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The US-China Trade War Explained …. And How It Could Affect Your Investments

You’ve probably heard about the US-China trade war, but not really had time to digest what it means for you. So what, in a nutshell, is the dispute about and – most importantly – how could it affect your investments? In this report, we’ll take a look.

As you probably know, the US and China are the two biggest economies in the world. The US is China’s largest export market. The US also has a sizable trade deficit with China …. around $375bn annually.

A key element of Donald Trump’s presidential election campaign was a promise to bring manufacturing and jobs back to the US from abroad.

The initial skirmishes of the trade war began in 2017 – and steel emerged as the first battleground. Trump said that the dominance of the Chinese steel industry posed a threat to US national security. Significantly, steel producing areas of the US have also been hit hard by Chinese steel exports.

Later in the year the US announced an investigation into allegedly unfair Chinese trade practices, particularly its claimed theft of intellectual property. The Chinese government, coincidentally, has a policy aimed at expanding its knowledge economy.

After a quiet few months the trade war proper began in early 2018. The US announced tariffs on a range of significant Chinese exports, including a 25% tariff on steel and a 10% tariff on aluminium. China quickly responded with tariffs of between 15% and 25% on 120 US exports including fruit, nuts, wine, soya beans, recycled aluminium and pork.

How does this impact world trade, even away from the US and China?

Firstly, in a global economy, products made in one country frequently use components or materials made in another …. and frequently these are made in China. Also, an estimated 50% of products made in China are produced in joint ventures with US and other foreign companies. As a result these tariffs could mean that prices for manufacturers and consumers worldwide could rise.

Next let’s take a look at the impact on stock markets, and the possible impact on investments.

The latest manoeuvres in the trade war saw stock markets slip worldwide last week. Although many later rebounded recent gains were wiped out as a result. For example, the Dow Jones Industrial Average slipped 2.3% last week. Stocks in companies thought to be particularly vulnerable slipped further. For example, stocks in Boeing – both a major user of aluminium and major supplier to Chinese aviation – fell 3.1%.

Most commentators agree that is it hard to forecast how the trade war will develop, but suggest that there will be increased uncertainty and volatility as it is played out as a kind of ‘proxy war’ in the financial markets. The Financial Times reports: “While investors may struggle to work out the ultimate effects of a possible trade war, they may have to get used to financial markets being part of the negotiation process.”

Could there be any positives for investors?

It’s perhaps odd to suggest that a trade war could have any advantages. But some commentators suggest several sectors could benefit and even offer opportunities. These include services and technology sectors (which make light use of commodities like steel) and sectors which are traditionally defensive, like healthcare. For example, shares in small cap US biotechnology company CASI Pharmaceuticals performed impressively last week, even though they are very active in China.

If anything, the US-China trade war emphasises the benefits of taking professional advice on your investments and pension arrangements, and of having a diverse investment portfolio.

Here are two articles from our Knowledge and News section which you might find useful:

The Importance of Diversification and Asset Allocation When Investing

How To Avoid Being An Irrational Investor

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