Markets

7 Reasons Why a U.S.-China Trade War Is Unlikely

Very few people would benefit from a U.S.-China trade war, including President Donald Trump himself.

Instead of worrying each time fears about U.S.-China “trade wars” crop up, keep your wits about you and take advantage of the buying opportunities that the miniature panic-attack presents.

Because it’s very unlikely we will see a full-blown trade war.

As concerns about tariffs and retaliations wear off, the shares of companies hit because they do significant business in China will recover. In fact, there are several companies worth following as potential buys should we see yet another round of saber rattling.

To feel confident enough to implement this tactic you need to be fairly certain there will be no serious trade war. That’s because, as Kiplinger warns, there are very real concerns should a trade war emerge: “If tariffs on Chinese goods cause prices on store shelves to jump, consumer spending could take a hit. And consumers remain the backbone of the U.S. economy.”

Here are seven reasons why this will most likely be the case.

#1: President Donald Trump cannot afford to tank the market.

Trump’s list of tangible accomplishments is rather sparse. One important achievement, however, has been to create a monster stock market rally by bolstering confidence among investors and CEOs – especially at small companies responsible for most of the job creation in our country. This newfound confidence may lead to a fresh wave of capital spending. That could help create more economic growth and boost productivity.

In contrast, trade wars are terrible for the economy and for most stocks. This boxes Trump in. He can’t risk erasing one of his biggest achievements and creating a lot of disgruntled investors – especially going into midterm elections, which could reverse Republican dominance in Washington.

#2: Trade wars are really bad for growth.

Historians cite trade wars as one of the main causes of the Great Depression, which in itself was one of the contributing causes of World War II. This is why the market trembles every time there is noise about a trade war – and why most experts will be warning Trump to avoid getting into one.

#3: The Chinese are cleverly targeting Trump’s Midwest voter base.

China has already threatened several tariffs on U.S. agricultural goods, with a potential 25% tax on imported soybeans among the most worrisome possibilities. This hits the heartland – a core of the Trump voter base.

Trump knows this, and it pressures him to retreat before trade wars really get serious.

#4: Trump likes to bluster and back down.

Here’s the basic game plan in Trump’s version of the “art of the deal”: Start off negotiations with a lot of tough talk to soften up the other side, then compromise.

We’ve actually seen this come into play already with other nations. Trump started off talking about broad tariffs on aluminum and steel, but then negotiated most of them away with exporters such as South Korea who agreed to voluntary restrictions.

#5: Americans love to shop, and they like bargains even more.

Trump’s goal of protecting jobs via tariffs seems noble. But everything comes at a cost. Trade sanctions are subsidies for workers in protected industries, because trade barriers increase the price of goods they make, by limiting competition.

Right now we can buy lots of cheap consumer goods from Mexico, China and elsewhere – from guitars and air conditioners to dishwashers and solar panels. The top three imports from China are things we use every day: cell phones, apparel and computers, according to Deutsche Bank. Trade war tariffs on those goods would make them more expensive. Consumers would notice, and a political backlash could follow.

#6: Trade wars would disrupt a key way that U.S. companies do business.

Thanks to years of open trade, U.S. producers have intricate supply chains stretching deep into Mexico, China and elsewhere. These companies ship parts and unfinished products across borders every day for assembly and finishing. Disrupt these supply chains with a trade war, and you completely upset a way of doing business. U.S. corporations will not be happy. Business confidence will erode, and so may political support for Trump.

#7: Trade wars mean more jobs for robots, not people.

Trump wants to impose trade barriers to protect manufacturing jobs. But factories increasingly employ robots instead of people. Thus, putting up trade barriers will mean more jobs for robots, not necessarily workers, according to a recent study by economists at the University of Chicago Booth School of Business.

The money quote: “(Trade barriers) will not reverse the broader trend in manufacturing employment that has significantly weakened labor market options particularly for less educated workers.”

The Bottom Line

When trading partners fight, no one wins except maybe a handful of workers (and robots) in protected industries. Unless politicians become truly irrational and stop caring about what voters think, a serious U.S.-China trade war seems highly unlikely.

Thus, every time the market sells off on trade war fears, those stock declines mark good entry points either for swing traders or investors.

Michael Brush is a Manhattan-based financial writer who publishes the stock newsletter Brush Up on Stocks. Brush has covered business for the New York Times and The Economist Group, and he attended Columbia Business School in the Knight-Bagehot program.

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