The last few months have been a rollercoaster ride for the stock market, and the rollercoaster seems to be getting even faster with the prospect that a U.S. and China trade war could ensue. The question is, does it really matter and how big of a deal is it?
Nothing is conclusive at this moment. And, only time will tell if a trade war possibility will, in fact, have an effect on the market and TSP funds. Still, there is some idea of what could happen.
U.S. Trade Deficit
The U.S., since the 1980s, has had an ever-increasing trade deficit with the world, as we import more goods than the country exports. Â At the current rate, the U.S. deficit is sitting at $60 billion a month.
Based on 2017 information from the Census Bureau:
- The U.S. exported approximately $1.5 trillion goods but took in $2.3 trillion, giving the nation an $800 billion deficit.
- The U.S. imported $505 billion of Chinese goods but exported $130 billion to the country, meaning there is a $375 billion deficit with China.
Nearly half of the country’s total trade deficit is with China alone, and the number is only increasing. The start of a deficit between both countries occurred in 2002 when it hit $100 billion. In 2005, that number hit $200 billion, and the number continues to grow. It could hit $400 billion before too much longer.
Why is that?
It’s because many U.S. companies have outsourced manufacturing jobs to China. As China grows in its development and becomes more expensive, companies are looking to other Asia regions to outsource jobs and manufacturing.
Simply put, the country’s gross domestic product is just below $20 trillion, which means the deficit of $800 billion is about four percent of the country. A China trade deficit equates to two percent of the U.S. economy.
Understanding The New Tariffs and What It Means Competition-Wise
It’s only natural the U.S. government wants to get control of the deficit, especially with China. For U.S. workers, it also makes sense. After all, outsourcing means companies can find less expensive labor overseas, which drives down wages and boosts the unemployment rate in the U.S.
However, many companies are looking to embrace both outsourcing and globalization where financially it makes sense to do it. After all, they save money, provide goods to American consumers at a lower price and stay competitive in the worldwide market.
There are a plethora of competing interests going on here.
The Trump administration announced in 2018 that it would implement tariffs on certain types of exports. To date, here’s what has been suggested.
- January 2018 – 30 percent tariff on imported solar panels – to last four years and decrease five percent each year. Tariffs were added to imported washing machines.
- March 2018 – 25 percent tariff on steel; 10 percent tariff on aluminum. A number of economic regions were excluded from the tariffs, but China remains included in them.
- March 2018 – New tariffs were included on $50 billion worth of imports from China. This caused the Dow to drop 724 points – the fifth-biggest daily drop in American history.
In response to all this, China announced it would put a 15 to 25 percent tariff on more than 100 American import goods, and then announced a few days later, an additional 100 or more items would be tariffed. This is when President Trump announced another $100 billion of Chinese imports would be subjected to tariffs, but this has yet to be implemented. This created rumblings of a U.S. and China trade war, but there is no direct announcement as of yet.
A big concern investors have is how much China owns in U.S. Treasuries, which is $1.2 trillion – more than five percent of the nation’s federal debt. Should China quit buying or selling them in retaliation for these tariffs, it could lead to higher interest rates for the U.S. debt and cause upheaval in the global bond market, so a U.S. and China trade war may not be in China’s best interest.
Is there a balanced solution to it all?
As it currently stands, the S&P 500 is roughly 10 percent off from the highs, and the future price-to-earnings ratio is thought to be 16.4x. The latest market drops and volatility have given some high U.S. stock valuations some breathing room, but the U.S. is still considered expensive by the majority of the metrics.
There is still a lot of room for stock prices to drop should the U.S. and China trade war become reality. However, you can decrease your portfolio’s volatility by holding onto a lifecycle fund or TSP funds. Just ready yourself for the news – good or bad.
