How Will Trump's 104% Tariff on China Benefit Indian Stocks?

A trade war between the US and China has begun.

US President Donald Trump has shown that he is indeed serious about the US trade deficit with China.

However, the tariffs he has imposed on China, will have far reaching consequences.

The cumulative tariff on China now stands at 104% after an additional 50% was added by Trump yesterday. This came after China refused to withdraw its 34% tariff on US imports that it imposed to match the 34% 'reciprocal tariff' imposed by Trump on Chinese imports.

The tariffs on Chinese goods coming into the US is now so high that it will be almost impossible for China to sell any product at a competitive price in the US.

This trade war has triggered fears of a recession in the US as consumers cut down purchases and business sourcing from China shut down.

But there is another side to this story. US businesses will try to replace Chinese imports with goods from other nations... at least to an extent.

This opens the doors for India to capture market share in the US across various industries that China is currently dominates.

In this editorial, we will examine some possibilities. Just keep in mind that the situation is dynamic at the moment. These examples could be impacted either positively or negatively depending on how the tariff situation develops.

Important: None of the stocks mentioned in this editorial are recommendations and should not be treated as such by the reader. There are no views on the price of any stock mentioned in this editorial.

#1 Textiles

This is one of the most obvious beneficiaries of the US-China trade war.

China is the top textile exporter to the US. Any slowdown in sales of Chinese garments in the US will directly benefit a country like India.

As per Eximpedia, India is the fourth largest exporter of textiles in the world and textile exports from India contribute around 12% to India's total exports.

The US is the biggest market for Indian textiles accounting for 29% of total textile exports. Indian textile firms can look to capture market share in the US if the trade war continues.

Of course, there will be fierce competition from other nations like Vietnam and Bangladesh for market share. However, these nations have been hit with tariffs higher than India.

So, Indian textile companies have a real opportunity to increase revenue and market share in the US.

But this doesn't mean that all Indian textile stocks will do well. Competing on price during a trade war is not easy. Businesses like stability. Trade wars create an unstable, indeed volatile, business environment. Trying to take advantage of this is not every company's cup of tea.

Investors will have to look for those firms that already have a strong position in the US market, with the ability to scale operations and a reputation of delivering high quality garments.

Examples include Kitex Garments, Alok Industries, Raymond, and Arvind.

#2 Electronics

Electronics as a broad category, including smartphones, is China's biggest export to the US. This industry is on the frontlines of the trade war.

Can Indian electronics firms step up to plug any gaps in the US market?

This will be difficult because Indian electronics manufacturing is much smaller than in China.

However, there could be winners.

As per the Economic Times, in FY24, India exported US$ 10 billion (bn) worth of electronics to the US, accounting for 35% of its total electronics exports. Out of this, smartphones contributed US$ 5.6 bn. This was 36% of India's total smartphone exports.

Clearly, there is scope for improvement here. If the trade war between the US and China continues, Indian electronics manufacturing companies can use their existing capacities to push more products in the US in an attempt to gain market share within the US. This won't be easy but it is possible.

Examples include Dixon Technologies and Voltas.

#3 Speciality Chemicals

India's main competitors in the US market in this industry are China, South Korea, Japan, and the EU.

Amid fierce competition, it's not easy for Indian speciality chemical firms to dominate in a particular category in the US market.

However, there is a genuine opportunity now to gain market share and boost revenues for these companies. This is because, the tariffs of India (26%) is lower than those imposed on other countries.

In the speciality chemicals market, pricing matters less to customers than the quality and performance of the chemicals. Thus, the Indian firms in this sector, which have a good presence and reputation in the export market will benefit from the reorganisation of the supply chain.

Examples include Navin Fluorine, Gujarat Fluorochemicals, and Laxmi Organics.

Conclusion

Indian firms have a good opportunity to grow their revenues by expanding their market share in the US due to the ongoing US-China trade war. This opportunity could also enable them to strengthen their position in the global supply chains.

If they pull it off, there will be a direct value addition to their businesses resulting in gains for shareholders in terms of higher stock prices and dividends.

However, this is not the way long-term investors in the stock market should invest. Trying to find the biggest beneficiaries of the trade war is not a sound strategy to pick stocks. In fact, the whole exercise could devolve into speculation.

It's a much better idea to focus on the leaders in the specific industries, analyse their fundamentals, corporate governance, and valuations, before taking any investment decision.

Happy investing.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...