Will You Be a Victim of Trade War Friendly Fire?

For this episode of Motley Fool Answers, Robert Brokamp and Alison Southwick wanted to consider one of the biggest macroeconomic dangers facing Americans today: the full-blown trade war President Trump seems determined to heat up with China. To help, they brought in an outside expert: Scott Kennedy, the director of the Project on Chinese Business and Political Economy for the Center for Strategic and International Studies -- a nonpartisan, foreign-policy think tank.

In this segment, Kennedy talks about the ways in which Americans will pay the price for the escalation of the trade conflict. At the outset, the hit to our wallets will be more of a ricochet, as large industrial players and manufacturers get punished. Then comes the trouble that many investors fear -- and Kennedy says they're right to. A lot of U.S. stocks will likely sink if the conflict worsens -- and for what it's worth, using Chinese equities as a hedge is not a strategy he recommends.

A full transcript follows the video.

This video was recorded on April 24, 2018.

Alison Southwick: Let's talk more about, selfishly, the impact that a trade war could have on us. First let's start as consumers. How concerned should I be about the price of bacon? I don't know. People really love bacon. How concerned should I be as a consumer about rising prices?

Scott Kennedy: Bacon may face problems, but turkey bacon is going to be OK.

Southwick: And turkey bacon is totally fine. Just get used to it.

Rick Engdahl: Sorry, no. No! Turkey bacon is not the same.

Robert Brokamp: Of everything, Rick is going to weigh in on turkey bacon.

Southwick: You've been here this whole time and that's when you speak up.

Kennedy: Soy bacon is OK, but not...

Southwick: Oh, OK. I may draw the line, there.

Kennedy: In terms of the direct hit that industries are going to face, which then will affect consumers, at least in the first cut of products identified for higher tariffs [that the U.S. first laid out and then the Chinese laid out], most of these aren't direct consumer-facing products. The U.S. primarily picked machinery, electrical equipment, and stuff like that that is part of China's industrial policy in areas of high tech, and that primarily involved Chinese domestic suppliers.

For those of your audience that buy construction equipment to build large buildings -- or maybe they use that in their backyard -- it'll be more expensive for them. Chinese cars will be more expensive for folks, here, but we don't import a lot of Chinese cars. I don't know if we import any.

There's some things which are minor; but, if this expands, then I think that we and the Chinese will then start targeting consumer goods, so there will be more things, potentially at Walmart and elsewhere [clothing, shoes, computers]. Dell assembles lots of their computers in China. The final assembly of most iPhones is in China. So, there could be some of those products which eventually face higher tariffs and the prices of them go up; but those aren't the ones that are scheduled at the moment to face these problems.

Southwick: In an interview you gave to The Atlantic, you said that the pain for Americans isn't necessarily going to be felt on the shelves, just yet, like you just said, but it could be felt in our portfolios. As investors, that really hits home for us. How worried do we need to be about our portfolios?

Kennedy: I think you need to be very worried about your portfolios.

Southwick: Oh, no! I didn't want to hear that!

Kennedy: Yeah, sorry!

Southwick: That is not the answer I wanted to hear.

Kennedy: It's not going to be a world where you just need to go short, but you do need to be super careful in a couple of ways. First of all, there are going to be individual companies that are going to be targeted. The Chinese are going to pick companies in a variety of different industries. Many are publicly listed companies.

The Chinese haven't said [they'll stop importing any] Boeing aircraft, but they've identified that they're not going to import the older 737s. Currently there are about 27 of those planes still on order to be delivered. There are 250 larger 737s that haven't been blocked, but if the Chinese move that number a little bit, then Boeing's business in the short term will be affected and all the companies that supply parts that go into 737s could end up [as part of] the Dreamliner.

You could also look at semiconductor companies and then agricultural firms -- not just the farmers, but the processors that take agricultural products and export them to China. Many of those companies are listed. For that, you just need to see specifically which companies and sectors are going to face penalties and then make your choices accordingly.

But the bigger challenge for most folks -- because not everyone just invests in individual companies and needs to step carefully and avoid those landmines -- is my expectation that the market, overall, is affected by talk of a trade war and implementation of a trade war, and the sort of contagion effect which takes down all stocks, good and bad, regardless of whether they're specifically targeted. That's the bigger effect. That means that folks want to look for options where there are industries, businesses that are so far out of the line of fire that are safer long term in a broader economic downturn.

Southwick: You talked about the potential hit to our portfolios as being short term. We're very long-term investors here at The Motley Fool. Do I get to sleep a little better?

Kennedy: Sure, if you've got a really good mattress you can put that money under for a while you're going to be fine. No, you don't have to do that, but you do need to think about how your grandmother would invest. How would others who really need to depend on this income long term and need to protect themselves [invest], just because in addition to the markets potentially going down, it's just volatility. There's going to be a lot of volatility and it's [about] how much heartburn you can take. Do you want to have to pay attention every single day?

So, looking for things that are safer, whether it's bonds or mutual funds, or other types of instruments or currency. It might be gold. Who knows? That doesn't fit under your bed really well; but safer things. There will never be a siren that says "all clear" as long as we've got leaders in both the U.S. and China who are relatively nationalistic. Who are somewhat unpredictable. Who themselves have high tolerance for risk. That means everyone else has to have a high tolerance for risk or ways to avoid risk.