Despite stocks rising higher Monday after President Donald Trump claimed the Chinese government is eager to negotiate with the U.S., a Raymond James analyst warns we aren’t out of the woods yet and the dispute will likely continue.
“I think the message right now” to investors “is this is something that is going to go on for probably longer than initially appreciated,” Edward Mills, managing director at Raymond James, said as part of a conference call with analysts.
There’s been a widely-held belief that if the dispute lingers for an extended period of time, this benefits China. “What we’ve heard from a number of the conversations we’ve had with different” unspecified contacts, however, is that the Trump administration “has been OK with a prolonged time period” for resolution of the dispute, according to Mills.
Why is this the case? An extended timeline for the disagreement “gives U.S. companies more opportunity and more time to make the necessary adjustments” to their supply chains to find alternatives to China, he explained.
The desire to achieve that only seems stronger now after Trump said on Friday that he “hereby ordered” U.S. manufacturers to “immediately start looking for an alternative to China.”
Mills points out that the Trump administration also has threatened to tax $250 billion in goods currently socked with a 25% tariff with an additional 5% tariff; the threat also imposes a 15% tariff, instead of 10% levy, on another $300 billion worth of imports from China.
When it comes to the increased tariffs, “from the investors I speak to, kind of where they are most concerned is in the technology space because that seems to be where we have had most of the national security concerns” with China, he said, pointing to semiconductors, artificial intelligence and biopharmaceuticals.
How much it will cost U.S. manufacturers to move their assembly work out of China “depends on the product,” he said, noting that some estimates suggest it will costs 25-50% more that what they pay today for certain higher-end products. When you levy a 25% tariff, for some high-end products “it might be a wash to make it inside the United States.”
But Mills said: “For other products, the technology, the expertise, the work force only really exists in China, so some companies that we’ve spoken to said there’s really no short-term alternative to production [there].”
‘No Hard Cap’
It had been commonly believed before last week that Trump was going to cap the tariffs at 25%. Now, though, it seems there’s actually no “hard cap” at all, according to the veteran analyst. The general view among companies seemed to be that while a 10-15% tariff was “unfortunate,” it could be absorbed, but if it goes to 25% or higher, “that’s where it becomes a real problem,” Mills said.
It’s possible that the Trump administration could get “some sort of weak deal” done soon, Mills said. But he’s doubtful because of what seems like a “kind of game-changer moment — at least in the last six months,” when Trump claimed that China had walked away from negotiations and then, a week later, threatened to put tariffs on Mexico even after a deal supposedly had been negotiated with that country.
At that point, “there was a big shift in China, where they really started to view or got a confirmation of the view that Trump is not a reliable negotiator,” he said. Trump’s claims since then regarding China’s position appear to have strengthened the Chinese government’s lack of trust in the U.S. leader, according to Mills’ sources.
“Right now on the Chinese side, what we see is that about a year to year and a half ago, China would have loved to write a check to get out of this and move on,” he explained.
“Today, they’re not even willing to kind of entertain even some of the lower-hanging fruit” that’s been identified during the conflict, Mills said. “I think that has to be a real concern.”
Meanwhile, Morgan Stanley Chief Economist Chetan Ahya has warned that the global economy could fall into a recession six to nine months after the U.S. and China enforce their new round of tariffs, according to a CNN report Monday. (Morgan Stanley didn’t immediately respond to a request for comment.)