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This sector will leap if there’s a U.S.-China trade war

By marcuss. Originally published at ValueWalk.

In case you can’t see the graphic on your screen, it reads, “Trump set to launch first major trade action targeted at China”.

This was the first shot in what will likely be trade war with the world’s second-largest economy – which also happens to be a crucial party to de-escalating tensions with North Korea.

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Getting into a trade tussle with China is a Trump campaign promise that’s relatively easy to keep, as it doesn’t require the cooperation of anyone else in the U.S. government.

It also caters to the sentiments of the 34 percent of Americans who approve of the U.S. president’s job performance. And it’s over an issue where the U.S. actually has a legitimate gripe, no less. The Financial Times explains…

“Donald Trump is set to launch his first major trade action targeted at China… by ordering his top trade negotiator to begin an investigation into intellectual property rules that Beijing uses to force foreign investors to turn over valuable technologies.”

And (also says the FT), “The step could lead to US tariffs and other restrictions on Chinese imports within a year in what many see as the potential first step towards a trade war between the world’s two largest economies.”

The measure came a few weeks after negotiations over a Chinese proposal to cut steel production overcapacity were rejected by President Trump, over the counsel of his advisors – because he preferred to impose tariffs on Chinese steel.

The timing of the launch of a trade war with China could hardly be worse, as the war of words with North Korea threatens to become a real war. Still, cracking down on intellectual property violations by China is less bad than imposing a 45 percent tariff on all Chinese imports, which was a Trump election campaign promise.

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What (could happen) next?

Of course, a reasoned and even-keeled effort to curb Chinese infractions over intellectual property could quickly escalate into a midnight Twitter offensive by the U.S. president. Restraint has not been a hallmark of President Trump so far. So a rapid escalation into a full-scale trade war with China is eminently possible. But what happens then?

One thing is clear: China’s government will fight back. China knows how to exploit the advantages it has over its adversaries. In this case, China has a real advantage in what I’ll call for now “hot commodities”.

Most people aren’t familiar with these small but essential ingredients to modern civilisation. Without these “hot commodities” Samsung couldn’t make TVs, Toyota would have to close its Prius factories, and Canon would shut down camera production. U.S. military contractors couldn’t produce missiles, night-vision goggles or satellites without them, either. Without “hot commodities” your smartphone speakers wouldn’t work properly – and its screen wouldn’t be as sharp.

And the key player in this “hot commodity” market is China. It controls a whopping 90 percent of the world’s “hot commodities” production. And it also controls the export of “hot commodities”.

A trade war – or even just the scent of a trade war – between China and the U.S. could push the price of these commodities through the roof. That’s because it would be easy for China to restrict the export of these key commodities to the manufacturers in the U.S. (or anywhere else) that need them.

History might not repeat – but it can rhyme

What’s more, we’ve seen this happen before.

In the spring of 2010, tensions between China and Japan escalated when China asserted control over uninhabited islands in the South China Sea also claimed by Japan. In September of that year, after a Chinese fishing boat captain allegedly rammed a Japanese patrol boat, Japan arrested and detained the captain. China responded with an economic left hook: It stopped the export of “hot commodities” to Japan.

China was essentially Japan’s only source of “hot commodities”, which were (and are) vital to Japan’s huge automotive and lighting industries.

The market responded with panic.

The price of one “hot commodity” – which is used for hybrid vehicles, among other devices – moved up 1,000 percent in ten months. Another one, which is vital for iPhones as well as for wind turbines and night-vision goggles, jumped nearly 700 percent in 15 months.

So, it’s not a big leap to think that if President Trump digs in deeper to launch a trade war against China – as he’s repeatedly promised to do – China might respond by punishing the U.S. the same way it punished Japan: By restricting “hot commodity” exports. If that happens, prices could surge as they did in 2010-2011.

The best way to invest

Since then, though, many “hot commodity” stocks suffered a near-death experience when the bottom fell out of the market. Many once-hot stocks in the sector collapsed 95 percent – or went to zero – as prices for “hot commodities” came back to earth. The dot-com bust was like fairies in a rose garden compared to the “hot commodities” meltdown.

But demand hasn’t gone away for these essential ingredients to modern civilisation – in fact, just the opposite. And China remains the first, largest and by far the most important supplier of them. At some point, the price of these elements is going to rise sharply.

In December, we recommended to subscribers of The Churchouse Letter a way to invest in “hot commodities”. The share price of our recommendation is up 39 percent since then. But I think this is just the beginning. “Hot commodities” have a lot further to go.

To be fair to subscribers to The Churchouse Letter, I can’t share anything more about this stock here. But you can learn more about “hot commodities” – and the best way to invest in them – in a special report that we just released. You can learn more about it here.

The post This sector will leap if there’s a U.S.-China trade war appeared first on ValueWalk.

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