On 10 May 2019, the US officially raised tariffs on US$200 billion worth of Chinese goods to 25 percent. Returning to his brinkmanship style of diplomacy, Trump once again threatened to expand the list to include all Chinese imports. At this moment, there is still US$325 billion worth of Chinese goods not being targeted. If tensions continue to escalate, tariffs could even be levied on American products manufactured in China, such as the Apple’s iPhone. So far, only pharmaceuticals and rare earth minerals are exempted.

In less than a week, on 16 May 2019, Trump declared a “national emergency” targeting  companies seen as “unacceptable risk to national security of the US”. Under the guise, Trump bypassed the congress and blacklisted Huawei. The move is aimed at thwarting China’s Huawei business in the US.

Huawei’s 5G capabilities are surpassing that of the US, so much so that major allies are already resisting Trump’s pressure to ban the Chinese telecommunication equipment maker from their 5G networks. In an attempt to stop Huawei’s charge to the top of the leadership in 5G technology, Trump banned Huawei from buying any American parts and technologies without the US government’s approval.

This move on Huawei, which is similar to the one that crippled China’s ZTE, is much more comprehensive. With a significant number of components in Huawei products that are made in the US, the Trump administration is disrupting Huawei’s supply chain in order to curb its production and development.

Fortunately, Huawei is not a public-listed entity or Trump could force US institutions to cause the collapse of the stock price. Bond securities issued by Huawei have plummeted on the news. Meanwhile, other Chinese 5G concept stocks such as ZTE Corporation (0763.HK) and China Tower (0788.HK) have also been sold off dramatically.

After witnessing the ZTE episode, Huawei has been stockpiling chips and vital components to keep business running. To prepare for trade war uncertainties, the company has reportedly built up an inventory worth a year of crucial components. More importantly, it is highly likely that ZTE and Huawei have been moving on to develop their own semiconductor components to become less reliant on US suppliers. Consequently, it would be almost impossible for Trump to completely wipe out Chinese competition in the 5G space.

On the other hand, US suppliers to Huawei would be severely impacted as orders would stop to flow in. Following the news on Huawei’s ban, stocks of US semiconductor companies like Qualcomm tanked four percent immediately.

Despite the escalations, both the US and China have yet to close doors on negotiations. In September last year, the US slapped 10 percent tariffs on US$200 billion worth of Chinese goods, but both parties continued to stay on the negotiating table.

Interestingly, the tariffs did little to hit the Chinese economy or caused inflation in the US. In other words, this meant that the 10-percent tariff is “acceptable” for both the US and China’s economy.

It is the sovereign right of any country to impose tariffs on imports. As the US is a net importer of Chinese goods, it is also highly incentivised to use tariffs as a bargaining chip. Meanwhile for China, it is imperative for the economy to be resilient in a high-tariff environment. In the short-term, the US and China are likely to continue trading blows to assert pressure by inflicting pain on one another’s economy. For now, it seems that both parties are waiting to assess the repercussion of the latest tariff hike.

As trade negotiations grind on, investors should ready themselves for a protracted trade war. More importantly, observe the effects of the latest tariff hike. While the impacts on China would be more devastating, the Chinese people are more enduring and resilient than the American public. As investors, we should also learn to improve our endurance when the outlook becomes grim.

As the Chinese government readies the populace for a long fight, I suggest readers to read the “Protracted War” written by Mao Zedong many years ago. The collection of speeches was written by Mao amid the Japanese invasion in China. As the Japanese was militaristically superior then, Mao knew that China had to drag the war in order to wear out the Japanese military.

This time around, the book serves as a guide to explain the psychological aspect of the Chinese people in a long and difficult trade war. In a similar context, the US wields much greater economic clout compared to China. However, a protracted trade war will still incur heavy economic losses on both sides.

Although the US will suffer “lighter” impacts compared to China, the two countries have very different political systems. In China, its authoritarian regime could very effectively suppress dissent. On the other hand, the US is a representative democracy and the American voters will likely grow discontent with the inflation caused by trade tariffs. That said, there still seems to be bipartisan support for the US to be tough on China.

Taking a step back, investors should recall how China navigated the 2008 global financial crisis with its Rmb4 trillion fiscal stimulus to boost infrastructure and consumption spending. Always bear in mind Warren Buffett’s investment adage, “Be fearful when others are greedy and greedy when others are fearful.”

Market sentiments are poor and selling interests are heavy. Trying to take advantage of the situation right now are the short-sellers. However, short-selling is dangerous for unsophisticated investors that do not have a trading strategy which puts themselves at risk of margin calls.

With the US and China testing one another’s resolve on trade, Trump will likely add pressure by expanding the scope of disputes. As trade tensions continue to simmer on, investors should be more conservative and refrain from betting on a rebound as well.

In recent days, the Chinese Renminbi has depreciated significantly back to the level last seen in October 2018. Compared to the peak in mid-2018, the currency has depreciated by 10 percent in value. Theoretically, after offsetting the 25 percent tariff rate, the real impact would be 15 percent. Assuming the impact is shared equally by consumers, the Chinese imports to the US will see prices rise between seven to eight percent. While more expensive, Chinese goods in the US would still be highly competitive and consumers would continue buying them after the initial knee-jerk period.

Back when Trump first embarked on his quest to reset world trade, he imposed tariffs on imported steel and he did so without negotiating with other countries.  While the move benefited the US steel industry, higher steel prices adversely impacted US automakers. This is the reason why Trump intends to impose tariffs on Japanese and European cars. If that happens, the EU has explicitly said that it would retaliate by imposing tariffs on US products as well.

Fearing trade war on multiple fronts, Trump seems to be focusing his efforts on dealing with China first. Consequently, on 17 May 2019, Trump announced that it would postpone imposing tariffs on Japanese and European cars for 180 days. On the same day, the US announced that it would lift all steel tariffs on Canada and Mexico. In reciprocal gesture, Canada and Mexico also ended all retaliatory tariffs.

The move clears a major hurdle for the eventual ratification of the USMCA. The USMCA, that was a renegotiated North American trade deal in 2018 meant to replace the NAFTA, has not yet been approved by the US Congress.

As the US-China trade war prolongs indefinitely, Trump could not begin renegotiating trade terms with Japan and the EU. In the meantime, his only way to alleviate the US auto industry is to end all steel tariffs on Canada and Mexico.

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