The U.S., China Tariff War - Where Will It End?
“There’s no room for the weak” - to quote the late great British philosopher Ian Curtis - when the world’s two leading economic powers go tit-for-tat on the tariff battlefield.
Where will it end?
The U.S. and China can’t increase tariffs in perpetuity, especially given that the U.S.’ 125% tariff on China and China’s 84% U.S. tariff are both substantial - and importantly leave plenty of room to negotiate those numbers downward, probably on a sector by sector basis. That won’t be soon however, as both the U.S. and China are in the escalation phase.
The car at the edge of the road
The auto industry may build a bridge between the U.S. and China. My guess is that China-based BYD will be building cars here in the U.S. within the next several years. It would be good for the EV industry if Tesla and BYD play nice in the U.S. market, particularly if BYD strikes a deal with Tesla to use TSLA’s charging stations. The two biggest EV players competing in the U.S. may accelerate EV adoption as both Tesla and BYD would be forced to bring their “A+” game.
No room for the weak
Neither Trump nor Xi will want to cave - but neither leader wants an economic slowdown - both countries want full employment. Therefore, expect for this standoff to be resolved with non-public, back room negotiations. However, in the near-term my view is that the U.S. / China economic tension will escalate.
I do not see how the U.S. avoids recession at this point. Consumers are pulling back, companies are watching expenses, some are pulling their financial guidance (Walmart, WMT). There’s lots of uncertainty roiling markets, between geopolitical risk, a devalued Dollar, a protectionist trade policy and multi-trillion Dollar annual deficits, at some point the chickens will come home to roost.
Distorted and thin
As March quarter earnings roll around, I expect that companies will have largely protected earnings, but that sales pipelines will have further diminished. At some point valuation multiples have to come in. The arguments I’ve heard for justifying 30x, 40x, 50x Revenue multiples - never mind PE - are distorted and thin. For example, why pay 32x for Apple (AAPL), a company that essentially has had flat Revenue for three years?
The answer is because the U.S. Capital Markets still have too much liquidity floating around as a result of the massive fiscal and monetary response to the flu that went around in 2020. Crisis over (even if vaccine side effects linger dangerously), yet fiscal deficit spending persists. In fact, the fiscal debt mountain ($36 Trillion), is alive and well.