Two of the biggest economic issues of the week appear to be the looming trade war and continued “techlash” on the world’s largest technology companies. What does this mean for the markets? Read on to find out…
The U.S.’s Tit-for-Tat on Trade with China – this week saw a flurry of activity in the brewing “trade war” between the U.S. and China. First, China issued a response to the Trump administration’s 25% steel and 10% aluminum tariffs by imposing retaliatory tariffs on $3 billion worth of U.S. imports. Among the targeted industries were pork, recycled aluminum, wine, and nuts. While this may seem like a big story, the data suggests otherwise – $3 billion in tariffs represents a meager 0.027% of U.S. exports and 0.0033% of US GDP.1
24 hours later, however, the Trump administration proposed imposing 25% tariffs on about 1,300 Chinese-made products worth about $50 billion. These tariffs focused on high-tech items from semiconductors to lithium batteries to television components, medical devices, dishwashers, snow blowers and flame throwers. China immediately responded with a list of similar proposed tariffs ($50 billion) on key American imports including soybeans, planes, cars, beef and chemicals. It is important to note that at this stage, the “$50 billion” tariffs are not in effect. The public can submit comments until May 11 and a public hearing is scheduled for May 15.
Meanwhile, President Trump’s top economic adviser, Larry Kudlow, and U.S. Commerce Secretary Wilbur Ross both indicated an openness to talks to resolve the matter, and the Wall St. Journal reports that China and the U.S. seem likely to “follow a timeline stretching over the next half year, during which the two sides will seek to negotiate a new normal.” 2 In our view, this adds to the distinct possibility that the “trade war” could end up being a smaller deal than many currently anticipate.
Waging War on Amazon – Amazon felt selling pressure this week as a result of President Trump’s tweets about the company not paying its fair share in taxes, while also ripping off the U.S. Postal Service. Amazon’s response to date has been to say nothing at all. 3 The reality check for investors on this issue is that the President and the executive branch have very little power to intervene directly on any one company. The Justice Department could feasibly do so with an anti-trust lawsuit, but that could drag on for years and is not even being rumored at this point. The Justice Department tried a similar action on Microsoft two decades ago, but many recall that the effort went nowhere.
Meanwhile, Facebook Lands on its Heels – Facebook’s posturing on the data breach issue has evolved greatly since day one, ultimately culminating in Mr. Zuckerberg finally admitting that 87 million users may have had their data poached by Cambridge Analytica.4 The revelations come as Facebook faces growing ire from the public and Congress about their handling of data privacy, and it feels increasingly likely that this road could lead to greater regulation.4 The question for investors is, will regulation be significant enough to dent the digital advertising business? Our view is that it won’t. Though momentum is clearly on the side of new legislation, it should be noted that (several) previous attempts by Congress to take action on this issue have failed. Congress has tried in the past particularly after big data breaches or scandals, but it has never been able to get a bill across the finish line. It might this time, but our guess is that it will be a bill that’s narrow in scope and soft in impact.5
From the looming trade war to the evolving “techlash,” news this week left us with more unanswered questions. There is no way to predict how these stories will unfold, but you can try to prepare for what is to come.
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