A grim preview of a trade war takes shape
In what could be a grim preview of how investors might react to a full-out trade war between the world’s two largest economies, shares in multinational corporations sank Monday after United States (US) President Donald Trump threatened new tariffs on China.
Any damage from higher import taxes would almost certainly ripple outwards and affect anyone who buys a refrigerator, a car, an iPhone, or anything else with a computer chip inside. Companies that import goods or parts from China may or may not pass on costs to consumers, but they usually act to offset rising costs somehow, including potential job cuts.
Goldman Sachs doubled the odds of auto tariffs coming this year to 20 and lessened the odds it gives to a free-trade agreement among the US, Canada and Mexico.
“The president’s willingness to risk a market disruption by threatening an unexpected tariff hike suggests that he might also be willing to risk the disruption that formally proposing auto tariffs or announcing the intent to withdraw from NAFTA (the North American Free Trade Agreement) might cause,” Goldman Sachs said in research published over the weekend.
The sector hit hardest by escalating trade tensions was technology, particularly companies that make computer chips. Micron Technology Inc, Advance Micro Devices Inc and Applied Materials Inc all slid more than three per cent by early afternoon. Other chipmakers were not far behind.
According to data provider FactSet, 64.7 per cent of Qualcomm’s revenue comes from China. Broadcom’s Chinese revenue is 48 per cent of its total.
Heavy hitters in the tech sector like Apple Inc, Amazon and Alphabet all lost ground. Apple gets nearly one-fifth of its revenue from the world’s second-largest economy.
But every sector was under pressure Monday, from industrial to retail, and shares that were in retreat Monday tracked closely with its exposure to China.
Wynn Resorts, with a host of casinos and hotels in Macau, gets about 75 per cent of its revenue from China, according to FactSet. Wynn shares tumbled 4.2 per cent.
Chinese companies were not immune to the damage.
Alibaba shares skidded more than four per cent, and shares in Weibo – China’s version of Twitter – fell more than six per cent.
On Sunday, President Trump tweeted that he would raise import taxes on US$200 billion in Chinese products to 25 per cent from 10 per cent as of Friday. That’s on top of a 25 per cent duty on another US$50 billion of Chinese imports. Beijing has imposed penalties on US$110 billion of American goods.
Trump’s announcement caused financial markets to plunge early, starting in Asia. The Shanghai Composite index closed 5.6 per cent lower, and Hong Kong’s Hang Seng index sank 2.9 per cent on Monday.
The Dow fell 300 points at the open of trading, with the S&P 500 and Nasdaq sliding one per cent each.
In a note to clients, an analyst for Raymond James said that although Trump has in the past used the threat of more tariffs as negotiating leverage, that doesn’t appear to be the case this time. The analyst wrote that based on the firm’s discussions with trade sources, there is “universal belief” that any potential agreement fell apart in recent days despite an agreement being close to finished last week.
A spokesman for the Chinese government said its envoys continue to prepare for a trip to the US for trade talks, although there were concerns in the aftermath of Trump’s tweet that Beijing might back out to avoid looking weak in the face of American pressure.
“The most important near-term indicator to watch will be whether the large delegation of Chinese officials comes to Washington on May 8, as scheduled,” wrote Goldman Sachs analysts. “If they do, this would indicate that they believe a deal is still reasonably likely. In this case, the tariff rate would rise only if the two sides are unable to come to an agreement by Thursday, before the increase takes effect on Friday. Alternatively, if the upcoming visit is cancelled, an agreement in the coming week would then seem very unlikely.”