While we welcome healthy renegotiations of antiquated, and probably inefficient, global trade deals with key partners (such as NAFTA), we think diplomacy must precede presidential threats. We see President Donald Trump's hard line posture as a double-edged sword for the health of the U.S. economy.
Major industries that are likely to experience disruptions due to trade negotiations include energy, autos, airlines and industrials.
Energy and the China effect
China is the biggest elephant in the room in the energy commodities market as it is the U.S.'s second-largest export country, after Canada, for American crude oil. According to the US Energy Information Administration, the U.S. exported 75 million barrels of oil to China in 2017.
Autos
Steel remains a core component of auto fabrication. Manufacturers end up passing along the cost to consumers in a fight for market share. In addition, spikes in crude oil result in higher prices at the pump, also impacting consumers. Gasoline prices currently trade at $2.10 per gallon, a 19% increase year-to-date (as measured by the NYMEX-traded RBOB Gasoline futures contract).
Airlines
U.S.-based global airlines companies like American Airlines ( AA) , United Airlines ( UA) and even small carriers like Jet Blue ( BLUE) are exposed to the global fluctuations of commodity prices, specifically jet fuel. Potential retaliations from trade partners could decrease travel traffic, reducing earnings growth.
We recommend investors taking long positions in Delek US ( DK) , a mid-sized independent refiner, to capture any potential increase in refined products markets.
Industrials
The energy sector stock with the most exposure to trade wars is Tenaris ( TS) , a global manufacturer of steel pipe for the energy and industrial sectors. Also, with a slowdown in new drilling in the U.S. and an increase in steel tariffs, U.S. shale producers will be more sensitive about their costs, including pipe.
NAFTA, a new player at the table
The U.S. and Canada will have to restart negotiations with Mexico as the new administration of president-elect, Andres Manuel Lopez Obrador, takes office on November 1. During these negotiations, the new Mexican president is likely to push on sensitive industries, such as manufacturing, auto parts and energy.
