Wait, did the US tariffs on China not work?
Many expected the US-China trade war would have a negative impact but the numbers don’t seem to bear that out
According to our economists, that could have important implications for any prospective trade deal.
All’s well that ends well?
Since President Trump set out the prospects for a 'Phase One' trade deal, investors have responded positively and largely put aside their fears about the impeachment proceedings. But this enthusiasm could be premature.
A resolution to the trade war is only positive if it had a negative effect on China in the first place, and Erik Leuth, Global Emerging Market Economist, isn’t convinced this is the case.
Blame the global growth slowdown, not the tariffs
Since Trump started to introduce tariffs in the middle of 2018, trade has in fact contributed positively to China’s GDP growth. The number of Chinese exports has weakened, but not by more than those of other countries that didn’t face tariffs. In other words, what looked like a slowdown caused by President Trump’s tariffs was actually the result of a global slowdown affecting everybody.
Why didn’t Chinese exports suffer more? The answer is trade diversion.
The trade switcheroo
Instead of exporting directly to the US, China exported to the likes of Vietnam and Taiwan. Only then, the goods were shipped to the US – often after minimal processing or simple relabelling – and therefore avoided the expensive tariffs. This explains why China’s share of global exports remained unchanged, despite a steep fall in exports to the US.
Most people acknowledged the effect of a reduction in exports would be small, but they did expect it to at least be negative.
Brand new Cadillac
Erik’s research finds that consumption, which is how much a family or household purchases goods or services, is the main driver of China’s recent slowdown. For instance, fewer Chinese nationals purchased new cars last year compared to the year before and this alone resulted in a 0.5% reduction in growth for 2018.
But what does this mean for investments?
First, a Phase One trade deal is less likely than many commentators might have us believe as the Chinese are simply not as desperate to resolve the tension. Second, if a Phase One deal is struck, Chinese and emerging-market assets may perform well in the short term, but investors need to be aware of the wider issues China faces, not just President Trump’s ire.