Michael Kagan, Portfolio Manager at the Legg Mason affiliate ClearBridge Investments
We have been expecting the Trump administration to put steel and aluminum tariffs in place since early last year. The European reaction has been sharp, the Chinese muted even though China will be most impacted by these trade restrictions.
The Chinese know that they have misbehaved and are waiting for the much bigger ruling on the horizon. Section 301 of the 1974 Trade Act will have an outsized impact on US and Chinese trade arrangements. This is the investigation into China's alleged theft of US company intellectual property and forced technology transfer practices. A preliminary determination is expected within the next month and Trump has alluded that its findings will arrive at a very large dollar estimate of those damages that could exceed $1 trillion, which would be used as a basis to impose high tariffs and other trade or investment action.
In addition to tariffs, the US could block any Chinese investment in the US, restrict the ability for Chinese companies to do business in the US, work with trading partners to isolate China, and limit access to the US by Chinese citizens by limited visas. Depending on the severity of the determination, a retaliatory response of similar consequence could be forthcoming from Beijing on US industries and imports. The Chinese trade ruling could be a market shaking event and we are monitoring it closely.
Although the US trade balance is very negative with China, more US public companies would be hurt by a trade war with China than would be helped. Industries that would be hurt by a trade war with China would be aircraft, autos, agricultural crops, semiconductors and chemicals. Industries that would be helped by a reduction in imports from China include steel, aluminum, telecommunications equipment, furniture and textiles.
Our portfolio has minimal exposure to the industries most susceptible to trade restrictions. Meanwhile, we have exposure to the steel industry through Nucor and have other companies in industries that could benefit from tariffs under consideration for purchase.
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