US China Trade War: Winners and Losers

A trade conflict between the US and China will alter the shape of commercial activity across Asia, harming some companies, but perhaps presenting opportunities to others. Here is a provisional assessment of how to stay on top in a rapidly changing environment.

The Trade War

Setting aside “Trumpisms”, US patience towards China’s mercantilism – exemplified by the provision of cheap credit and subsidies to exporters, the systematic appropriation of intellectual property, and a failure to open its economy – has run short.

Now, Washington has started to impose tariffs on China (and other trading partners) on a staggered basis. The tariffs include a 25% levy on steel, a 10% tax on aluminium, and a 25% charge on Chinese goods worth about USD34 billion, and with tariffs on goods valued at USD200 billion or more in prospect.

The Chinese government has responded with its own tariffs on American fruit, pork, soy beans, sorghum, aluminium, and steel pipes. Further escalation seems inevitable, as tensions intensify.

Investments are also at risk. Washington plans to curtail Chinese investment in high technology companies, while General Secretary of the Chinese Communist Party (“CCP”) Xi Jinping has threatened to “punch back”.

Winds of Change

Any trade war will prompt striking changes across Asia. From a strategic standpoint, commercial ties between the US and China have hitherto stabilised a competitive relationship. Without such restraints, ties will fray.

The prevailing concern, though, is economic. Tariffs will dampen economic activity, by raising uncertainty and by pushing up prices, so eroding demand. Moreover, President Trump’s hostility towards the global trading regime, exemplified by his reported disdain for the World Trade Organisation, posits the prospect of severe damage to the existing trading order.

In particular, a focus on bringing production back to the US will loosen or restructure international supply chains that have contributed much wealth to Asia, with consequences to business across the region.

Sectors Most at Risk

A truism is that no one benefits from a trade war. Yet, some sectors and businesses will do better, or worse, than others.

The Gaming sector in Macau is highly exposed. Any significant slowdown or fall in the yuan’s value may lead to Beijing’s further curbing of capital outflows, so dampening casino revenues. Moreover, three of Macau’s six gaming concessionaires are US companies, Las Vegas Sands (“LVS”), MGM, and Wynn Resorts; and LVS founder Sheldon Adelson boasts close ties to US President Trump. These companies now sit on a geopolitical fault line. Their Macau concessions can therefore be on the line.

The regional Electronics sector is also at risk, posing producers such as Taiwan’s Foxconn with major challenges. Trade diversion could benefit Japanese or Korean companies with factories in Thailand or Vietnam, though.

The Technology sector is another potential target. Indeed, the value of Chinese acquisitions of US technology companies had already fallen, from USD15 billion in 2015 to USD13 billion in 2017, and will slip further. The loss of prospective partnerships could now pose challenges for businesses in the robotics, information technology, communications, and aerospace sectors in Asia, such as Huawei or Alibaba.

Consumer goods businesses operating in China may face boycotts, akin to those waged against the Philippines and South Korea. That said, targeting foreign businesses will prove hard, as many such businesses operate in joint ventures with Chinese partners. Even so, national champions will benefit by wrapping themselves in the flag.

Foreign companies selling Services such as education and tourism in China are another potential target; the US ran a surplus of USD38 billion in trade in services in 2017. That may be why the Chinese government in July warned its citizens of US gun crime; and Chinese students may come to prefer or be encouraged to select Australia, Canada or Europe over the US for study. The legal sector, particularly the part focused on trade rules, may also benefit.

Agriculture is also in play. Beijing’s decision to charge levies on US soybeans and sorghum will boost suppliers in Brazil and Canada. Thai cassava production may also rise in response to Chinese demand for ethanol inputs.

Trade shifts could also affect the Shipping industry, which has struggled to recover from the 2008 downturn. Now, the industry’s focus could depart from US-China trade, perhaps bolstering companies operating regional or domestic routes instead.

Finance also faces notable risks. A trade conflict will strain China’s economic model, given high debt levels, bond defaults, and tightening money supply. The Chinese government will shore up stability, but the risk of financial denouement is real, and any contagion could harm the frailer South East Asian economies. Even so, companies could respond by buying specialist financial instruments or insurance, boosting some businesses.

What can be done to mitigate risk?

For now, much is unclear. Key issues include how deep the trade conflict goes, and for how long it runs. The more intense a conflict, though, the more substantial the changes, whether in terms of trade diversion, the loosening of Asian supply chains, or of growing financial risk.

Companies can take steps to protect and even further their interests, though:

  • Businesses should prepare for price rises, by stockpiling input supplies, by identifying new suppliers, and by setting aside funds or buying financial instruments. Companies should examine how to make savings, taking account of changes in trade finance, insurance, or currency hedging costs. SVA can assist in identifying new suppliers.
  • Businesses should examine their exposure to shifts in trade flows, as well as that of key suppliers and customers. Companies should stress test supply chains, so as to identify prospective weaknesses. SVA can carry out investigations into current and prospective partners.
  • Businesses should assess the political risks posed by nationalist measures, such as boycotts. Companies might consider restructuring joint ventures, so as to invest alongside partners deemed “neutral”. Companies should also ask whether such campaigns might spiral out of hand, as in Vietnam in 2014, and prepare plans to handle any such eventuality. SVA can provide insight into the political risks facing businesses.
  • Businesses should train frontline staff, so that they can respond to the imposition of new tariffs, or any sudden or arbitrary tightening of customs controls. Such programmes should aim at ensuring continuity of business. SVA can provide insight into how, and why, officials might act.
  • Companies should watch regulatory developments, so as to prepare for invasive investigations. Companies should bear in mind that the tone of these regulatory actions may become nastier, as nationalism is given a free rein. SVA can monitor potential regulatory risk on behalf of clients.

SVA is a specialist risk mitigation, corporate intelligence, and risk consulting company. The firm serves financial institutions, private equity funds, corporations, high net-worth individuals, and insurance companies and underwriters around the world.

SVA has carried out many political risk, business intelligence, investigative and special risk projects across Asia. The team has many years of experience in assessing business risk and assisting in a search for practical business solutions.

We are in a strong position to help firms to weather these changes, by preparing analyses of the policy environment, by examining the liabilities of current or prospective joint venture partners, by investigating the risks of, or reasons behind, regulatory actions or customs difficulties, and by carrying out appraisals of the risks related to supply chains and key partners.

Please do not hesitate to contact us by telephone, or via email at [email protected]