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The last week of August proved to be a week where the salvos in the trade war between the U.S. and China took a breather. On top of President Trump’s statement that China wanted to come back to the negotiating table was some lightening news out of China itself with the trade ministry saying that it did not want to keep piling on to the trade war. While less negative news is of course a positive, there is no resolution yet and that resolution will either take a long time to see and it may not be an outright “OK, we’re best buddies again!” And as of now tariffs appear to be on schedule. All that said, the financial markets reacted favorably in the past week over less new tension. What really matters at this point is to ignore some of the headlines and to do a real-world analysis about what is really at stake.
If the public only listened to the talking heads on TV or the rants on social media, the trade war is the end of the world and the end of the U.S. recovery as we know it. The reality is something quite different. It’s important to consider what the real numbers are behind imports and exports in the scale of the broad U.S. economy — and China’s latest manufacturing data will feel like a recession there. The U.S. gross domestic product is currently running over $21 trillion. The GDP reading had peaked at $14.8 trillion in 2008 before getting hammered during the Great Recession and it took until the second quarter of 2010 to get back above that figure. And at the end of 2016, U.S. GDP was $18.9 trillion.
24/7 Wall St. has tracked multiple Dow and key company moves from Friday, August 30, 2019 versus the close a week earlier. Technology stocks were excluded because almost all have direct exposure and even more indirect exposure to China. We have also taken data directly from the Office of the U.S. Trade Representative (USTR) first to show what the actual trade numbers are as of 2018.
The USTR showed that China was the third-largest U.S. goods export market in 2018 with a total of $120.3 billion in goods sent there. That was actually down by 7.4% versus 2017, but the USTR showed that it was up 72.6% from 2008 and up 527% from 2001 before China joined the World Trade Organization.
Where the proof that China has more to lose than the United States is on how much the U.S. imports in goods that come from China. The tally of $539.5 billion in imported goods from China in 2018 alone was 6.7% higher than in 2017. The U.S. imports from China were shown to be up by 59.7% from 2008 and up 427% from 2001 before China’s WTO accession. All in all, U.S. exports to China account for 7.2% of overall U.S. exports and U.S. imports from China account for 21.2% of total U.S. imports in 2018. That’s $120 billion in goods sent there versus $539.5 billion we have taken in.
It’s imperative to keep in mind that the United States is now really a services and materials economy rather than a manufacturing economy like China. U.S. imports of services from China were $18.4 billion versus $58.9 billion in U.S. exports of services to China in 2018. The USTR showed that the leading services exports from the United States to China were in travel, intellectual property (trademark, computer software), and transport sectors. The $41.5 billion in services surplus pales in comparison to the goods deficit of more than $419 billion.
Once you look at the categories of what we import from China and what we export to China, it’s easy to see how and why the stocks of American companies most dependent on China as suppliers or as customers are getting pinched by the stock market. The top import categories from China into the United States in 2018 were as follows: electrical machinery ($152 billion), machinery ($117 billion), furniture and bedding ($35 billion), toys and sports equipment ($27 billion) and plastics ($19 billion).
The top export categories by the United States to China were ranked as follows: aircraft ($18 billion), machinery ($14 billion), electrical machinery ($13 billion), optical and medical instruments ($9.8 billion) and vehicles ($9.4 billion). U.S. total exports of agricultural products to China were $9.3 billion in 2018, with China being the fourth largest agricultural export market, ranked as follows: soybeans ($3.1 billion), cotton ($924 million), hides and skins ($607 million), pork and pork products ($571 million) and coarse grains excluding corn ($530 million).
A.O. Smith Corp. (NYSE: AOS) manufactures residential and commercial gas and electric water heaters, boilers, tanks and water treatment products and is about one-third reliant on China. After a 0.8% rise to $46.52 on Friday, A.O. Smith closed the week up 3.3% and it is still down about 23% from its high.
Apple Inc. (NASDAQ: AAPL) has seen its shares rise and fall with news on China, but it also has an iPhone refresh cycle coming soon. Most important in this context is that just about everything made by and for Apple is manufactured in China, and the company also sells into China. Apple closed down 0.1% at $208.74 on Friday, but this was a one-week gain of 3% and Apple is down roughly 10% from its 52-week high.
Boeing Co. (NYSE: BA) has seen its shares not directly as impacted out of China due to its ongoing woes (and maybe even progress) on the 737 Max. Boeing closed up 0.37% at $364.09 on Friday, and its gain for the week was 2.27%. Boeing shares are still down almost 20% from their highs prior to the 737 Max crashed and subsequent grounding. This remains a 737 Max recovery story despite having sales exposure of jets to China. That said, the USTR note about $18 billion in exposure to aircraft exports should imply Boeing and the company’s 2018 annual report showed direct revenue to China as being $13.7 billion and other Asia revenues (ex-China) of $12.1 billion.
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Apple Inc. (NASDAQ: AAPL), which struggled with investors earlier this year, posted an impressive share price increase after it launched the new iPhone 11 and Apple TV+. The rally last week pushed its stock to $218.75, which is up 38.7% this year. That is better than any other of the 30 Dow Jones industrial average components. The Dow is up 16.7% for the same period to 27,219.52.
The new product launches were indeed the tonic the stock needed. It had sold down sharply in mid-summer after Apple announced earnings. The mainstay of revenue, the iPhone, continued to weaken as the iPhone X series did poorly, particularly in the world’s largest wireless market, China. The trade war better China and the United States also dragged on the stock, as anxiety about Apple supply chain interruptions grew. Apple sources many parts of the iPhone from companies in China.
Apple’s management argued that its Services business would replace the iPhone as the company’s growth engine. It is not an easy argument to make. Services revenue in Apple’s most recently reported quarter was $11.5 billion, out of a companywide total of $53.8 billion. iPhone sales totaled $26 billion.
The launch of Apple TV+ is critical to the new strategy. Apple already has a huge music store. Its app store is by far the largest in the industry. By some estimates, total apps downloaded since the store started are more than 130 billion. Many experts believe that app sales cannot continue to grow at rates they have over the past decade.
All this means that Apple’s bet on TV is absolutely critical. At $4.99 for the first month after a seven-day free trial, it is aggressively priced compared to industry leaders Amazon and Netflix, which have price points of $12.99 a month. Apple’s management has gambled that, although its library of content is limited compared to the leaders, the low price, the Apple brand and the hundreds of millions of iPhones, iPads and Macs in the world are large enough base to which it can market its streaming service.
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A significant number of investors have bought into Apple’s new iPhone and services plan. Its market cap is back near the $1 trillion level. When it announces earnings in the upcoming weeks, that likely will be the catalyst to keep Apple’s share growth rate well ahead of the Dow’s — or to drag it back down.