U.S. foreign direct investment in China was $107.6 billion in 2017, up by 10.6% from 2016, and that was led by manufacturing, wholesale trade, and finance and insurance. China’s foreign direct investment in the United States was $39.5 billion in 2017, down 2.3% from 2016, and that was led by manufacturing, real estate and depository institutions.
At the end of the day, trade wars are not a win for any nation. Much of the aim by the United States has been to prevent and limit China’s handling of intellectual property when companies do business in China. The nation has been known for mandatory technology transfers and for duplicating intellectual property within systems, held in patents and so on.
Another consideration here is that the current expected outcome of a trade war would be worse for China than it would be for the United States. Most U.S. companies do not have to rely on Chinese intellectual property, and after a period of transition, the manufacturing of electronics, machinery, parts and other goods done in China could be steered to other nations. That has even begun in some cases, and it has been contemplated in many others.
What if China would choose to adopt further currency devaluation measures? Or what if China decided it wants to teach a lesson to the United States by dumping its Treasury securities? Of the $22 trillion or so in U.S. debt, more than $6 trillion was said to be owned by foreign governments and central banks. As of June 2018, China owned just $1.18 trillion, followed by $1.03 trillion owned by Japan. China could create a short-term situation in U.S. Treasuries, but at not even 5% of the total debt it may be harder to influence the bond market than in the past. China also needs to keep some of that debt as part of its reserve assets as well.
It would be silly to predict that a trade war with China would have no impact on the broad economy and the markets at all. Unless a full-blown trade war of one-upmanship ensues, which neither country nor the world can afford, it’s important to keep all of these figures in mind. It just might not be the end of the world.
There are eight U.S. brands with large exposure to China that might face pressure or boycotts if the rhetoric heats up too much, but there are also five rather large U.S. companies with zero exposure to China to which investors can turn.
In the three trading days since the news broke, the major Chinese exchange-traded funds were down 5.6% to 8.5%. The major U.S. equity indexes are down far less. The Dow Jones industrials were down about 1.8% since last Friday. The S&P 500 was down less than 2%, and the tech-heavy Nasdaq Composite was down about 2.3% in that time.
Note that the SSE Composite (Shanghai) was down about 6.3% and the Hang Seng (Hong Kong) was down 3.5% as well.
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