President Donald Trump’s policies are creating a unique economic environment for businesses, consumers, and investors across the globe. How do Trump’s policies affect the economy? Have Trump’s policies led to any profit opportunities? These are some questions that we hope to answer in our analysis of the economic situation created by Donald Trump.
The US-China Trade War
The Trump Administration is attempting to punish China for currency manipulation, theft of US trade secrets, and global competitiveness by applying a series of tariffs on Chinese goods. Analysts expect that US tariffs will be applied to over $550 billion of Chinese goods. China has responded with tariffs and import quotas on American goods. Investors like Ted Bauman understand that companies like Walmart will experience large losses from the US-China Trade War.
Economic Costs of a Trade War
The world’s most well-respected economists have consistently spoken against trade wars. Tyler Cowen, Joseph Stiglitz, Ben Bernanke, and other leading economists argue that tariffs cause high costs and few benefits for society. To make matters worse, the exact effects of tariffs are difficult to predict. In general, tariffs and other policies that decrease competition are harmful to innovation and the material well-being of consumers.
High Transaction Costs
A trade war affects the economy in several ways. The most obvious effect of trade war tariffs is high transaction costs. A transaction cost is any cost associated with completing a trade. A transaction cost may include taxes, transportation costs, and time spent coordinating a trade.
If a policy requires that Chinese imports to the United States receive a 10 percent tax, the final product price will increase by at least 10 percent. This situation may cause consumers to purchase goods from a different producer. In some cases, the trade may not happen at all.
High transaction costs can also cause a lower level of competition. Assume that there are 10 producers selling products in the United States in 2015. 5 of these producers are American companies. The other 5 producers are Chinese companies. In 2016, Donald Trump initiates the trade war. Due to higher transaction costs, 3 Chinese companies are forced to exit US markets. In 2017, there are just 7 producers selling products in the United States. This situation may increase the prices for US consumers. Wages for laborers can also decrease or stagnate due to a smaller pool of employers. Markets with tariffs tend to be more monopolistic than markets with low barriers to entry.
The example we just described is a simplification of the current situation, but it demonstrates how high transaction costs can lead to a poorer society through weaker competition.
People tend to make bad decisions when information is unexpected or unclear. Economic changes caused by policy decisions tend to cause a high level of uncertainty. When this happens, people often overestimate the risks associated with certain assets. Investors may sell good stocks. Businesses may decide to delay investments that would increase output. Over time, uncertainty can make the economy sluggish.
Investors often find that the policies of Donald Trump are difficult to predict. People must speculate about how large Trump’s tariffs will become. Unfortunately, economic uncertainty makes people skeptical of the long-run economic health of the United States and China. Low consumer and investor confidence reduces economic opportunities.
Costs to Businesses
Economic costs translate to real losses for businesses in the United States and China. Consider the example of an electronics company in California. The Trump tariffs reduce competition in US markets, so the electronics company faces less pressure to innovate. It can maintain its current output and increase prices to increase profits. This situation is a benefit to the company, but it is a cost for consumers. However, this situation does not tell the entire story. If the US manufacturer relies on inputs from China, its production costs will increase. Higher production costs may result in job layoffs and reduced productivity. Consumers and workers are forced to take on the real costs of tariffs.
A different situation occurs for Chinese companies that sell products in US markets. The tariffs will increase the transaction costs of Chinese companies, so they will sell fewer products on US markets. If the companies cannot find ways to adapt to the new costs, their productivity and revenue figures will decrease.
Currency Devaluation: China’s Response to Trump Tariffs
The US-China Trade War is costly for both US and Chinese companies. In an effort to alleviate some economic hardship on Chinese firms, economic planners in China have launched a Yuan devaluation strategy.
By devaluing its currency, Chinese economic planners hope to make Chinese goods cheaper on international markets. This strategy could increase the demand for Chinese goods. If the strategy is successful, it will counter the effects of Trump’s tariffs.
The currency devaluation strategy is not a perfect hedge for the US-China trade war. A weaker Yuan will increase production costs for Chinese producers that rely on inputs from international markets.
Opportunities for Investors
While the US-China trade war is an textbook example of a poor economic policy, there is a silver lining for investors. Investors can take advantage of falling Chinese stock prices to find investment opportunities.
Chinese stocks are falling due to a combination of high prices and a shrinking consumer base. Investing in these stocks would be a poor decision if the decline in stock prices is permanent. However, it is likely that Chinese stock prices will increase in the future. The US-China Trade War is likely to end with Trump’s presidency because the tariffs face broad opposition from economists and Wall Street investors. By buying Chinese stocks during the trade war, investors can secure a growth opportunity for their financial portfolios.
This investment strategy was suggested by Ted Bauman, an experienced investor who serves as the editor of The Bauman Letter and Alpha Stock Alert. Ted Bauman studied economics and history at the University of Cape Town. He uses his education and experience to understand the relationship between economic policies and productivity over time. Bauman has successfully used this background to identify profit opportunities in emerging markets and advanced economies.
Ted Bauman is an expert at turning bad situations into economic opportunities. Many people view the Trump-led trade war as a terrible economic crisis. Bauman views the trade war as an opportunity to secure and grow your assets until cooler heads prevail.
The data suggest that Bauman’s instincts about the US-China are correct. In July 2018, the Shanghai index was down by 23 percent since January 2018. During the same period, the Shenzhen index was down by 22 percent. In the US, the S&P 500 fell in value by just 4 percent
Analysts expect the Chinese markets to recover their losses when the US-China trade war ends. The current economic situation is a rare opportunity for investors to purchase undervalued stocks from Chinese companies and US companies that rely on inputs from China. Growth is not guaranteed, but it is likely. Wise investors will use the advice of Mr. Bauman.
To learn more about Ted Bauman, click here.