Protect Yourself from Trump's Trade War - The 5 Minute WrapUp by Equitymaster
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Protect Yourself from Trump's Trade War

Jul 11, 2018

Sarvajeet Bodas, Research analyst

'Trade wars are good, and easy to win'.

That's one of the recent tweets of US president Donald Trump.

On the face of it, trade wars sound harmless. No one shoots. No one dies. No blood. No destruction.

But that's not the case.

Because in trade wars, no one wins.

Here's the definition of a trade war:

  • 'A situation in which countries try to damage each other's trade, typically by the imposition of tariffs or quota restrictions.'

But it doesn't end there.

Trade wars can easily escalate into tit-for-tat duty enactment.

And over time, trade between the countries can drop to a minimal level. This would hurt various industries in both countries and related industries in other countries.

But it gets worse. So many variables - exchange rate, inflation, monetary policy, unemployment - change in response to tariffs. This makes trades wars very complicated.

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Last week, the Trump administration imposed tariffs on US$ 34 billion worth of Chinese goods. In retaliation, the Chinese government is targeting a range of American products with tariffs, including pork, soybeans, and automobiles.

But this is just the start.

Yesterday, the Trump administration pushed ahead with plans to impose tariffs on additional US $ 200 billion worth of Chinese imports.

And then...

Donald Trump took it to the next level.

He warned that the US may ultimately target over US$ 500 billion Chinese goods.

Just imagine the collateral damage...

  • US farmers are caught in the cross hairs of an escalating trade war due to increased tariffs on their produce.
  • US consumers will need to pay more for imports from China.
  • American companies lose market share in China as Chinese consumers turn to other countries.
  • There is disruption to supply chains, which are a key part of world trade. In the worst-case scenario, companies may have to relocate factories or distribution centres.
  • A trade war will raise costs for American industry, potentially threatening the manufacturing jobs that the president Trump has long said he wants to protect.

As you can see, it is a bigger problem for the US where the impact will play out in full public view, unlike China which can tightly control the discourse.

My colleague, Tanushree, editor of StockSelect wrote about the trade war a few months back. Here's what she said:

  • Trade wars can cause short-term pain. But it can't change the long-term trend of the market. Only earnings can do that.

    Back in India, we too have suffered a lot; wars, droughts, riots, terrorism, corruption, corporate frauds, political assassinations, multiple government changes, failed economic policies...

    But corporate earnings have grown by about 15% annually and the BSE Sensex has delivered about 15% annualised over the long-term.

    That's the important thing. I'll never tire of repeating it.

    In the long-term, only earnings can drive stock prices.

This is true.

During times like these, the best thing you can do is to identify stocks that can ride out the storm.

I think a long-drawn battle could be the death knell for global trade, investment, and growth. And the main victims would be exactly those Trump claims to protect.

Let's hope better sense prevails.

Perhaps, Donald Trump should pay attention to what Mahatma Gandhi said, 'an eye for an eye makes the whole world blind.'

Chart of the Day

In March 2018, Trump said, 'Last year we lost US$ 500 billion on trade with China.'

But this isn't true.

According to the US Census Bureau, the actual trade deficit is US$ 375 billion.

Donald Trump Is Wrong About the Trade Deficit Data

Also, running a trade deficit isn't a bad thing.

If trade surplus was a measure of success, then why hasn't countries like Nigeria, Malta, and Azerbaijan faring well? These countries enjoyed trade surpluses last year.

Or take the example of Japan, which is enjoying a trade surplus for many years, but it failed to lift its economy from a low growth phase.

The Trump view is basically that exports are good. They are like revenues. Imports are bad. They are like costs.

However, this approach doesn't consider that both imports and exports are beneficial.

So, by buying goods and services more cheaply than it costs to produce them at home, the nation benefits from imports.

Similarly, by selling goods and services in world markets, it can enjoy higher prices for them than it could earn by selling only at home.

That's the point of any trade.

Nevertheless, at the current juncture, trade wars have created some fear in the market.

But this is an opportunity to lap up good stocks.

In fact, last week, Tanushree sent two special updates to StockSelect subscribers.

Two Buy at lower recommendations have now become Buy recommendations.

In case you don't have access to StockSelect, you can sign up here.

Regards,

Sarvajeet Bodas
Sarvajeet Bodas
Research Analyst, Smart Money Secrets

PS: For over 16 years, our Safe Stocks recommendation service, StockSelect, has guided its subscribers towards financially sound futures. Today, you have the chance to get access to its proven research and recommendations that generated double, even triple digit returns. Click here to begin your journey towards a wealthier life...

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1 Responses to "Protect Yourself from Trump's Trade War"

BRUCE KURIAKOSE

Jul 13, 2018

The main problem is, this trade war slowly will attack the earning power of the company then?

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