More Reasons to Doubt the Alleged Trade War’s Bite

Editors’ Note: MarketMinder doesn’t recommend individual securities. The below merely represent a broader theme we wish to highlight.

With the G20 meeting in Japan approaching, it seems most pundits are transfixed, arguing the meeting is make-or-break for global stocks—particularly its sidebar between US President Donald Trump and Chinese President Xi Jinping on trade tensions. Mere weeks ago, Trump’s ban on firms selling US products to Chinese Tech giant Huawei roiled sentiment. Ditto for his renewed threats to ratchet up tariffs on China, disclosed via Twitter in early May. However, news Wednesday highlighted more reasons to think the alleged “trade war” isn’t as risky as many presume.

Take Huawei. When Trump announced the supplier “ban” in mid-May, many assumed this would prevent US firms from transacting with China. But the ban isn’t actually, well, a “ban,” as it turns out. Huawei’s entry onto the “entity” list—a list of foreign companies subject to export restrictions—applies to US-made products. But manufacturing is global. As The New York Times reported today, that means US firms’ products manufactured outside America can still be sold to Huawei. As John Neuffer, president of America’s Semiconductor Industry Association put it, “‘As we have discussed with the U.S. government, it is now clear some items may be supplied to Huawei consistent with the entity list and applicable regulations.’” After a brief pause, it appears the industry is legally selling products to Huawei once more, based on commentary from earnings calls. Score one for globalization, we guess. Now, we always questioned the staying power and scope of Huawei restrictions, concluding this wasn’t a huge deal either way. It also looked like Trump employing a non-tariff barrier as leverage in the continuing saga with China over trade. But skirting Huawei restrictions by supplying goods from outside America further waters down any impact.

On the more illicit front, news Wednesday also highlighted a reason why bilateral tariffs don’t pack the punch many presume. The Wall Street Journal featured a stellar report highlighting how Chinese exporters have skirted tariffs on Tech products. The article documented May’s 81% year-to-date y/y surge in Vietnamese imports of computers and electronic goods from China … and a 72% jump in Vietnam’s exports of the same to the US. Does anyone actually think that is coincidence? While we don’t advocate firms relabeling goods and “transshipping”—shipping goods to another country prior to the US to dodge tariffs—it happens. Further, and less illicitly, sometimes small modifications to products impact the country of origin. The WSJ report shows that is also occurring. We have long argued all currently threatened and implemented tariffs’ maximum impact including global retaliation—0.3% of 2018 global GDP—is too small to derail growth.^[i] This news further suggests that estimate is high.

Last, but not least, came the news Trump was set to delay the 25% tariff on $300 billion in Chinese goods presently slated to hit at yearend. Interestingly, this comes as rumors grow of a third US/North Korea summit mount. As Fisher Investments founder and Executive Chairman Ken Fisher has long theorized, Trump’s China tariffs are less about economic policy and more about geopolitics. Trump knows Xi is one of few global leaders with any sway over Kim. Trump needs him to broker talks potentially leading to a denuclearization deal. Xi just returned from paying the first Chinese state visit to Pyongyang in 14 years last week.

Maybe Xi and Trump will hammer out a deal at the G20. Maybe not. Perhaps failing to do so stirs some short-term volatility. But after all the time tariff and trade fears have spent hogging headlines, we suspect markets have already dealt with them. However, we see lots of evidence suggesting the “trade war” that has spawned so many headlines is likely to prove much more bark than bite—a positive surprise for stocks.