How the U.S. Is Backing China Into a Corner

Matthew Carr By Matthew Carr
Emerging Trends Strategist

Market Trends

This year has been dominated by a reshuffling of global trade. And it hasn’t exactly been met with applause from around the globe.

Especially as two of the world’s superpowers – China and the U.S. – have faced off.

The mood is getting even more tense, particularly as China is getting backed into a corner.

People’s Daily, the official Communist Party newspaper, proclaimed, “Washington is playing double-faced tactics in the ongoing trade war.”

It accused the U.S. of having “zero sincerity,” of employing “carrot-and-stick diplomacy to bully China into unilateral trade concessions.”

And for starting the “biggest trade war in history.”

It warned, “China will not be defeated.”

But let’s be honest…

Can China win?

And how much more can the U.S. really do?

The Trump administration’s anger at China is fueled by the fact that from 2016 to 2017, America’s trade deficit with China increased more than 8% to $375 billion.

As negotiations between the two countries failed to reduce that deficit, the U.S. proposed tariffs on $500 billion worth of Chinese imports.

Now, that’s significant. And it’s pretty much the ceiling for what the U.S. can do.

I mean, American companies imported $506 billion worth of Chinese goods last year…

On the flip side, China’s options are even more limited.

The country imported just $130 billion worth of goods from the U.S. in 2017. It’s already proposed $60 billion worth of tariffs on American products.

That means, on the tariff front, it can’t go toe to toe with the U.S.

New Highs on Tariffs

The U.S. steel and aluminum tariffs are really what got the ball rolling this year.

On March 23, the U.S. implemented a 25% tariff on imports of Chinese steel, as well as a 10% tariff on imports of Chinese aluminum.

The goal was to protect U.S. metals companies, which have struggled.

Now, the U.S. accounts for 14% of China’s aluminum exports but only roughly 1% of China’s steel exports.

So the tariffs are a mixed bag for China. It wasn’t a fan though. And the Chinese government has filed a complaint against the U.S. with the World Trade Organization.

But despite all the back-and-forth rhetoric, here’s the reality…

First, in the five months since the tariffs were imposed, U.S. aluminum imports from China haven’t fallen. In fact, China’s aluminum exports are up 12% globally and have increased more than 6% to the U.S.

And China has found a welcoming market in Europe because of U.S. sanctions imposed on Russia’s Rusal, one of the world’s largest aluminum producers.

Second, the U.S. is cashing in. Between March 23 and July 16, the U.S. collected more than $1.4 billion from tariffs on imports of steel and aluminum.

The total for 2018 is expected to rise to $7.5 billion. Of that, $5.8 billion would come from steel and $1.7 billion from aluminum tariffs.

For U.S. metal recycler Covanta (NYSE: CVA), the tariffs have also been a boon.

During the second quarter, revenue increased more than 7% to $454 million. And its metals business saw sales increase 43%. The tariffs provide Covanta with better pricing power, so it raised full-year guidance for its ferrous metals segment.

Shares of Covanta set a new 52-week high following the report.

For years, the U.S. trade deficit with China has been a thorn in the country’s side. But the recent shake-up of the global trade structure is sending ripples around the world.

Investors must remember that in any such realignment of trade, there will always be winners… and there will always be companies that come out ahead. They just may not be the ones you expect.

In my next article, I’ll cover the other booming industry reducing the trade deficit. Stay tuned.

Good investing,

Matthew