Conventional wisdom suggests that trade wars have no winners. This was certainly the case during the early 1930s as import-export tariffs helped to usher in an era of economic protectionism widely blamed for the Great Depression. The years of 2018 and 2019 are prompting many in the financial community to believe that history may be on the cusp of repeating itself.
With trade tensions building between the U.S. and China, volatility has swept the capital markets. A tit-for-tat tariff exchange and currency devaluations have turned pricing volatility into the new norm. Is it even possible to determine who, if anyone, is winning the U.S.-China trade war?
Equity Market Valuations
Depending upon whom you talk to, the importance of equities performance as a barometer of domestic economic health varies. Since charged rhetoric evolved to a hot U.S.-China trade war in the summer of 2018, the leading equities indices for each country have turned in very different scorecards:
|Dow Jones Industrial Average (DJIA)||25,378||26,378||+3.4%|
|Shanghai Composite (SSE)||2,795||2,794||-0.03%|
|Shenzhen Composite (SZSE)||8,813||8,919||+1.2%|
In the aggregate, U.S. equities appear to be weathering the trade war moderately better. Both the DJIA and S&P 500 have outperformed the Shanghai and Shenzhen Composite indices from August 2018 to August 2019. This suggests that U.S. companies are able to deal with the fallout surrounding the extensive 10% and 25% tariff structure in a more efficient fashion than China’s leading publicly traded corporations.
Currency Performance: Yuan vs. the Dollar
On August 4, 2019, the Chinese yuan (CNY) fell significantly against the U.S. dollar, to an exchange rate of more than 7/1. The devaluation took the yuan to levels not seen since 2008, the beginning of the global financial crisis.
The sudden drop of the yuan highlighted a tumultuous year for the USD/CNY and drew harsh criticism from the White House. Shortly after the move, U.S. President Trump took to Twitter to air his frustrations:
“China dropped the price of their currency to an almost historic low. It’s called “currency manipulation.” Are you listening Federal Reserve? This is a major violation which will greatly weaken China over time.”
While Trump’s charges of currency manipulation were not unanimous across the financial world, the August 4 sell-off did illustrate the volatile relationship between the yuan and dollar. Since the opening salvoes of the trade war in April 2018, the USD/CNY rallied consistently. From 1 April 2018 to 9 August 2019, the Chinese yuan lost 12.5% against the U.S. dollar.
Who Is Winning?
So, who is getting the upper hand in the U.S.-China trade war? As of early August, U.S. equities indices are outperforming their Chinese counterparts on a year-over-year basis. In addition, the USD has posted double-digit gains over the CNY for roughly the same period. While there is much more to the story than stocks and currencies, at least on the surface, the U.S. appears to have an edge over China.
However, the trade war’s outcome is far from decided. Negotiations have broken down repeatedly, suggesting that neither side is ready to concede. As of May 2019, the loss in two-way trade stemming from the boosted tariffs is estimated to be US$165 billion. At this point, it is a mystery as to how high the price tag will have to rise before a constructive deal comes to pass.
Stay Informed With DT’s Insider Market Advisory
No doubt about it, international trade is a complex issue. Tariffs and currency devaluations often play key role, not only in commerce but also in the global marketplace. Staying on top of important developments and how they influence finance is a full-time job.
For the latest on the U.S.-China trade war and its impact on commodities, currencies, and equities, check out the Insider Market Advisory available at Daniels Trading. Featuring timely reporting and valuable insight, it has everything you need to stay abreast of the ever-evolving geopolitical atmosphere.