Given the close economic ties between the U.S. and China, the prospect of an all-out trade war between the two nations has rattled the U.S. stock market for months. Now, tensions between the two governments may be easing, prompting the equities markets to breathe a collective sigh of relief. Those stocks that stand to gain the most lead the S&P 500 Index (SPX) in the percentage of sales that come from China. The size of their exposure is breathtaking, as you can see by the table below. They include Skyworks Solutions Inc. (SWKS), Qualcomm Inc. (QCOM), Qorvo Inc. (QRVO), Broadcom Inc. (AVGO), and Micron Technology Inc. (MU). Most chip stocks rose on news of a trade cease-fire. 

Company % Total Sales in China
Skyworks 83%
Qualcomm 64%
Qorvo 62%
Broadcom 54%
Micron 51%

Source: FactSet Research, as reported by CNBC.

Qorvo develops radio frequency (RF) technologies for use in mobile communications, defense, and aerospace applications. The other four companies are semiconductor manufacturers. The full list of 20 companies compiled by FactSet includes 16 in the technology sector. The non-tech companies are casino and hotel operator MGM Resorts International (MGM), 20%; medical diagnostics company Agilent Technologies, Inc. (A), 20%; auto parts supplier Aptiv PLC (APTV), 26%; and water heater maker A.O. Smith Corp. (AOS), 33%.

Interlinked Economies

In 2017, the total value of U.S. exports of goods to China was $130 billion, while the value of imports from China was $506 billion, per the U.S. Census Bureau. In services, U.S. exports to China were $56 billion and imports were $18 billion, per another Census table.

Not only is China a major exporter of finished goods to the U.S. market, but many U.S. companies are reliant on long global supply chains for key parts sourced from China. Many of the technology companies on the FactSet list are reliant not just on sales into China, but also sourcing or final assembly performed on the mainland. IPhone and computer maker Apple Inc. (AAPL) is notable in this regard. Apple also derives 20% of its revenue from sales in China.

Robert Shiller, the Nobel laureate economist, has warned that the mere threat of trade disruptions can be deeply destabilizing for the global economic system. These supply chains are the result of years of planning and development, and building alternative sources and processes cannot be accomplished on short notice. (For more, see also: Why a Trade War Risks Economic 'Chaos:' Shiller.)

Unanticipated Consequences

Earlier this year, the Trump administration shot down a proposed merger of chipmakers Qualcomm and Broadcom on national security grounds. At the time, Broadcom was incorporated in Singapore, but subsequently shifted its domicile to the U.S. in response. A longer-term fallout of this episode, as well as rumors that the Trump administration was planning to restrict chip sales to China, may be that China tries to jump-start its own efforts to become a major producer of semiconductors to reduce its reliance on U.S. suppliers. (For more, see also: How Chip Stocks May Get Killed By a Trade War.)