Steel, Apple, China, And Trade Wars?

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Includes: AAPL, FXI, X
by: Courage & Conviction Investing

Summary

Reports today by the WSJ indicate China's less friendly stance towards Apple.

Perhaps, the U.S.'s hefty duties in the steel sector were a contributing factor given the sheer number of Chinese workers employed in that sector.

Forces of nationalism and protectionism points towards a rugged Brave New World.

Since the U.S. has announced strong trading duties on Chinese steel, I have been reviewing past articles and headlines about China's steel overcapacity. Given the sheer size of China's steel industry and the millions of people employed in that sector, I anticipated that China may engage in some form of retaliation against the U.S. for slapping these steel duties onto them. I had the imagination to envision that China would symbolically send a trade salvo back. Logically, I figured that they may hit the U.S.'s crown jewel technology sector because of its relative domestic importance similar to China's dominance in steel. I just didn't have the foresight to know exactly how China would do it.

Perhaps, Donald Trump should take notes as we now have concrete evidence compliments of this morning's WSJ article that Beijing has ordered an embargo on sales of Apple's (NASDAQ:AAPL) iPhone 6 and iPhone 6 Plus. This is a brave new world and the proliferation towards nationalism in a slow growth world (measured by GDP) is unfortunate.

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Source: WSJ

Enclosed below are a series of steel articles.

Seeking Alpha captured the breaking news in late May.

The global investment landscape is much more complicated today given the many growth headwinds as the world's number two economy, China, continues to experience decelerating growth. This slowdown has had broad ripples as there isn't another nation to gracefully take China's growth baton. Bouts of decelerating growth places China in an untenable position of trying to thread a needle by questing for full employment to keep its system going, while at the same time avoiding massive structural overcapacity that could create shocks and banking losses when the weaker players get squeezed in a downturn. Unfortunately, gravity has a way of catching up to all of us, and even China can't grow an economy of its size at its former blistering pace forever.

Here are few articles from earlier in the year stating China's steel overcapacity.

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Source: Reuters

The issues for China is that upwards of 1.8 million jobs will/could be cut in the steel and coal sectors to rebalance the overcapacity.

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Source: Reuters

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Source: Bloomberg

I am not sure U.S. policy makers have fully thought through the challenges China faces and how the steel tariff will negatively impact employment. I am not arguing that China's behavior isn't dumping nor am I defending their behavior, but there will be implications from Beijing. Besides these trade war tensions, the forces of nationalism are in full bloom in many parts of the global economy. Look no further than the Brexit drama taking place ahead of the June 23rd vote. Lo and behold, these tensions in a slow growth world have been brewing for quite some time. There have been good articles written a few years ago that presciently observed these nationalistic behavior patterns.

Here are two goods ones. There were others arguing similar points.

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Source: WorldPost

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Source: Project Syndicate

Concluding thoughts

The risk of exogenous shocks and traversing more rugged terrain look likely. China and other countries are showing an increasing unwillingness to have U.S. technology companies eat their lunch. I am not defending China's behavior by any stretch, but their economic model is about maximizing employment and keeping their factories humming. Moreover, I recognize that U.S. steel companies, like U.S. Steel (NYSE:X) are hurting given their higher margin tubular businesses have ebbed from given the oil crash. However, per Newton's third law: " For every action, there is an equal and opposite reaction." As an investor, I am not smart enough to fully understand the potential implications from sparking a trade war, but make no mistake, Beijing is signaling they will respond to Washington's steel tariffs and U.S. technology may be on the receiving end of this shifting policy dynamic.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.