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Why there are no winners in a trade war with China

Alan Valdes
Alan Valdes

By Alan Valdes, director of floor operations at Silverbear

There are no winners in a trade war with China. While President Trump’s state visit with Chinese Premier Li Keqiang in early April ended amicably, an increasingly antagonistic North Korea remains a thorn in the side of future trade negotiations between the US and China.

Peter Chun, the CEO and founder of Silverbear Capital,* one of Hong Kong’s leading private investment banks, spoke about the ramifications of a trade war between the two nations. Chun sees no winners in this possible war.

“American businesses would suffer should there be a trade war with China,” Chun notes. Should the Trump Administration enact heavy tariffs, this would hurt US companies more so than Chinese companies. Eventually, the trickle down effect would be fewer profits for the American companies and less taxes for the Trump Administration.

Why President Trump can’t have it both ways

The White House plans to spend billions on everything from infrastructure projects to military buildups and at the same time cut taxes and roll back and replace Obamacare. Accordingly, revenues derived from overseas products sold here in the US would not offset the lost tax dollars.

But it goes deeper than just taxes. Apple (AAPL) makes iPhones, iPads and laptops all in China. The Chinese company Huawei could eventually compete with Apple in making a similar product at a cheaper cost. It would take time to play out, and we would have to see if the American consumer would be willing to switch to a similar product made at half the cost, as opposed to paying a higher price for the Apple brand because of tariffs.

The bottom line is that there are cascading effects—many of them unintended—to any major change in US trade policy. As trade is not a one-way street, any trade war with China’s biggest trading partner would likely lead to mass layoffs for Chinese companies. In a country of 1.3 billion people, this could become a social disaster.

US to use North Korea as leverage in China talks

The key to balance may be North Korea, which conducts 80% of its trade with China. Breaking with decades of tradition, Trump seems willing to leverage North Korea in negotiations with China, specifically focusing on the US trade deficit.

Trump recently said to the Wall Street Journal, “We have tremendous trade deficits with everybody, but the big one is with China. … And I told them, ‘You want to make a great deal?’ Solve the problem in North Korea. That’s worth having deficits. And that’s worth having not as good a trade deal as I would normally be able to make.”

Sentiment on both sides is cautiously optimistic. At a news conference, Premier Keqiang said, “Our hope on the Chinese side, is that no matter what bumps the Chinese-US relationship may hit, we hope it will continue to move in a positive direction”. Chun echoes the premier’s sentiments, believing a trade war will not happen, as the consequences are too big for all concerned.

* The author is affiliated with Silverbear Capital.