The Investment Scientist

Trade War Started. What Do We Do?

Posted on: March 26, 2018

trade war .jpgLet’s start with some basic facts. As of 2017, the US imports goods worth about $550 billion from China, while only exporting about $175 billion to China. The trade imbalance is about $375 billion in China’s favor. President Trump believes China is making off with $375 billion of the US’s money every year and he is out to stop that. He announced tariffs on $60 billion worth of Chinese goods yesterday, mostly targeting high-tech imports from China.

The biggest high-tech import item from China is … round of applause …the iPhone, totalling about $70 billion a year since China is the final assembly place of all iPhones using parts from Japan, Korea, Taiwan, the US and China.

If an iPhone sells for $1000 in the US, it is counted as $1000 worth of Chinese imports, but 60% of all its economic value is captured by Apple. China probably captures less than 10% of the economic value. The rest is shared primarily by Japan, Korea, Taiwan. A tariff on the iPhone will harm Apple more than China, and also hurt Japan, Korea and Taiwan along the way.

Because China is so integrated into the global supply chains of just about everything, having been the factory floor of the world for the past ten years, it is nearly impossible to single out China for punishment.

I could be wrong, but that’s the reason I think the trade war will be relatively short.

There is a risk that under nationalist pressure, China might retaliate unproportionally and both sides could start  escalating tit for tat and before we know it, the global trading system could collapse and a global recession ensue.

Judging from the initial response from China however, that risk is very minor. China retaliated with tariffs on $3 billion worth of US goods within twelve hours of Trump’s first salvo.

That shows two things: China is prepared, and China is clearly taking a de-escalating posture. Trump could claim victory if over the next two months China removes market barriers and strengthens IP protection.

Both my rational reasoning and my gut feeling tell me that this is a tempest in a teacup. If the market panics and gives you a 20% discount, you should take advantage of that.

(Feel free to share if you find it insightful.)

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.


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