Trade Tensions Will Likely Escalate Before Things Get Better

August 10, 2018
948 Views

Trade tensions between the United States and its largest trading partners have been simmering throughout most of 2018. While the White House has worked to resolve some of its trade differences with the European Union, the government is still in a tense situation with NAFTA partners Canada and Mexico, and relations with China are at an all-time low.

For investors hoping for a break from the constant rhetoric, the market uncertainty, and the threat of new tariffs, things may unfortunately get worse before they improve.

Top Analyst Not Optimistic About the Trade Tensions

In an August editorial, UBS Global Chief Investment Officer, Mark Haefele, noted that “trade tensions have been increasing” while stating that geopolitics don’t always have a medium-term impact on financial markets. However, because GDP may slow in the coming quarters, businesses and investors could be at increased risk.

The editorial noted that Trump’s push for new 25% tariffs on China was intended as a “negotiating chip” that could potentially lead to more tariffs from both sides, and that these would likely extend beyond the mid-term elections.

UBS also stated what many analysts have said in recent months: that China could look for other ways to retaliate. Regulatory hurdles could be put up to disrupt U.S. companies that produce in China. The Chinese government could also sell some of its $1.18 Trillion of U.S. debt to devalue the American dollar and economy.

Even if China chooses to go the most straightforward route, it will target U.S. industries with tariffs that cause heavy damage. Semiconductor firms and companies that rely on raw materials or components from China are at high risk. Companies that generate a large portion of their revenue in China could also be targeted. Examples include Apple, GM, Ford, Boeing, and Wal-Mart.

UBS estimates that the companies with the most exposure to China could take a 40% profitability hit if tariffs continue to escalate. Most investors will find this situation hard to accept, regardless of their position on the political spectrum.

The Deficit is Growing, Which Could Cause the White House to Become More Aggressive

Despite this year’s tariffs, the trade deficit with China increased in the first half of 2018. The deficit is $185.7B, compared to $171.1B from the same period last year.

With the White House applying constant pressure on China, it is difficult to predict just how the economy and investment markets will react throughout the rest of 2018.

Investors don’t need to panic and offload high-risk stocks yet, however, monitoring the situation and exploring safer industries could help protect the most vulnerable portfolios.

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