On May 10, the U.S. hiked tariffs on Chinese goods worth $200 billion from 10% to 25%, jeopardizing a trade deal currently being negotiated by the two countries. The Chinese government has vowed to take "necessary countermeasures."
The S&P 500 and Dow Jones Industrial Average slid over 2% last week amid trade tensions. The tech-focused Nasdaq 100 was even worse hit and dropped 3.3%. Futures indicated a rough start on Monday as concerns about what China's retaliation would look like grew.
If a full-blown trade war between the two countries becomes a reality, it's likely that some industries will be hit harder than others. Below, we'll examine some spheres which may be most susceptible to this impact.
One of the biggest areas affected by trade tensions is the U.S. automotive industry. Last year China increased the tariffs on U.S.-made automobiles entering the country from 15% to 40% in retaliation to U.S. tariffs. While Chinese consumers mostly buy locally manufactured vehicles, U.S. automakers, like Tesla Inc. (TSLA), bear the brunt of trade tensions. The electric automaker first raised the price of its Model S and Model X cars by $20,000 in July after a new round of trade tariffs, and then slashed prices and decided to absorb the difference. China has since suspended the additional 25% tariffs on U.S. vehicles and auto parts as a goodwill gesture. If tensions should flare up again, however, you can expect that China will hit the automobile industry with another round of tariffs.
China also lies at the heart of the complicated global automotive supply chain, which means U.S. producers spend more on parts from China when they are taxed at a higher rate. “Tariffs and quotas on automobiles and automotive parts will not strengthen the U.S. economy or make U.S. automakers and suppliers more competitive in the global market,” said Carla Bailo, Center for Automotive Research's CEO and President. “Prices will rise for U.S. consumers – even if they buy a U.S.-built vehicle – due to the share of imported parts content used in U.S. production.”
Chip makers and electronics manufacturers that depend on China for sales, like NVIDIA Corp. (NVDA), Micron Technology (MU) and Intel Corp. (INTC), are seen as especially vulnerable in a trade war scenario. "Semiconductor suppliers have relatively high ‘ship-to’ revenue exposure to China," Quinn Bolton, senior semiconductor analyst at Needham, said in a note reported on by CNBC. "This high exposure to China puts the semiconductor sector at greater risk to the escalation in the U.S.-China trade war than many other segments of technology."
Apple Inc. (AAPL) has been able to escape tariffs on its China-assembled phones so far, but that will change if Trump imposes tariffs on all Chinese imports like he is threatening. The trade war has already had an impact on the iPhone maker's earnings since it adversely affected the slowing Chinese economy.
The timing may have been coincidental, but trade tensions and concerns about intellectual property and national security also exacerbated the situation with Chinese telecommunications giant Huawei. In December, Huawei's CFO Meng Wanzhou was arrested in Canada on charges of fraud related to the alleged use of a shell company to bypass U.S. sanctions with Iran. The Justice Department also charged Huawei with stealing trade secrets from its American partner, T-Mobile. Huawei is a very important company to China, and Trump did little to allay fears that it was a pawn in a political battle when he told Reuters he would intervene in the case if it were to mean a better trade deal for the U.S..
If the fight for technological dominance and the trade war escalate, China may choose to retaliate with tariffs or cripple American companies with other tactics. "China’s imports from the U.S. aren’t large enough to match Trump’s tariffs dollar for dollar, but the country has other levers it could use, such as imposing new taxes and added regulation on U.S. companies, slowing deal approvals, or encouraging citizens to boycott American products," said a Bloomberg report from last year.
China is the fourth largest agricultural export market for the U.S.. Total exports of agricultural products to China totaled $9.3 billion in 2018, according to the Office of the United States Trade Representative.
As trade tensions have ebbed and flowed, however, one key buzzword has been soybeans. Traditionally, China has been the largest importer of U.S. soybeans, with $3.1 billion worth bought in 2018. Other agricultural products exported to China in high amounts include cotton ($924 million), hides & skins ($607 million), pork & pork products ($571 million), and coarse grains ($530 million).
In 2018, Chinese officials imposed an added tariff on U.S. soybeans. American soybean farmers were put in a bind, with huge stockpiles of product that they couldn't sell. Given that soybeans have become a token of the trade war between the U.S. and China, the latter made a show of good faith by buying $180 million worth of the soybeans from the U.S. in December, but this was a fraction of the multi-million dollars in sales American farmers lost that year. Another trade-sensitive commodity is cotton, with China turning to countries like India and Brazil to meet its requirement instead.
If China slows down or stops its purchases of U.S. agricultural products again in the future, farmers and related industries will likely feel the squeeze.
Is There an End in Sight?
There's no telling whether we've already witnessed the highest points of tension between U.S. and Chinese officials in the battle over international trade. If so, the auto, tech, and agriculture industries may have a smoother road ahead. On the other hand, if precedent has taught us anything, it's that nothing is certain when it comes to trade wars. If the dispute rages on, these industries could be hit the hardest by new rounds of tariffs — and Chinese officials know it.