Just when the US intensifies its trade war against China, Trump announced that he would impose a five percent tariff on all Mexican goods on 10 June 2019. The move aimed to push the Mexican government to crackdown on illegal immigrants coming into the US.
The tariffs would be raised to 10 percent on 1 July 2019, and by an additional five percent each month for three months and remain at 25 percent until Mexico acted. In other words, all Mexican imports would face 25 percent tariffs from October onwards, potentially jeopardising the USMCA trade deal agreement.
On another potential trade war front, Trump recently terminated India’s designation as a developing nation. The move eliminates the exception that allowed India to enjoy exporting products to the US duty-free. Looking at things, Trump may well make his move on Southeast Asia soon.
The current dynamics may be a silver lining for China as many corporations that were planning to relocate their plants to other developing nations like Mexico, India, Vietnam and Indonesia, would now have to reconsider. Faced with the uncertainties of where Trump will target next, it would only be logical to stay put in China than to incur unnecessary capital expenditure by setting up manufacturing plants elsewhere. The only way to completely avoid the risk of being hit by US tariffs is none other than to set up production in the US.
In reality, those that should have shifted out China would have already done so over the past decade. Today’s China is no longer a place for cheap labour and wages have climbed ahead of many developing Southeast Asian economies. For those that remained, they chose to do so due to China’s technological advancement and its 1.3 billion consumers market. With the trade war escalating, the Chinese government would surely look into stimulating domestic consumption spending to bolster the economy.
In September last year, Trump imposed a 10-percent tariff on US$200 billion worth of Chinese goods, sending the US stock market to tumble from record territories. Following which in December 2018, the US and China agreed on a trade truce and began negotiations.
Hopeful of a trade deal, investors piled back into US stocks. By May 2019, all major US stock indices were trading in record territories once again. But the rally was a short-lived one as Trump began to turn his crosshair back on China, Mexico and India.
The latest trade moves by Trump were clearly well-timed. With the economy still churning and stock prices at record levels, Trump knew that the US stock market would be able to hold off most of the downward pressure. That said, however, as the US is beginning to fight trade wars on multiple fronts, its retail industry would be bearing the brunt of the impacts.
After banning China’s Huawei, the US government has made moves to blacklist several other Chinese technology companies as well. US businesses are not allowed to sell their products and components without the government’s approval, aimed at severely disrupting the supply chains of Chinese technology companies.
Fortunately for Huawei, the company’s CEO Ren Zhengfei had the foresight to develop its own capabilities and reduce reliance on US suppliers over the past decade. As a result, today’s Huawei can produce its own components or develop its proprietary operating system for its smartphone products.
That said, not many Chinese tech companies have the foresight like Ren. The ban by the US is expected to cripple the operations of many other Chinese tech companies like in the case of ZTE Corporation. In the grand scheme of things, Trump is likely to use this as leverage when negotiating with China.
On 30 May 2019, Trump flipped his stance when he said that Huawei could “possibly be included” in a deal to end the trade war. Originally, Trump had maintained that the issue with Huawei was one of national security concerns, not related to trade frictions. In other words, the issue of Huawei vice chairwoman Meng Wanzhou’s extradition to the US from Canada would also be one of Trump’s chips on the negotiating table.
But the strategy is a double-edged sword if Huawei has indeed become self-reliant in producing its own components and operating system for its products. On the contrary, it could backfire on Trump as he would need to lift the ban in order to help US suppliers like Qualcomm, Microsoft and Google.
In such an event, Trump would instead force Huawei to purchase large quantities of US-made components and continue using Google’s Android software. Otherwise, the globally integrated technology as it is, would be splintered three-way: Apple and its operating system, Huawei with its own chips and operating system, and Qualcomm, Microsoft and Google with their own chips and software. This would greatly undermine the US’s interest.
After Google dropped support for Huawei devices, Korea’s Samsung would be highly concerned given Android’s monopoly in the global smartphone operating system and hence could start to create its own software as well. The world is about to see a variety of competing operating systems and applications in the market. Likewise, a hiring frenzy for talents amongst technology companies would ensue. This would be an interesting new post-cold war era.
Some years ago, China unveiled its ambitious “Made in China 2025” blueprint, listing a number of products and key areas where the country wants to take the lead. Unsurprisingly, the blueprint has drawn the ire of Trump, as he believes that no country should surpass the US leadership in any products. Huawei’s 5G leadership over the US was thus the reason why it is being targeted.
In the next phase, other products listed in the “Made in China 2025” blueprint could be targeted by the US. In another scenario, Trump could also raise the existing 25 percent tariffs on the US$200 billion worth of Chinese goods to 100 percent. Since most of these goods are not consumer products, raising the tariffs will have little impact on American consumers.
It is clear now that the US-China trade war will drag on for a long time. Neither would the illegal immigrant dispute with Mexico be resolved any time soon. At this stage, investors are taking profit whenever stock prices are near record levels, holding on to more cash or buying into inverse exchange-traded funds (ETF) to hedge their positions.
Apart from buying into safe haven stocks or holding on to cash, some investors in Hong Kong are short-selling the Hang Seng Index instead. However, I think investors should not be too aggressive when it comes to hedging or it would tantamount to gambling. Therefore, unlike buying into put warrants, buying into inverse ETFs would be more ideal.
There are many ways an investor can deal with the stock market when it turns bearish. The simplest and most obvious way is to exit the stock market entirely. However, how often do investors manage to buy back at lower prices after exiting their positions at a loss?
Often lacking the conviction to buy back when prices are lower, these investors typically return to the market when stock prices are recovering. The fear of missing out eventually takes over and such investors often end up chasing the market at higher prices, only to repeat the cycle again.
For me, the inverse ETFs are preferable. Unlike short-selling, the instrument provides downside protection for the portfolio, which means investors can still continue to buy and hold on to high-quality stocks. By including a good ratio of inverse ETFs in his portfolio, one may still reap dividend returns without any downside.