The Trade War Is Real, Protect Your Portfolio Now

Investors should have seen all this coming.

Last October, Peter Navarro, director of trade and industrial policy for the White House, told CNN Business, "If we lose our industries of the future, we lose our future."

It seemed like a throwaway line, little more than negotiating bravado. Except two days earlier, the U.S. Commerce Department announced that American companies would no longer be permitted to sell components and technologies to Fujian Jinhua Circuit Co., a leading Chinese semiconductor company.

Navarro, and other hawks inside the Trump administration, are not content to win strong competitive advantages over the Chinese.

White House trade adviser Peter Navarro, front left, with Transportation Secretary Elaine Chao,... [+]

 ASSOCIATED PRESS

Rather, they see Sino innovation as an existential threat.

They want to shut it down. They want the de-industrialization of China.

And for a long time, remarkably, it looked as though China might be willing to go along. A deal was so close, the two parties began talking about the logistics of the signing ceremony, according to a May 13 Wall Street Journal story.

Then, abruptly, Chinese negotiators walked away from everything.

It's a bad omen. It means the Chinese are in for the long haul.

For decades, Chinese political leaders have committed to globalization. They supplied access to cheap labor and lax environmental regulation. Offshoring re-industrialized China. In the process, countless millions of Chinese were lifted from poverty into the middle class.

Today, China's high-single-digit Gross Domestic Product growth is the envy of the developed world.

Made in China 2025, a longer-term vision from its popular President Xi, is dedicated to moving the country up the value chain in 10 key sectors. Xi wants China to be a global leader in technology-forward sectors like robotics, biotechnology, self-driving vehicles, semiconductors, aerospace, renewable power generation and agriculture. It is an ambitious agenda that local companies have fully embraced.

CNBC reported in August 2018 that Chinese firms added 87,000 industrial robots in 2017, about the same number as the combined purchases of Europe and the U.S.

It's a double-edged sword. Retooling Chinese factories is a global competitive threat. It also makes China a major buyer of high technology.

IC Insights, a semiconductor industry research firm, notes China is the world's leading buyer of semiconductors. The country consumes $140 billion, or 38%, of the world's integrated circuits.

And the trajectory is straight up.

Xi has signaled his government is prepared to commit $161 billion over 10 years to develop homegrown chip companies.

The decision by the Commerce Department to block sales to Fujian Jinhua may be in the longer-term best interests of the U.S., but in the near term it has been devastating for American technology companies.

Big suppliers like Intel and Nvidia reported Chinese demand fell off a cliff in the fourth quarter of 2018.

For a long time, investors have ignored the U.S.-Sino trade dispute. Many assumed tariffs and tough talk were bluster, a bargaining tactic. The calculus was officials on both sides would eventually come to their senses because further escalation meant mutually assured destruction.

It is now clear there will be no cease-fire anytime soon. This means investors must tread far more carefully.

So far, the impact for most stocks has been negligible. However, moving supply chains from China will impact everything from furniture and appliances, to textiles. Given this, earnings estimates are too high across most sectors.

Now is a good time for investors to reduce exposure to stocks.