The US stock market's resiliency to mounting trade tensions may be about to come undone

Apple store in Shanghai, China. (Photo by VCG via Getty Images)
  • China may respond to Trump’s $US200 billion trade threat by targeting US subsidiaries in China.
  • Research from Capital Economics (CE) shows sales from US-owned affiliates total $US350 billion – similar in size to the US trade deficit.
  • CE said that if China introduces penalties for US owned companies it could significantly weigh on US stocks.

China’s next step in the escalating trade skirmish with the US could be to target US multinationals operating in China. Such a move could have a materially negative effect on US stocks, Capital Economics says.

As this chart from CE shows, the size and scope of the US multinationals operating in China dwarfs that of Chinese companies in the US:

Source: Capital Economics

“There is considerable scope for China to retaliate by penalising these firms, for example via much more stringent regulatory checks or consumer boycotts,” CE’s Oliver Jones said.

In the first round of a tit-for-tat trade war, China responded to last week’s US tariffs with import taxes of equal size on $US34 billion worth of American exports.

US President Trump subsequently threatened to apply a 10% tariff on another $US200 billion worth of Chinese products. According to UBS, the new tariffs were structured to allow for fast implementation, and the bank said it’s now likely the US will follow through on its threat.

China hasn’t yet clarified how it will respond to the latest salvo. However, it will be unable to respond in equal measure because total US exports to China only amounted to $US154 billion last year.

The lopsided export balance between the two countries acts as a bargaining chip for the US in when it comes to tariffs. But China is well-placed to exploit the fact that US companies operating there generate big profits.

Based on recent data, Jones said US-owned subsidiaries in China generated sales of around $US350 billion, “which is similar in scale to the US trade deficit in goods with China”.

So a move targeting the operations of those companies would allow China to exploit a bargaining chip of it’s own.

And Jones said such a move would weigh on the S&P500, which has so far been more resilient to mounting trade tensions between the two countries:

Source: Capital Economics

Chinese stocks slumped by another 1.8% yesterday in the wake of the latest US tariff threat, while the S&P500 posted a smaller decline overnight of 0.71%.

However, a move by China against US multi-nationals “could pose a far greater threat to the index in time”, Jones said.

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