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Chip Stocks Fall as US Prepares for a Full-Blown Trade War

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The United States imposes a new round of tariffs on Chinese imports 

The US-China (FXI) trade war has entered its second year, and things are once again heating up after a cool period. The trade war began as US President Donald Trump tried to pressure China into ending forced technology transfers, implementing better protections for American intellectual property, and increasing market access for US companies.

The negotiations stalled on May 6 as the two parties ran into differences of opinion. On May 10, President Trump enacted a third round of tariffs, raising the rate from 10% to 25% on $200 billion worth of Chinese imports. He also said to prepare for a fourth round of tariffs on the remaining $300 billion worth of Chinese imports. These tariffs will result in an economic slowdown.

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Possible retaliatory measures from China

As China imports less from the United States and exports more, it has little room to expand its tariffs to other imports, so it might increase its existing tariff rate on American imports. The Asian nation could also make it difficult for American companies to operate in China by tightening regulatory scrutiny and delaying customs clearance. The second measure stands in contrast to its objective of making China an attractive place to invest.

Stock markets hit by trade war

The trade war will have enormous implications on businesses, consumers, and investors. The SPDR S&P 500 ETF (SPY) fell 3.8% between May 6 and 10 as investors reacted to the twist in trade talks. Semiconductor ETFs fell twice as much as the market. The VanEck Vectors Semiconductor ETF (SMH) and the iShares PHLX SOX Semiconductor ETF (SOXX) fell as much as 7.9% each before recovering a little in the second half of trading on May 10.

Most US semiconductor stocks bottomed in the fourth quarter of 2018, when Trump imposed the third round of tariffs. These stocks recovered in the first four months of 2019 on the anticipation that the trade war would ease and growth would resume in the second half of 2019. However, the new round of tariffs has created uncertainty about growth in the second half. The stocks of NVIDIA, Intel, Micron, and Western Digital fell in the low double digits between May 6 and 10.

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