How to cash in on the Sino-US trade war

by David Kuo, Director, Motley Fool Singapore 

It’s starting to look uglier than a one-eyed budgie with a squint.

 China has responded in the only way it knows to the US tariffs on steel and aluminium. It has imposed its own import duties of up to 25% on 128 American products.

So, American pork, fruit, nuts and wines entering China will now be subject to higher duties.
I wonder if China knows, or even cares, that it is hurting one of its own by taxing American pork…
In 2013, China’s Shanghui Group paid US$4.7 billion for America’s Smithfield Food. The acquisition was intended to provide a reliable supply of one of China’s most popular protein — pork.
But now Chinese diners will have to pay more for the meat from a Chinese-owned processor in Virginia. Brilliant!
Victims of war
I feel sorry for Chinese consumers. They are the innocent casualties of the Sino-American trade spat.
But it might not be bad news for everyone.
Pig farmers outside of the US will be sharpening their knives. Vineyards in France, Spain, Australia and New Zealand will also be wringing their hands and ringing their cash registers at the same time…
They will be ready to step in to fill the void. That’s how capitalism in a globally-connected world works. Someone should tell the White House.
American consumers will also lose out, as more expensive imported steel and aluminium push up the cost of locally manufactured goods. Cars could cost more. Tins of beans could cost more. Cans of beer could cost more. Oh dear.
Blow for blow
So, American and Chinese consumers will be some of those who will end up footing the bill for the phony trade war. Unfortunately, that is usually what happens when ill-informed politicians fiddle with economics — a mess.
Worryingly, neither country is done with their chest-bumps and muscle-flexing. The wash, rinse and repeat cycle of trade tariffs has only just begun.
America has already followed up with tariffs on flamethrowers and dental cement. China has responded with tariffs on soybeans and airplanes.
The two global economic titans will try to match each other blow for blow, until they end up blowing each other out.
Meanwhile, stock markets around the world will react the way that it generally does in these situations. They run for cover. It’s already started. Some traders are more worried than a long-tailed cat in a room full of rocking chairs.

The next depression?
US stocks have had their worst April start since the Great Depression. The 2.2% slump in the S&P 500 at the beginning of this month was only beaten by the 2.5% decline 89 years ago. What followed then was the Wall Street Crash of 1929.
So, what should we, long-term investors, do?
Firstly, I have no idea how long the trade row between the US and China will last. It could be days, weeks or even months before the two countries come to their senses.
Secondly, the future is never very clear. But that’s ok. Put another way, we usually pay more for the stocks we like, if the future is certain.
The beautiful of uncertainty
If we could determine with absolute certainty, the future profits of a bank or the future distributions of a REIT, then their share prices would reflect everything that we know. Where’s the fun in that?
Thankfully, we don’t know everything.
That is why we, investors, are rewarded for taking on the risk. The excess return that we earn over risk-free investments such as government bonds is our compensation.
So, think of the uncertainty caused by the Sino-US trade spat as the best friend of the long-term investor, rather than our deadly enemy.

Of course, we could wait for the dispute to end before investing.

But I’m not waiting around. As an income investor, I will never let anyone, either in Beijing or in Washington, stand between me and my regular dividends.
In 10 years’ time, the shenanigans of 2018 will be long forgotten. But my reinvested dividends will be a reminder that total returns are more important than petty squabbles between political leaders, who should really know better.

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