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The Zacks Analyst Blog Highlights: ZTE, Qualcomm, Intel, Broadcom and Lumentum

Zacks Equity Research
The surge in oil equivalent production and crude price realization aid Energen's (EGN) Q3 numbers.

For Immediate Release

Chicago, IL –September 26, 2018 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: ZTE ZTCOY, Qualcomm QCOM, Intel INTC, Broadcom AVGO and Lumentum LITE.

Here are highlights from Tuesday’s Analyst Blog:

Inside China: Why a Trade War with the U.S. Means More than We Think

In part 3, we discussed how China is using its newfound wealth as an economic and political weapon through strategic foreign investments. The Middle Kingdom’s “Belt and Road Initiative” could potentially revolutionize global trade for centuries to come. To read the previous section, click here.

Trade has played as vital a role in China’s economic and political development as any of its other activities. According to data from the Observatory of Economic Complexity at MIT, China exported $2.27 trillion worth of goods and services in 2016, while importing $1.23 trillion worth. This makes it the largest exporter and second-largest importer on the planet.

China became the 143rd member of the World Trade Organization (WTO) in 2001. This served as a major catalyst for China’s increased foreign involvement, in both investments as well as trade. Membership of the WTO carries an array of benefits, such as fair means through which to resolve trade disputes, lower trade barriers (including lower tariffs), and increased access to developed markets.

While the Middle Kingdom has taken full advantage of its WTO membership, recent activity has seen its position as the largest trading nation in the world come under fire. Let’s take a closer look at what has been brewing.

Bull in a China Shop

In the last nine months, the US has targeted Turkey, Canada, Mexico, South Korea, Brazil, Argentina, Australia, the European Union, and most notably China.

Trump’s first trade-related move came in January, when he imposed a tax on Chinese solar panel exports. As the Washington Post highlighted, Trump hit a sore spot, considering China manufactures 65% of the world’s solar modules.

Then in March, the Trump administration released a report which found that China is conducting unfair trade practices under Section 301 of the Trade Act of 1974. Specifically, it claimed that China was forcing the transfer of technology and intellectual property from US businesses in exchange for Chinese market penetration. (For more details, also read Inside China: Are International Firms Destined to Fail?)  

The report would be used as justification for the continued escalation of threats between the US and China. After its publishing, Trump raised steel and aluminum import taxes by 25% and 10%, respectively, affecting $2.7 billion worth of Chinese goods. President Xi responded the following month by issuing tariffs on $2.4 billion of US goods, adding more fuel to the already-growing fire.  

From then on, both sides continued to issue an ever-growing list of threats, and Chinese telecom giant ZTE became a major bargaining chip. The US banned exports to the firm for what it claimed were violations of sanctions it had issued against Iran and North Korea.

Would the decision have been upheld, it would dramatically jeopardize the firm’s future. This is because many of the key components in its devices are made by US companies. The list includes big names such as Qualcomm, Intel, Broadcom and Lumentum, according to Jefferies analyst Edison Lee.   

The ban was in flux as the US and China continued negotiations, but after multiple exchanges were still reinstated in mid-June. In the meantime, both sides levied another $34 billion and $16 billion in tariffs during July and August, and Trump alluded to an additional $200 billion being put on the table.

By September, the situation had not cooled at all. Trump announced the $200 billion more in tariffs after alluding to it for some time. China immediately responded with another $60 billion of its own. Trump has also mentioned on multiple occasions that he may well levy tariffs on the entire $500 billion worth of annual Chinese imports.

Making Sense of the Mess

Neither Trump nor Xi is showing any sign of stepping down, nor can either afford to. For Trump, the negotiations are a key promise from his campaign. The same Washington Post article linked above points out that Trump mentioned China 21 times in his 2015 candidacy announcement. At least one of Trump’s goals is to show the world that America still is and will continue to be the main global power.

But for Xi, the motivation looks a bit different. China removed the previous two-term (10-year) presidential limit in March, putting Xi in position to rule indefinitely. While doing so further consolidated his power, it has left him more exposed to the expectations of both his peers and constituents. In other words, as the face of what many see as the future top global power, he cannot be seen bending the knee to anyone, especially the US.

But as powerful as China has become, a prolonged trade war will still do more damage to it now than it would the US. According to World Bank data, trade represented 37% of China’s GDP in 2016, but accounted for only 26.6% of US GDP. According to the St. Louis Fed, US GDP currently sits at $20.4 trillion, compared to China’s roughly $12 trillion. Yet, China exports nearly a trillion more dollars’ worth of goods than the US.

The data tells us that the US is a nation more focused on production than trade, but the opposite holds true for China. This means that in a hypothetical scenario where nearly all of that trade is bottlenecked by tariffs, both sides will be hurt. But China would still lose out on a bigger piece of its proportional pie than the US.

Looking Ahead

Trump said in mid-September that he is “under no pressure to make a deal with China,” instead claiming that “they are under pressure to make a deal with us.” Both sides have expressed interest in restarting negotiations and capping off the damage, but the situation remains ongoing.

Rhetoric aside, neither the US and China are interested in extending the trade war any longer than necessary. The real question is who will cave first.

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