Five ETFs For A Trade War With China

by on February 8, 2010 | ETFs Mentioned:

Sino-American relations are quickly reaching a breaking point, as the Obama administration continues to spar with the People’s Republic of China over a variety of issues. The first clash was seen in the tariffs proposed on Chinese steel pipe manufacturers last year, followed by another dispute related to tire producers shortly thereafter. The Chinese took a hard line approach in their response, threatening to apply similar duties to American products such as agricultural goods, much to the dismay of American producers. Although tempers cooled over the winter, tensions are heating up between these two economic rivals following a series of recent developments.

Issue Overview

The People’s Republic has always been very sensitive about issues involving Taiwan, which the the communist country believes to be a “rebel province.” The Chinese hope to see the return of Taiwan to the Mainland’s control some day, much like Hong Kong, while opposing any notion of ‘”two Chinas.” As such, Beijing has applied pressure in several international forums to restrict or ban the involvement of Taiwan in any organization that would suggest status as an independent country. While hardly any countries recognize Taiwan as an independent nation, it has not stopped countries such as the United States from arming the small island with the latest military technology. In a recent deal, the U.S. has approved the sale of over $6.4 billion worth of high tech military technology to Taiwan, including 114 Patriot missiles and 60 Black Hawk helicopters. Not surprisingly, the Chinese were not pleased with this decision. “The United States will shoulder responsibility for the serious repercussions if it does not immediately reverse the mistaken decision to sell weapons to Taiwan,” said Chinese Vice Foreign Minister He Yafei.

Tiananmen SquareFurthermore, Obama has stated that he intends to meet with the Dalai Lama, the spiritual leader of Tibet which has been occupied by the Chinese since the early 50′s. China considers the Dalai Lama a ‘separatist‘ and Beijing has voiced its displeasure over the upcoming meeting. “As far as Beijing is concerned, there is never a good time [to meet with the Dalai Lama],” said Drew Thompson, China Director at The Nixon Center. “But, I think, immediately on the heels of this notification to Congress of arms sales to Taiwan, it is probably going to be a bit too much for China to bear.”

Although a trade war still seems unlikely at this point, the possibility is growing as relations are put under more pressure. Should America and China find themselves in a protracted trade dispute in which tariffs rise on a multitude of products, several ETFs could see a big move.

iShares MSCI Australia Index Fund (EWA)

Australia and China have had their disputes as well over the past decade, but the countries are growing increasingly dependent on each other. While China relies on Australia to provide the country with a steady stream of minerals and resources, Australia is growing increasingly dependent on China for its growing demand for consumer goods. Should Chinese trade dip with the United States, China may look down under to Australia in order to help pick up some of the slack. This would help to improve relations between the two countries and ultimately benefit Australian equities.

Market Vectors Vietnam ETF (VNM)

If firms believe that prolonged tariffs will be imposed upon companies in China, they may try to move operations to low-cost Vietnam or chose to open up shop in Hanoi instead of Beijing. Vietnam offers multinationals cheap labor costs, a large market, and distance from the fraying relations between the two superpowers. This could allow Vietnam to sell products to both countries, allowing its manufacturing base to get a boost from any significant tariffs. This increased investment will also boost financials firms which stand to benefit from capital inflows as well as higher employment levels. The financials and industrials sectors make up more than 60% of VNM.

Global X China Consumer ETF (CHIQ)

In order to prevent a worsening unemployment situation that would be caused by American tariffs (some Chinese sources are estimating that over 100,000 Chinese would lose their jobs) China may have to significantly increase domestic consumption to pick up slack for decreased American purchases. If the government is able to spur consumption, it could have a huge impact on CHIQ which has about 21% allocated to consumer services and 28% to retail, two segments that are likely to see a boost in demand from increased spending.

Industrials Select Sector SPDR (XLI)

While tariffs are sure to hurt foreign manufacturing, they will likely help struggling American manufacturing firms that will be protected from low-cost competition in China. Firms such as General Electric and United Technology Group, which make up 18.3% of XLI, stand to benefit if double-digit tariffs like the 35% duty that was put on Chinese tires are applied to other products as well. These duties would go a long way to making American manufacturing competitive, at least domestically, which would help to boost the outlook of the entire industrials sector.


A loser in this, at least in the short term, is likely to be the American consumer who depends on many products from China for consumer discretionary goods. According to some anti-Wal-Mart sources, as much as 70% of Wal-Mart goods are made in China, suggesting that high tariffs could hurt short-term profit margins at major retailers. With consumers already stretched thin, it is unlikely that many would tolerate a 30% price increase on a variety of discretionary goods, which would limit purchases to non-Chinese made goods and necessities.

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Disclosure: Eric is long EWA