Trump trade war: Markets rejoice at 90-day tariff pause but China standoff remains the big game

Donald Trump’s triple backflip with a twist has sent markets skyrocketing.

The horror that investors had envisaged has lifted - for now. But don’t read too much into one day’s returns.

Bargain-hunting investors were already primed for any sign of a relief rally after drops of such a magnitude and were desperate for any indication that the old Donald Trump - who once measured success via the market’s applause - wasn’t fully captured by “dumber than a sack of bricks” advisers like Peter Navarro.

The rebound in boldface names like Tesla - up 22 per cent yesterday - suggest the market is running heavily on hopium. Investors pumped almost $US200 billion ($327b) into Tesla, pushing its price-to-earnings ratio to 133 times. Tesla would need to grow its profit 133 times, or close to it, to justify that price.

But Tesla’s reputation is trashed. American liberals - once the company’s best customers - have deserted the brand, Europeans are equating Elon Musk to a Nazi, and sales of Teslas across Europe dropped 45 per cent last month.

The situation is worse in China, where Tesla operates a massive Shanghai plant and sold nearly 80,000 cars in March. Sales were down 11 per cent in March alone, with rival Chinese carmakers now materially cheaper and significantly better - and that was before Musk became synonymous with Trump’s attack on China.

If Tesla needs to grow its profits 133 times to justify its share price, where will that growth come from?

That’s a question facing every investor and company globally as supply chains are upended. Mr Trump may have offered a 90-day pause on reciprocal tariffs for every nation except China, but the core of his tariff policy remains. Aside from their role as a de facto federal consumption tax, Mr Trump wants to use tariffs to force the tech supply chain back to the US.

But global tech supply chains are embedded in Asia and have been for 30 years. According to the Wall Street Journal, 40 countries contribute iPhone parts, with the vast majority coming from China, Taiwan, South Korea and Japan. Three hundred thousand workers assemble those parts at the Foxconn plant in Zhengzhou.

Dan Ives, a tech analyst at Wedbush, described the showdown as a “tariff Armageddon for US tech”. He estimates that if Apple were to fully repatriate iPhone production, it would cost consumers $US3500, and even then, any plant wouldn’t be up and running for four to five years.

Apple and its customers face prospect the prospect of an iPhone that’s three times more expensive if home-grown, or two and half times more expensive if a deal with China can’t be reached.

Art of the Deal vs the Art of War

China has been preparing for this event for a long time.

Overnight, it released a white paper listing its grievances with the United States, calculating that since Trump’s first tariffs in 2018, China has been hit with tariffs on $US500b of exports. In a week, the tariff on China has gone from 34 per cent to 125 per cent.

China’s People’s Daily said the US had “continuously implemented policies aimed at containing and suppressing China”.

The white paper is an attempt by China to justify its retaliatory tariffs, now at 84 per cent, and President Xi Jinping has reached out to other nations, including Australia, to join him in pushing back.

Prime Minister Anthony Albanese, conscious of not upsetting Australia’s largest trading partner nor its most important ally, trod a fine line. “We speak for ourselves. And Australia’s position is that free and fair trade is a good thing,” he said, noting that trade represents one in four Australian jobs.

China’s market also rose, buoyed by reports in Bloomberg that leaders are meeting to discuss economic stimulus. But 18 per cent of China’s GDP comes from exports, 15 per cent of which go to the US. Chinese manufacturers are already cancelling orders with US firms, the Wall Street Journal reports. And at 125 per cent, purchase orders are no longer viable.

China and its trading partners, including Australia, are now at a critical juncture in preserving the global trading system, according to Dr Jenny Gordon of the Lowy Institute and former chief economist at DFAT.

She worries that as China looks to diversify, it will foist its products on other nations negotiating concessions with the US, while trying to protect domestic industries.

“The real risk is that China then goes, ‘well, I can’t get my product into the United States ... I will push it into other markets’ ... and that’s the way you get a global trade war,” she said.

“Australia needs to be out there and building coalitions and not let the US play us off against each other, and not let China play us off against each other too.”

The upside is that the 90-day reprieve gives the rest of the world a chance to reset and negotiate. The downside is that the two largest players have either completely eroded trust, or barely had it. It was not long ago China banned Australian barley, wine, lobster and beef.

In bonds we trust

As trust declines at a state level, it also disappears in finance.

Trump was finally moved to backtrack by the massive US bond sell-off that pushed long-term interest rates higher. A similar bond tantrum ended the UK’s Liz Truss tenure.

Investors are pulling back capital and reassessing risk, with a global survey by Northern Trust showing an increased desire for liquidity “to manage counterparty risk during volatile times”. Cash hoarded for volatile times means less available for investment, while the relocation of global balances for lack of trust in once sacrosanct institutions like the US dollar, will push up global interest rates.

As investor Ray Dalio warned: “One way or another, there will have to be major changes to the debt/monetary orders to deal with the debt, trade, and capital imbalances problem.”

“This is ... a great time for investors who were shocked and terrified by what happened (and what might happen) to reconsider their approaches to structuring their portfolios so they don’t have such intolerable risks.”

While the Art of the Deal may favour short-term wins, while leveraging unpredictability, the Art of War calls for strategic restraint.

This has a way to play out yet.