(Forbes) This is it, folks. For the rest of this year, every thing China ships to the United States will have an extra tax charged to it, either a low of 15% or a high of 25%, everything from widgets you've never heard of, to the latest in Disney merch. It's all going to cost more. Get used to it. This is the beginning of the China trade war.
And you thought it was almost over!
The next and final round of tariffs is an inflection point in the China trade fight. For the first time, everything that reads "Made in China" will cost companies more to ship here. Many companies that have not yet been touched by tariffs will either have to absorb these new costs somehow, or transfer those costs onto consumers.
Many prices are marked up to such an extent that some companies may opt to just eat the margin, knowing that they cannot get the same goods sourced anywhere else at the same price.
If you've ever been to a Macy's after the holidays, or inside a Joann's Fabrics only to see seasonal decorations marked down 70%, then you have deduced two things if paying attention: either companies are willingly selling at break-even, or at a loss. Or they are buying something for a $1 and selling it to you for $10.
The latter is more likely.
Since President Trump raised tariffs on $200 billion worth of goods in September 2018, markets have been watching company after company complain about the uncertainty surrounding trade, but still managing to beat earnings estimates.
That can easily change now that everything will be tariffed by Dec. 15, when the final round of Trump's decisive $300 billion in new tariffs goes into effect.
Some investors think China is getting beat up in the trade war. Others believe that China can weather the storm.
Trump has maybe a year and four months left. All polls suggest he gets beat handedly by the Democrats. (Two-for-one advice: Remember 2016. Bernie Sanders and Elizabeth Warren won't be easier on China.)
Xi Jinping probably believes he can wait out the elections. In the meantime, the economy is weakening in China. Political unrest in Hong Kong has shown no signs of abating. The worst it gets in Hong Kong, the closer Beijing gets to acting out against the protesters. In a worst case scenario, Congress led by Nancy Pelosi acts to put an end to Hong Kong's special trading status with the U.S. if things get out of hand. In that case, the Hong Kong relationship is practically out of Trump's hands, meaning a new front in the trade war is being waged by a bipartisan congress. This isn't anyone's base case scenario. But keep in mind that five short months ago it was easy to find investors celebrating the end of tariff escalation.
If tariffs aren't stressful enough, there is the tech war to take the China issue a bit dealer. The world's largest telecommunications systems corporation, Huawei, is taking fire on the main battlefield.
Huawei remains on the Commerce Department's "entity list" that bans U.S. firms from selling computer hardware to them. In a sign of good faith to keep trade negotiations going, Trump allowed for U.S. companies to continue selling to Huawei for its smart phone division, but only temporarily.
Some 130 companies have requested licenses to sell to Huawei, according to a Reuters article last week, but the Trump Administration has not yet granted any.
China has also threatened to put American companies on their version of a blacklist if Huawei is banned from American microchips.
"Isn’t it time for firms from all countries that adhere to the rule of law to 'just say no' to becoming further entrenched in China’s economic and social dystopia?" asks Macrolens chief strategist Brian McCarthy in a note to clients on Friday.
Love China or hate it, more bilateral talks are expected this month.
Worth noting, it can’t be lost on Beijing that Trump is moving closer to inking the U.S. Canada Mexico Agreement, aka Nafta 2.0. That deal is more economically consequential than U.S.-China trade, even if U.S. China trade makes for more dramatic, must-see television.
Moreover, Trump is trying to complete a trade deal with Japan, and there is the potential for one with the U.K. if Brexit ever comes to pass.
China trumps all of those trade deals both for its size and for the fact that American corporations have set up shop their many years ago. They are rooted there, deeply.
For months, Wall Street has either rallied or sold off on bad China headlines. This trend isn't going anywhere.
Non-tariff barriers are becoming more important in the trade variable. Remember, just last week China hawk and Florida Senator Marco Rubio requested that a committee in charge of federal worker pensions explain why they are putting money in an index that invests roughly 8% in China corporations, including state owned ones.
There is a real risk of Washington pressuring public pension money out of the major indexes weighted to China.
“This controversy should send an unmistakable message to Wall Street and other fund managers and index providers that henceforth the material risks associated with Chinese corporate national security and human rights abusers must be taken into proper account,” Roger Robinson, president and chief executive of RWR Advisory Group, a Washington-based risk consultancy, told the Financial Times last week.
China is also recalculating the yuan's value against the dollar, allowing for it to weaken to compensate for tariff hikes. As a result of the weaker currency, financial authorities have rolled out measures to stem capital outflows from the mainland so rich Chinese aren't investing in foreign securities as their asset prices deteriorate.
The new rules include stricter oversight of banks in times of capital flight and restrictions on real estate developers' access to foreign currency bonds. Banks will be evaluated on the amount of yuan wired offshore and the volume of foreign currency sold. If the levels stray too far from the national average, the bank's credit rating will diminish and those lenders will face limits on banking activities, Nikkei Asia Review reported on Aug. 30.
Lastly, China bound investors need to be cautious to avoid being blindsided.
For years, the market thought that all the new financial freedoms afford to it by Beijing could, of course, be taken away by Beijing. It was a risk.
Now the market has to consider the fact that all of the freedoms the U.S. has given it to invest in China be taken away. That might not mean investors can't buy China exchange traded funds anymore. Or that MSCI will have to kick China out of its indexes.
But it could definitely mean Washington treats China different than it has in a generation. And depending just how different that is will set the tone and the pace for China-U.S. trade relations going forward.
It's either status quo, to which Wall Street understand best. Or it's disruption. If it's disruption, it won't be minor.
