigniting an old trade war on that basis.
In March 2018, the White House levied tariffs on Chinese made metal goods, raising the price of those goods, pressuring U.S. manufacturers who have to buy those goods. More tariffs in both directions ensued, ultimately putting marginal pressure on economic demand as companies raised prices to protect profit margins. Between mid 2018 and end 2019, the average net income margin on the S&P 500 had fallen to 10.7% from around 12% as the trade war got underway, according to data from FactSet. Importantly, wage increases, among many others factors, were part of the picture as well
The most significant issue by end 2019 was business confidence and investment. That's a negative for employment.
But on January 15 2020, a “phase one” agreement between the counties was signed, which rolled back some tariffs. But as of this pandemic, relations worsening again. In the trading day surrounding January 15, the S&P 500 rose almost 1%.
Trump has threatened more tariffs. China has put Apple (AAPL) - Get Apple Inc. Report and Boeing (BA) - Get The Boeing Company Report on its unreliable entities list. Trump has blocked off U.S. semiconductor sales to China’s largest tech company, Huawei. Semiconductor analysts say Huawei purchases only represent 5% of the global semiconductor market, but that worsening relations would be the major concern for U.S. chip makers. China, Ward and others experts TheStreet has spoken with, is trying to steal intellectual property from U.S. technology.
And most recently, the Senate has passed a bill, which is now in the House of Representatives for a vote, that would delist Chinese companies from American stocks exchanges. Congress alleges that Chinese companies do not adequately comply with standards from the Public Company Accounting Oversight Board, which lays out expectations that companies are transparent about their accounting and audit records. This just the latest sign of broader tensions between the two counties.
As American companies prepare for potentially the end of economic harmony between the two nations, there are several considerations for U.S. stock investors.
Companies that want to avoid tariffs may shift production to the U.S. or other countries. While this would enable companies to keep the cost of revenue in check, it could raise the cost of labor, a profit margin negative. Positively, it would bring jobs into the states, a boon to consumer spend. Negatively, some macro strategists think that higher prices resulting from depressed foreign competition in industries like steel manufacturing could cause inflation.