The trade war between the U.S. and China is on everyone’s radar but how important is it, really? Let’s be clear, in trade both parties should enjoy benefits and in war, there are no winners. So, in this war who is the biggest loser?
Let’s look at the facts:
The U.S. economy is roughly a $21 trillion machine. It exports $114 billion worth of goods to China. That’s about 7% of all U.S. exports but only 0.5% of the American economy. About 40% of those exports are aircraft parts and machinery. Unless China wants to stop flying and making things, they’re going to need to keep buying some of that stuff for the foreseeable future. If they stopped right away it would be bad for a few companies (like Boeing), but the U.S. economy would keep going just fine.
The Chinese economy is roughly a $13 trillion machine. The U.S. imports $522 billion from China. That’s 17% of China’s exports and about 4% of its total economy, so China’s relationship with the U.S. is a bigger deal than America’s with China. Tellingly, the vast majority of these exports are consumer goods like toys, clothing, furniture, and sporting goods, the manufacturing of which can be moved to other low-cost countries.
So, who’s the biggest loser in this game? China.
Will they blink? Most centrally planned economies go broke eventually because they stick to a plan that protects a political belief, which causes corruption. Not a good way to run a business or a company.
Will the Chinese compromise? They have in the past and it’s fueled their growth, but they may take their time to figure it out.
Neither imports nor exports to China are a big part of America’s economy, but the trade relationship is clearly significant to China. The issue on investors’ minds, however, is that no economies are growing quickly, so any slowdown in sales and or trade seems like a big hit. Until the U.S. and China figure out a way to play nice, investors will worry.
Let’s be clear, it’s not that big of a fundamental worry for most U.S. companies. It’s a bigger deal for U.S. consumers but, to put it in context, the increased cost of these tariffs is comparable to a 5-cent increase at the gas pump. With gas prices low and employment rates high, this war makes for good headlines but it’s unlikely to be a mortal wound to anything other than sentiment.
The real question is how much more will the Americans push the Chinese and how much more pain do the Chinese really want? Most investors will ride out the mess, but headlines will drive some to distraction. We are sticking to what we do and that is invest in good companies. And with these headlines, we don’t see much business risk—just volatility.