I don?t think there will be a trade war between the US and China.
Please forgive me, but I am new at this. I have only been covering China for 45 years now, since the Cultural Revolution was sweeping an impoverished, starving country.
With $659 billion in bilateral trade in goods and services in 2015, we have gone too far down the road to attempt any kind of substantial reversal.
Thousands of businesses in the US would go bankrupt and millions would be unemployed. Trans Pacific transportation would grind to a halt, filling up harbors with hundreds of redundant ships.
Trillions of dollars of direct investment in the two countries would be held hostage.
So, it?s not going to happen. It would be like cutting off our nose to spite our face.
However, I DO believe there will be some serious saber rattling, and suffer ample potholes down the road, as big as those found during a winter in San Francisco.
We may all laugh at Donald Trump?s moronic tweets. The Chinese take them deadly seriously.
Just as America has its Tea Party and right wing conspiracy theorists, so does the Middle Kingdom.
Their entire worldview revolves around the merciless exploitation of China by the western powers that took place during the 19th century.
British trading companies, like Jardine Matheson, imported cheap opium from India and sold it to the Chinese at the point of a gun, triggering three wars. With only primitive weapons at hand, the Chinese were powerless to resist.
By the time of the fall of the Qing Dynasty in 1912, the entire country had been carved up into spheres of influence dominated by the West and Japan.
Then, the Japanese invaded in 1937, and 29 million Chinese died. As recently as 1938, my Marine Corps uncle, Colonel Mitchell Paige, was charged with protecting American gunboats cruising the Yangtze River.
To us, this is all ancient history inhabiting dusty textbooks in libraries never visited. Patriotic Chinese feel like this happened yesterday.
You could dismiss all this as academic musings.
But national pride and sovereignty are really big deals in China today.
During China?s last trade war with Japan, only three years ago, several Japanese facilities were burned down by angry, uncontrollable mobs, and visiting businessmen were assaulted on the street. Trade ground to a halt.
It became so dangerous that my son switched from using his Japanese passport to using his American one, lest he be fired from his job as a university teacher.
So it behooves us to analyze which companies will suffer the most from any deterioration in the US-Chinese relationship before markets figure this out. The Chinese are not interested in any ?America First? policy in any way, shape, or form.
Here is my hit list:
1) Apple (AAPL) ? Yes, Cupertino, CA based Apple has a big fat bull?s eye on its back. The company is a vast, finely tuned machine that needs everything to work perfectly in order to deliver 180 million iPhones a year around the world.
The number of things that can go wrong here are beyond calculation. What if the one million workers at its Foxconn subcontractor fail to show up for work some day? What if they are not allowed to go to work?
Another problem is that Chinese growth is a key part of Apple?s long-term sales strategy. A Chinese boycott would put a huge dent in those plans.
Remember, Apple is getting it from both sides, with Trump promising a 35% import duty on all Apple products. That would certainly hurt sales.
I?m sure Apple management is on tenterhooks as to how all this will play out in the coming months.
There is no back up plan here. Apple is just too big and too sophisticated to change any part of its incredibly complex supply chain in less than a decade.
2) General Motors (GM) ? Is one of the most globalized US companies. GM can?t build a car in Detroit without 40% of its parts coming from Japan, Mexico, South Korea or dozens of other countries.
General Motors is also hugely dependent on Chinese sales. In November, it sold an eye popping 371,740 cars there, up 7% YOY, compared to only 252,644 in the US. That is one third of GM?s total worldwide sales.
Now the company plans to sell Chinese made Buicks in America.
And with the new, super strong dollar, the price advantage of those Chinese made cars is improving by the day.
While we weren?t looking, General Motors has become a Chinese company, and many others are following suit.
3) Wal-Mart (WMT) ? Imagine walking into your local Wal-Mart one day and finding out that all of the prices have been marked up by 35%?
This is a reason why the company is called the ?Chinese Embassy.? I dare you to find anything there that is NOT made in China, except for the food and the flowers (a dozen long stem red roses are only $10!).
Like Apple, the company is so big that any change in its supply chain would take years. You can add Target (TGT) to this hit list for the same reasons.
On top of that, Wal-Mart has 432 stores operating in China. Imagine the effect that a boycott would have there.
4) Boeing (BA) - The local flight school that maintains my plane has been totally taken over by Chinese students. That is because China needs to buy $1 trillion worth of aircraft over the next 20 years, some 6,800 jetliners in all.
Boeing expects to provide the lion?s share of these. The company has already entered the planning phases for the construction of a giant new aircraft assembly plant in China.
It would be really easy for China to switch a major part of these orders over to Europe?s Airbus Industries, which has been aggressively competing to accomplish exactly that.
Boeing didn?t get the business because of the advanced technology seen in the 787 Dreamliner. China was simply attempting to even out the trade balance.
5) Starbucks (STBX) ? Starbucks founder, Howard Schultz, made no secret of his dislike for Donald Trump before the election. With 2,500 stores in China, and plans to double that figure, he had little other choice.
With relations between the US and China turning colder than the firm?s overpriced iced espresso, sales, growth plans, and share prices could take a big hit. Chinese may have to postpone their caffeine addiction until the next Democratic administration.
6) Caterpillar (CAT) ? You can?t have an infrastructure boom anywhere in the world without Caterpillar, whose heavy machinery is the gold standard for large public works projects. I have been covering the company for 40 years.
As a result of the upcoming US round of massive deficit spending, Caterpillar?s share have been one of the best performers since the November 8th presidential election, up some 21.87%.
The shares are now trading at a positively stratospheric dotcom valuation level of 93.7 times 2016 earnings.
Unfortunately, this time the company is so heavily invested in China that it has also built a large assembly plant there. China accounts for 20% of the firm?s worldwide sales.
Time for a short?
The net effect on the impairment of business at all of these companies will be lower profits, higher volatility of profits, and continued uncertainty. The shares will be forced to trade at a discount.
When you are running a mammoth global business, the last thing in the world you want is unpredictability.
It will also bring a rapid rise in inflation, as prices are raised to offset higher costs and a strong dol
lar.
Who will be the biggest victims?
Working class Trump voters in rust belt states, least able to afford price hikes, especially those who already have jobs in Midwest manufacturing.
