US/China Trade War Winners

Since the Trump administration’s decision to focus so heavily on America’s trading position a trade war is ensuing with (especially) China and consequently a huge amount of discourse, debate and discomfort – both domestically and abroad.

From what has, arguably, been a trajectory of globalisation across the last few decades, this monumental shift in agenda has been a major jolt to the global economy and has further emphasised pre-existing longer-term trends. Trump however believes that “trade wars are good, and easy to win” so as the 2020 election approaches, he is continuing to reach out to his core supporters – those who are likely to benefit the most.

There are however some fairly unusual subjects that stand to benefit as a result of all of this…

1) Israel’s Technology Sector.

Broadly speaking, much of the Israeli economy is likely to suffer and this aspect cannot be undermined. The World Bank outlines that around 30% of Israeli GDP is export driven which is currently significantly higher than many major economies – the UK, for example, is striving towards a 35% goal over the next few years.

If, however, the trade war means that the import of goods restricted into the US from China and the EU does present other economies, such as Israel, with a unique opportunity. Their economy is heavily driven by technology, and more specifically ultra-high-tech technologies, which has attracted attention from some of the largest companies in the world, such as Apple. This grants this part of the economy a relatively stronger market position because goods/services can be considered less substitutable than more homogenous type products, such as orange juice, which are more easily exchangeable. This view was backed up by Psagot Investment House’s Chief Economist and Strategist explained to the Washington Post: “some products that we sell are not replaceable, like Intel micro-processing chips, cybersecurity services [and] weapons systems.”

Nonetheless, plenty of these companies have set-up US subsidiaries to benefit from the current/previous free trade agreements (NAFTA, for example). These firms, and possibly their parent companies as well, aren’t immune to any trade conflict within the North/Central American regions, despite their best intentions for diversification, which may result in the displacement of these subsidiaries and their associated employment and supply chains.

2) Nitrogen

This commodity seems to be an unlikely victor in this war, but nonetheless has performed well when measured by equity growth because of its extensive application as a fertiliser.

To provide some context, soybean prices have plummeted since May 2018 due to the uncertainty associated with the sale price of oilseed as a by-product of being caught up in the trade war. Consequently, US farmers are likely to switch to the production of corn, which is a high demander of nitrogen fertiliser; “U.S. spot prices for urea, a tradable, commoditized form of nitrogen fertiliser, have surged 49 percent in the past 12 months, according to Green Markets data.” This, compounded with the previous slump, have led to significant pricing increases being realised.

Investors have also flocked towards equities linked positively to the commodity and those likely to benefit from this shift towards nitrogen dependent crops. These gains were apparent in 2H18. Key examples include; CF Industry Holdings, Mosaic Co., Nutrien Inc. which performed particularly well driven, in part, by the rise in the price of nitrogen which increased by 10% by the end of 2018, which in turn translated into increase earnings and thus share price/dividends etc.

Interestingly, however, the US is a net importer of nitrogen, with the majority coming from the Trinidad and Tobago so the benefits, other than that of the share growth, may not be fully contained within the US. 3) China With any attack on international trade for an economy, the default response is often to focus on domestic industries and provide a stimulus internally. China is a good example and has used this attitude previously. Furthermore, the economy is, relatively, less economically underpinned by exports than some of its geographic neighbours and thus domestic companies may end up benefiting as the macroeconomy substitutes its import and export flows for its domestic market. On a wider macro level, China is in the midst of transition from an export-led and investment driven economy into a domestic consumption-based economy as its economy matures and population increases in wealth. Some consider this trade war to be a catalyst in this movement and has further highlighted the transition that is taking place. Conclusion. Macroeconomic theory dictates that trade between economies with different productive efficiencies provides more benefits than costs and more winners than losers, on balance. Through globalisation, short term pains will inevitably occur (job losses, labour force displacement and relocations) but as the economy adjusts over time the benefits from comparative advantages between economies can be realised and makes the opportunity of trade better for all. However, ‘Trumponomics’ simply doesn’t allow for US trade deficits within bilateral trade flows, despite the fact that the theory dictates that this may occur with specific trading partners (at least in the short term) but, on aggregate, the benefits for all outweigh any downsides. Time will tell whether Trump’s hard-line opening position is just his bullish method of forcing the US to gain a better closing deal or so that he can continue to portray his ‘business mogul’ image in the political realm, but to-date his approach seems less than complementary to theory. Fundamentally, however, the overarching issue is that this game-theory exercise is taking place whilst exaggerating current longer-term trends and that the expectation unfortunately is that the majority on a global scale stand to lose out. As a trade deal appears to finally be nudging nearer, it will be interesting to see how the two economic superpowers rebalance global trade and what the fallout will be.