How to Invest in a Trade War

Rising tariffs and barriers require some fancy footwork, but there are strategies to mitigate the risks??

SINGAPORE — Ask anyone what accounts for this tiny nation’s five-decade rise from steamy jungle colony to gleaming city-state and “free trade” will top most lists. ?But the generous cluster of global investors and multinational firms that have landed here during that time now face a world that no longer believes in this formula for success.

Rising tides of Chinese manufactured exports fuel worries of a fresh shock as the world’s second-largest economy pursues leadership in advanced industries from electric vehicles to machine tools to flat panel displays. ?Meanwhile, Beijing’s efforts to revive domestic growth continue to prioritize industry over households, making imbalances still worse.?

While China’s manufactured surplus with the United States has remained flat since before the pandemic, it has risen a little with Europe, a medium amount with Latin America and South Asia and a lot with Singapore and its ASEAN neighbors.

?

So far, the data suggests that many emerging markets have benefited from these dynamics as their exports have risen in line with Chinese imports.? But this will also make them vulnerable to new tariff barriers as the United States and Europe redouble their efforts to constrain China’s excess capacity when it is repackaged in Malaysia, Thailand or Vietnam. ??

“Deglobalization” is not quite the right word for these trends.? ??It’s more a re-wiring of the global economy’s interconnections as supply chains naturally adjust to new obstacles. ?While global trade to GDP has stabilized near 45% ever since the 2008 financial crisis, the number of trade restrictions has risen sharply.? It’s not that there is less trade, but trade has simply started eating into corporate profits and investment returns.

Given the mounting resentment towards China’s chosen business model which continues to suppress domestic demand, expect even more barriers to pop up.? Threats of new measures aimed at Chinese firms that sell to sanctioned Russian counterparts only? add to the uncertainty.

Sadly, there’s no magic here.

For nimble investors and corporate executives, the risks are mounting, too.? Still, some principles may help mitigate the potential costs as this latest cloud of protectionism descends.

• Avoid Borders!? This sounds glib, but there is plainly less risk in businesses that have most of their suppliers and most of their customers in the same country.? If your firm inevitably depends on inputs from far and wide, this is an especially good time to review localization strategies that can bring as much supply as possible closer to final demand.?
• Services Over Goods: ?China’s excess supply is in goods.? Services are not immune from barriers, but local regulations have actually relaxed for foreign investors in financial services and there is enormous demand for high-quality medical care.? Also, foreign firms that establish back-office operations in China for themselves or others can export their services with little fear of interference.
• Everyone’s Friends: There are a few key countries that neither Washington nor Brussels wants to alienate.? Despite longstanding trade issues with Brazil, India and South Africa, no Western government wants to do anything that might tilt them toward Beijing, reducing the odds of any new tariffs or barriers popping up in these parts of the world.
• Headwinds into Tailwinds: America’s efforts to keep out Chinese solar panels, batteries and semiconductors are paired with generous subsidies and tax breaks for anyone launching domestic production in these strategic industries.? An economist will grumble about why it’s all wasteful and distortionary, but the savvy investor or corporate executive will figure out how to take advantage of this government largesse.?
• Margins of Safety: ?The great value investor Benjamin Graham advised mitigating the risks of any investment by pricing them low enough.? One important strategy for navigating trade war uncertainties is to choose firms with what he called “margins of safety.”? This means profitability to absorb higher tariff costs and strong balance sheets to withstand shocks of non-tariff barriers.? For companies contemplating expansion or acquisitions, higher hurdle rates will help, too.?

Sadly, there’s no magic here.? For many investors and corporate executives there is no hiding when the world’s largest economies turn protectionist.? Tariffs – and retaliation – will inevitably hurt profits.? Still, an eye for where the risks are lower may help reduce the costs -- and might even reveal some brighter possibilities amid a darkening outlook.

?

?

?

?

?

?