ETFs To Be Impacted By Potential Trade War With China

Tensions between Washington and Beijing have been on the rise. After introducing a tariff on steel and aluminum, President Donald Trump has proposed the imposition of tariffs on around $60 billion worth of Chinese imports of IT, telecom and consumer products. China registered a $375-billion trade surplus with the United States in 2017 and the Trump administration is pressing Chinese representatives to cut that humongous amount by $100 billion (read: Trump Tariffs: ETF Winners & Losers).

United States trade representative Robert Lighthizer is leading an investigation into China’s alleged policies that force American companies doing business in China to hand over their technological knowhow. Trump’s administration is planning to impose tariffs on wide ranging Chinese products.

Corporate America is Worried

A trade war was imminent, following the 2016 United States general election, as Trump’s America first agenda focused on United States’ budget deficit from day one. However, the corporate sector of the United States is not convinced. A coalition of 45 trade associations issued a joint statement addressed to Trump urging him not to impose tariffs against China.

"The imposition of sweeping tariffs would trigger a chain reaction of negative consequences for the U.S. economy, provoking retaliation; stifling U.S. agriculture, goods, and services exports; and raising costs for businesses and consumers,” wrote the group, comprising companies from diverse sectors of the United States. It warned Trump of punishing China at the expense of American families.

Potential Retaliation From China

The country’s foreign minister noted that in case of a trade war, China will be ready with a “justified and necessary response”. However, Chinese foreign minister Li Keqiang stated that the emerging market nation aims to further open the economy and pledged to lower import tariffs. “With China’s economy so deeply integrated to the international economy, shutting the door would only block China’s own way,” per a Bloomberg article, citing Li during a news conference at the close of the annual National People’s Congress in Beijing (read: China Had a Strong Start in 2018: ETFs to Buy).

Given President Xi Jinping desire to take China closer to being the number one country, retaliatory actions can be expected. Analysts believe that China may reduce its imports of soybean from the United States, as China is expected to account for around 64% of global soybean imports in 2018, per a Market Watch article, citing a report by S&P Global Platts. If China decides to retaliate, major chunks of U.S. rural population from Republican-dominated states will suffer, serving a blow to Trump’s political campaign.

China “could easily levy their own tariffs on the cost of soybeans,” and “such a tax war could create serious problems on domestic soil,” per a Market Watch article citing Adam Koos, president of Libertas Wealth Management Group.

Moreover, the aerospace sector also might take a hit, if sour relations between Washington and Beijing compel China to order Airbus planes instead of Boeing. Boeing mentioned that it expects China to spend around $1.1 trillion over the next 20 years. However, the Chinese government made it clear that if Trump spoils trade relations, it might retaliate by reducing purchases of U.S. made goods.

Let us now discuss a few ETFs likely to be impacted by a potential trade war between the two countries.

iShares China Large-Cap ETF (TE:FXI)

This fund seeks to provide exposure to Chinese equities, serving as a pure play on the economy.

It has AUM of $4.7 billion and is a relatively expensive bet as it charges a fee of 74 basis points a year. From a sector look, Financials, Energy and Information Technology are the top allocations of the fund, with 52.4%, 11.1% and 10.0% exposure, respectively. From an individual holding perspective, China Construction Bank Corp, Tencent Holdings Ltd and Industrial and Commercial Bank of China are the top allocations of the fund, with 10.4%, 9.5% and 8.1% exposure, respectively. The fund has returned 30.8% in a year. FXI has a Zacks ETF Rank #2 (Buy), with a Medium risk outlook.

Teucrium Soybean SOYB

This ETF seeks to provide exposure to soybeans, by investing in futures based contracts.

It has AUM of $15.9 million and charges a fee of 100 basis points a year. The fund has lost 1.3% in a year but has returned 4.5% year to date. SOYB has a Zacks ETF Rank #5 (Strong Sell), with a High risk outlook.

iShares U.S. Aerospace & Defense ETF (HM:ITA)

This fund seeks to provide an exposure to the Aerospace and Defense industry. It has AUM of $5.8 billion and charges a fee of 44 basis points a year. The fund has 10.5% exposure to Boeing (NYSE:BA) . ITA has returned 31.6% in a year and 5.6% year to date. It has a Zacks ETF Rank #1 (Strong Buy), with a Medium risk outlook.

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