Weekly Edge: Trade Battle Heats Up Between U.S. And China

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by: Invest With An Edge

By Troy Tanzy

Co-authored by Daniel Rangel

The Trump administration recently announced plans to impose tariffs on an additional $200 billion worth of Chinese goods, including fish, furniture and luggage, The Wall Street Journal reported. China responded immediately, stating that the United States' protectionist policies undermine globalization and trade. China and the U.S. have been engaged in several rounds of tariffs and countertariffs, initiated by the United States for the purposes of national security, protecting domestic employment and economic development and reducing the national trade deficit. The trade balance is accounted into the national gross domestic product (GDP), and a deficit in the trade balance (more imports than exports) reduces overall GDP. The U.S. trade deficit with China last year was $375 billion.

If all of these tariffs are imposed, around $450 billion worth of Chinese goods would be affected, which is nearly 82% of all Chinese goods imported by the United States. While Beijing vowed to match the tariffs with dollar-for-dollar countertariffs, they have yet to respond with their own in this latest round. The Chinese countertariffs in the first round of the trade dispute mainly affected agricultural products, while the U.S. has targeted industrial goods and intermediate products from China. These industries employ thousands of people in their respective countries, and increased costs could raise prices and threaten demand for products, placing pressure on jobs.

The tariffs threaten to cause serious changes to domestic economic landscapes and, more broadly, to the course of global trade and the progress of globalization. Trade-offs will be instrumental in analyzing the efficacy of the tariffs. Economists and politicians in the United States must weigh the benefits of such policies, which include increased government revenue due to the tariffs and reduced competition, against the consequences, which include reduced consumption from consumers due to price increases and potentially reduced innovation and development. Domestic producers of substitute goods may benefit in the short term, but over the longer term, the results will be difficult to forecast.

Neither side seems to be backing down on trade - and a full-on trade war seems more likely with each new development.

Sectors: Among the Sector Benchmark ETFs, the average momentum score skyrocketed from 5.72 to 16.45. The results for the sectors were mainly positive for the week. The largest gainer was Telecom, up 17. Real Estate is the leading sector at 33, followed by Energy at 26 and Health Care at 24. Defensive, cyclical and sensitive sectors are all up. The gain in Health Care was more than enough to offset Utilities' loss of 5 points. Industrials and Financials continue to be at the bottom of the rankings. Nine of the 11 sectors remain "in the green," indicating a positive score for the week.

Factors: Among the Factor Benchmark ETFs, the average factor score jumped drastically from 2 to 13.64. All 11 factors were up from the previous week. Low Volatility increased the least, up by 8. High Beta increased the most, up 16 points. High Beta and Value are at the bottom of the ranks with scores of 8 and 6, respectively. All 11 factors are "in the green."

Global: Global Benchmark ETF momentum scores were up for the week. The average score by country increased from -19.09 to -6. The top positions remain dominated by developed global areas, including USA and Canada. None of the global areas lost ground. Japan gained the least, up by 6 points. Latin America increased the most, up by 27 points. At the bottom are Emerging Markets, Latin America and China. Five of the 11 global areas remain "in the green."