Who has a better hand? Who can hold out the longest? I am talking about the People's Republic of China versus the United States and the unexpected trade war that has developed between us. That's the point behind the decline in stocks. It's the reason why so many industrial stocks got hammered while the soft goods and defenses surged. And it all comes down to whether you believe that our nation or the Chinese have the staying power to handle a real battle as opposed to what we have been doing in this country, which is accepting that you have to do what the Chinese want or we lose their market to sell into, the best growth market in the world.
Let's go over both sides and what they have going for them.
First, we have, in many ways, a bizarre upper hand when it comes to the tariffs because we import far more from China than they import from us.
We import about a half a trillion dollars in goods from China while they import about $115 billion from us.
That disparity works in favor of President Trump because if you put tariffs on the Chinese it could cost them far more jobs than it will cost us. It is possible that the President could slap tariffs on the Chinese that are so high that U.S. stores, a primary buyer of goods, decide to shift production elsewhere if it is private label -much of which is still made in China - or demand that their suppliers switch production to another country. It's not easy to pull up stakes from China but here's where China's in a lot of trouble: companies that make product in China tend to have another source to be sure they aren't captive to China. Clothing manufacturers, for example, try not to have more than 20% of their goods made in China. They will shift that production elsewhere and can do so within the year. Many of the traditional products, like appliances, can easily be made in Mexico. Yes, anyone thinking of switching has to worry about NAFTA but we know from Martin Franklin, who used to run the largest small appliance company, Jarden, that it's cheaper to make things in Mexico and he was busy onshoring from China to Mexico in his last years running an independent company.
It's a curious amalgam away from these two crucial areas. There's lots of machine engines made there, lots of mechanical goods. We will be hurt by tariffs on those. They will raise prices for many goods because plants can't be built overnight for that material.
Similarly many of the least expensive goods, the dollar tree trinkets, will have to go up in price. How much can they squeeze the consumer versus Dollar Tree (DLTR) or Dollar General's (DG) margins? Not clear. But I don't want to wait around and see.
Now how about the $115 billion or so - it has meandered between that and $150 billion over the years. First, it's not really clear how much is imported and how much is made. For example, we know that Starbucks (SBUX) and YumChina could be boycotted. We know that FedEx (FDX) planes could be idled on the tarmac. We know that the diaper market, the razor market, the shampoo market and the make-up market could all be hit. We know that machinery, particularly machinery made by Caterpillar (CAT) and the Otis division of United Technologies (UTX) could be taxed. Honeywell (HON) , 3M (MMM) and Emerson (EMR) all have substantial businesses in China. All of these stocks have been hurt and probably will continue to get hurt to the point where they reflect no real growth from China or even a decrease in sales.
Boeing's (BA) the most visible but as I have been saying for so long that it's become repetitive: judging by the queue for Boeing planes, China needs Boeing more than Boeing needs China.
Judging by the items I just ticked off in entirety, I think it is obvious that China needs us more than we need China. And I am not even including how much technology they need, as we saw from how easy it would be to close ZTE (ZTCOF) , the Chinese telcom equipment manufacturer without our technology.
The one wild card? Will the Chinese risk boycotting Apple (AAPL) when it is one of the largest employers in China? That's the trillion dollar question, as in the trillion market cap.
If you take Apple off the table what you can conclude is that the Chinese need our markets much more badly than we need theirs except for the handful of companies that have been able to sneak in and do business. I think President Trump is willing to say that enough businesses will thrive here, that if Boeing and Caterpillar and Otis orders from United Technologies, or diaper orders from Procter & Gamble (PG) and Kimberly-Clark (KMB) , or carbonated drinks, coffee and chicken all get cut to zero, we will be a stronger nation.
What else? We hear constantly that the Chinese have more than a trillion dollars in our Treasuries and they could dump them. If they did that they would increase the value of their currency which they are desperate to keep down to be a cheap exporter and they would lose the best investments they have. Take that argument off the table.
We know that many U.S. outfits want badly to do business in China. The financials all want Chinese access. The techs all want more access and companies that are already established there, companies like IBM (IBM) and Intel (INTL) and Cisco (CSCO) and Microsoft (MSFT) would love to do more business. But the traditional FANG does very little there. Facebook's (FB) not been able to crack the market. Neither has Amazon (AMZN) nor Netflix (NFLX) and Alphabet's (GOOGL) Google hasn't been willing to play ball because of censorship.
China is GM's (GM) largest market. It has a JV with a Chinese company. If China slaps a tariff on their cars it hurts a large Chinese company as GM sold 4 million cars there last year.
Again, the edge goes to the U.S. China just hasn't let our companies do so much business in China that it will hurt our nation, just several handfuls of stocks. It was stupid, in retrospect, for the Chinese to insist, for example, that China didn't allow more companies to do more business because then they would have more clout in Washington. They don't, and the companies that want to sell more into China wouldn't dare confront this president. They would be taking their corporate lives into their hands.
Which brings me to one of the biggest advantages the U.S. has. Even as the PRC is a communist dictatorship, it is a communist dictatorship that could be on the run if there is a dramatic slowdown in U.S. exports. We are just too big a market and the rest of the world too small. Now the rest of the world needs the Chinese markets more than we do as percentage of exports. These nations are going to be loath to do anything but encourage China to take stern action against us so they can sop up the orders we lose.
But the simple fact is that China as a nation is on shakier grounds than we are. They are more levered. I know, that seems impossible, but they are. They attempted to have a coherent, U.S. like stock market but it broke down badly last night with more than one thousand stocks falling more than 10%. The Chinese government is going to have to prop up stocks, a multi-trillion dollar undertaking after the five trillion in market cap already lost from the top. There is no real functioning market other than a couple of stocks that trade here and there.
Now the President knows that fighting back in a trade was is bad for stocks and for some businesses. But he also knows that we have an incredible economy here with employment numbers that are better than any time in 40 years. If you can't take the Chinese on now, when can you? And, here's the coup de grace: the President, like President Obama before him, has figured out that the stock market is not a good barometer of the voters: employment is. You keep the economy strong you win reelection. You keep the stock market strong, rich people from states that aren't going to vote for you anyway, are happy.
I know that until it's broken down we presume that the U.S. is the paper tiger and the PRC is the real one. But the bottom line is, I think we might find, ex the stock market, that the PRC's the paper tiger and we're the tiger that just woke up and is sick and tired of the beatdown the Chinese have delivered all in the name of lower cost merchandise that's now cheaper to make elsewhere and open markets that aren't really all that open anyway.
(Honeywell, 3M, Emerson, Apple, Microsoft, Facebook, Amazon and Alphabet are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells HON, MMM, EMR, AAPL, MSFT, FB, AMZN or GOOGL? Learn more now.)