Can U.S. Exporters Survive China's Retaliatory Tariffs?

China is avenging President Donald Trump’s tariffs worth $60 billion on steel, aluminum and other products by imposing import duties on as many as 128 U.S. items including agricultural products, pork and fruits. Undoubtedly, the tariffs imposed by China’s Ministry of Finance, effective Monday, heightened fears of an ensuing trade war.

Trump’s tariffs, which were cheered by domestic steel and aluminum producers, were opposed by producers of finished products. Automakers, apparel and shoe manufacturers, which belong to this ilk, will be severely affected by the newly imposed import duties. And if this was not enough, China’s retaliatory tariffs on imports worth $3 billion will only make matters more difficult for a number of U.S. companies, whose revenues depend on bulk exports to China.

Naturally, the only option left for these exporters is to cut down on production, which will definitely hurt their revenues unless if these looks for avenues to channelize their exports to other countries. However, it is too early to predict how U.S. exporters will survive the tariff war and think of alternate export routes.

Trump Instigates Tariff War

In late February, Trump raised fears of a trade war when he announced his plans of 25% and 10% tariffs on imported steel and aluminum, respectively. In March, the import duties were finally put into motion.

The move, which Trump believes will help in rebuilding the domestic steel and aluminum industry that has been treated unfairly by other countries for decades, was cheered by U.S. steelmakers. It saw shares of major steel manufacturers like AK Steel Holding Corp (NYSE:AKS) U.S. Steel Corp (NYSE:X) , Nucor Corporation (NYSE:NUE) and Steel Dynamics Inc. (NASDAQ:STLD) surging immediately. Also, shares of aluminum producers Century Aluminum Company (NASDAQ:CENX) and Alcoa Corp. (NYSE:AA) increased.

Manufacturing Blue Chips Suffer

However, the decision drew flak from other quarters that utilize a significant amount of imported steel. Shares of major automakers like General Motors Company (NYSE:GM) and Ford Motor Company (NYSE:F) , heavy equipment makers such as Caterpillar Inc. (NYSE:CAT) United Technologies Corporation (NYSE:UTX) and airline manufacturer The Boeing Company (NYSE:BA) witnessed a sharp decline. Specifically, shares of General Motors have declined 2.9% in the last months, while Boeing and United Technologies have decreased 4.9% and 3.2%, respectively.

Following this, in March, Trump announced plans of slapping tariffs on about $60 billion worth of China imports following an investigation by his administration into the theft of intellectual property from U.S. companies operating in that country. The decision was once again vehemently opposed by retailers and apparel and shoemakers, who rely heavily on imports or have manufacturing units in China.

Quite obviously, Trump’s target is China, as a number of U.S. trade partners like Canada, Mexico, Brazil and Argentina have been exempted from the tariffs. Given this scenario, China’s backlash was only a matter of time.

China Tariffs to Affect U.S. Exporters

China finally raised import duties on 128 U.S. goods that include pork, aluminum scrap and other agricultural produces on Monday, thus escalating fears of a trade war. China increased tariffs by 25% on eight products that include pork and aluminum scrap, while a 15% import duty has been set for 120 products including apples and almonds. The affected U.S. goods, which include products like pork, wine, fresh fruits, steel pipes, modified ethanol and ginseng, had an import value of $3 billion in 2017.

Naturally, this is going to have a negative impact on the bulk exporters of U.S. livestock and agricultural produce. U.S. farmers exported nearly $20 billion of goods to China in 2017. According to the U.S. Meat Export Federation, in 2017, China purchased about $1.1 billion of pork from the United States, making China the third-largest market for U.S. pork. It goes without saying that meat products companies like Hormel Foods Corporation (NYSE:HRL) , Tyson Foods, Inc. (NYSE:TSN) and Sanderson Farms, Inc. (NYSE:F) , which exports huge quantities to China, will feel the pinch because of the new tariffs. Hormel Foods has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Moreover, per the Renewable Fuels Association, China was the third-largest importer of ethanol from the United States in 2016, accounting for almost 20% its total exports. The recent tariffs now put an additional 15% duty along with the existing 30% duty on denatured ethanol imports from the United States. This will only worsen the situation for U.S. exporters. Also the U.S. apple industry, which exports around 2.5 million cartons of apples to China, is likely to face a major blow with the imposition of tariffs.

Interestingly, the dragon has breathed fire on goods that are primarily produced in the U.S. heartlands primarily comprising mid and mid-west states, which had mainly voted for Trump in 2016. This certainly will not make Trump loyals too happy.

In Conclusion

Although, it is too early to gauge the impact of China’s retaliatory tariffs on U.S. imports, it will certainly leave the huge cohort of exporters, which have so long been earning a chunk of their revenues from that country, feeling uneasy. Moreover, Trump’s voters might be dissatisfied and complaining. The tariffs definitely have escalated fears of a trade war and exports needs to look for new options to survive this onslaught. Let’s see how they to channelize their exports to countries that have been exempted from tariffs.

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