China’s Trade Backlash Could Affect These ETFs (XLB)

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April 9, 2018 6:36am NYSE:XLB

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From Zacks: Trade war fears between the United States and China seem to be at its optimum level. President Trump first announced a pair of tariffs on steel and aluminum and then imposed about $50 billion in import duties on Chinese goods.


In retaliation, China first announced $3 billion worth of tariffs on U.S. imports and most recently declared that it will levy tariffs on more than 100 American products, with a total trading value of over $50 billion.

According to a new structure announced this week, mainly Chinese machinery, technology and agricultural equipment are being subjected to a new 25% tariff. The Chinese government did not waste time to fire back and raised the limit of import tariffs to match the $50 billion figure.

The reason behind this trade war is that China registered a $375-billion trade surplus with the United States in 2017 and the Trump administration is persistently forcing China to reduce that enormous amount by $100 billion. No wonder, recent moves would scale up global trade tensions.

A full-blown trade war will however depend on whether negotiations between China and the United States fail. The two parties have offered each other time to rethink the decision as the American tariffs have a 60-day public comment periodbefore enactment and China won’t levy its charges before the American ones take effect. Still, we can take a look at the ETFs that will be in focus in light of the likely China tariffs.

Agriculture

Agricultural products like yellow and black soybean faced a retaliatory tariff. Notably, China is likely to import 64% of global soybean this year. The two largest exporters of soybeans, Brazil and the United States, are likely to make up about 85% of total global import demand.

As per a document from 2013, soybeans are the key U.S. exports to China. China purchases about half of the U.S. soybean and the country is the second-largest buyer of American cotton.

Needless to say, funds like Teucrium Soybean Fund (SOYB – Free Report) and Teucrium Corn ETF (CORN – Free Report) will be watched closely now. SOYB was down more than 1.8% on Apr 4 while CORN lost about 1.9% and iPath Pure Beta Grains ETN (WEET – Free Report) shed about 3% on Apr 4. Overall, PowerShares DB Agriculture ETF (DBA – Free Report) was down about 0.3% on Apr 4.iPath Pure Beta Cotton ETN (CTNN – Free Report) should also be under the spotlight.

Civilian Aircraft

China plans to levy tariffs on Aircraft and other aircraft with an empty weight between 15 to 45 tons. Per a document, civilian aircraft comes second on the top-exporting list. Notably, China is a key market for Boeing Co (BA – Free Report) (down 1% on Apr 4) where it serves as the largest exporter of America. Last September, the company said that it expects China to spend about $1.1 trillion over the next 20 years, purchasing more than 7,200 airplanes. So, aerospace ETFs likeiShares U.S. Aerospace & Defense ETF (ITA – Free Report) could bear the brunt.

Auto

SUVs, passenger cars and other vehicles have also been threatened with tariffs. A number of new passenger vehicles and light trucks that United States exported to China from 2011 to 2017 grew about 113%. One in 10 cars bought in China is likely to be a General Motors (GM – Free Report) despite China levying tariffs between 21% and 30% on American auto and the fact that foreign subsidiaries need to operate as 50-50 joint ventures with Chinese companies in the Mainland. So, a deep impact on the car industry could be seen, putting First Trust NASDAQ Global Auto Index Fund (CARZ – Free Report) under the spotlight.

Materials

Chemical products focused Materials Select Sector SPDR Fund (XLB – Free Report)will also be in focus. The fund puts about 72% weight on the chemical industry followed by 12.94% focus on containers & packaging (read: Watch These ETFs as Trade War Risks Rise).


The Materials Select Sector SPDR (XLB) was unchanged in premarket trading Monday. Year-to-date, XLB has declined -6.64%, versus a -2.68% rise in the benchmark S&P 500 index during the same period.

XLB currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #3 of 34 ETFs in the Industrials Equities ETFs category.


This article is brought to you courtesy of Zacks Research.


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