London: In Europe and North America, the airwaves buzz with anticipation of an all-out trade war between the US and China. President Donald Trump has publicly threatened to impose tariffs on the entire $500 billion (Dh1.83 trillion) worth of goods that flow from China to the US each year, and last week he proposed increasing tariffs on an existing target list of $200 billion of Chinese imports.
The feeling here in Beijing is quite different. In China, there is not a great deal of concern about tariffs. There is even an emerging debate within both the government and the business community about whether retaliation against further US import tariffs would be worthwhile.
Most accept that both sides would lose in an all-out trade war, as the textbooks suggest. Many here also recognise that China and the US will hurt their own companies and consumers, rather than the other party’s, with their tariffs — and that US consumers and US companies will feel most of the pain.
Corporate China does not export much to the US
That might seem counterintuitive. The US exports only $130 billion of goods to China each year. Surely, as some of the more aggressive advisers to the White House have argued, that means China has much more to lose in a tariff war?
This argument fails because it is inadequate to describe the economic relationship between two countries using only the trade balance. That number tells you very little about where revenues and earnings are being booked — especially when the two countries are China and the US
How many Chinese brands can a typical American consumer name? Not many, and for good reason. The $500 billion of goods shipped from China to the US is not 10 million Huawei mobile phones. While a handful of Chinese companies such as domestic appliance manufacturers get 10-15 per cent of their earnings from American consumers, most analysts estimate that the listed China equity market as a whole generates barely 5 per cent of its revenue in the US The companies that China equity investors focus on — think Alibaba or Tencent, for example, or Chinese banks — often have no direct exposure at all.
The fact is that most of those $500 billion of imports are goods made by US companies in China, for US consumers. Apple alone imports some $50 billion a year in hardware from China. A large proportion of the rest is electronic components and machine parts made by Taiwanese, Korean or European companies for American businesses.
In short, when we consider earnings rather than the trade balance, it appears that corporate China needs the US much less than corporate US needs China.
Chinese consumer may turn against US brands
Moreover, anyone living, working and shopping in China knows that tariffs are not the only threat to US firms. These businesses have spent a lot of time and money building strong brands for the Chinese consumer market, and those strategic interests are at risk, in part from government intervention but mostly from customer sentiment. Again, think of Apple generating more than a quarter of its earnings, or $18 billion a year, in China.
China’s consumers have voted with their High Street dollars during past international disputes, without explicit official encouragement. In 2012, when China and Japan argued over the sovereignty of islands in the East China Sea, sales in China of Japanese autos, most of which are made in China, plunged by some 50 per cent. Korean automakers suffered similar declines last year, during a dispute over anti-missile defence installations. Consumer staples products, such as household goods and cosmetics from Japan and Korea, saw a smaller but still significant impact on sales, and leisure travel to Japan and Korea also fell. These headline-driven sales declines lasted two to four quarters, on average, before stabilising.
That history suggests that Chinese buyers opting for a Volkswagen over a Buick, Chevrolet or Focus represent a substantial risk for the likes of General Motors and Ford. Businesses such as Nike or Starbucks, which get 24 per cent and 15 per cent of their earnings from China, respectively, might also have their momentum disrupted.
What Are the Risks for China?
From China’s point of view, while some US products are easily replaceable (such as agricultural commodities), most of its $130 billion of imports from the US are competitive, high-quality products that are difficult to replace (such as aircraft parts and semiconductor chips). The government recognises that imposing tariffs on those will have no effect other than to hurt Chinese businesses and consumers. Along with the lack of direct harm to corporate China coming from the US import tariffs, this is what feeds the domestic debate about the efficacy of retaliation.
Politics can overwhelm economic self-interest, of course. While US companies are more directly exposed to tariffs than China’s, a 10 per cent tax on every dollar of US imports from China would have a big negative impact on the global economy and investor sentiment, which would damage China along with everyone else — and is not something we can rule out at this stage. Nonetheless, evidence from the first round of tariffs, with its already growing list of exemptions and subsidies, suggests that self-interest still prevails.
Longer-term, the emergence of China’s economy as a competitor with the US is a strategic challenge that is independent of President Trump and will persist after he has left office. Corporate China will take the same commercial and pragmatic approach to that as it has to this year’s tough talk on tariffs.
(Bin Yu is a Senior Portfolio Manager and Head of China Equities at Neuberger Berman.)
