China businesses are as aggravated about the trade war brewing between Beijing and Washington as their U.S. counterparts. But China companies may have more to sweat.
“Our China partners are surprised and disappointed to see this happening,” says Jim Sutter, the CEO of the U.S. Soybean Export Council, the main lobbying arm for one of the industries China hit with tariffs. “They want to keep doing business with us. But they understand they have to follow the lead of their government.”
Cosco, one of China’s largest state-owned shippers of soy, will have to pay itself 25% more for importing U.S. beans. Of course, they will go to Brazil, instead. Otherwise, the government-owned shipper will apparently pay the extra duties to … itself.
Shanghai companies are talking with exchange officials to figure out what’s at stake. Mainland Chinese equities are in a bear market, despite Thursday’s gains. The risk of some companies being banned from trading if their stock falls too much is a real possibility should the latest trade threats come to pass.
On Wednesday, investors woke up to $200 billion more of potential tariffs. Chemical imports are on the hit list, with ingredients used in making medicine part of it. Rosemary Gibson, author of the book China Rx: Exposing the Risks of America’s Dependence on China for Medicine and a senior advisor at the Hastings Center, a biotech ethics research institute in upstate New York, tweeted on Thursday that China’s government-funded penicillin industry “wiped out” U.S. manufacturers of the key antibiotic.
From a market perspective, the trade war is being won by the U.S. The S&P is down only 3% since the January 26 high: better than Europe, Japan, Canada and Mexico.
China is facing more pressure than the U.S.
The World Trade Organization is currently conducting its biannual review of China’s trade practices. The country is still subject to frequent criticism for allegedly unfair trade practices, such as state subsidies for companies.
Dennis Shea, U.S. ambassador to the WTO, accused China of causing “serious harm” by failing to live up to free-trade principles. “It is clear that the WTO currently does not offer all of the tools necessary to remedy this situation,” Shea told the WTO yesterday.
China is opening, but the Trump Administration is at least as interested in countering China’s growth in Asia, where it can challenge U.S. market share, and remedy a decades-old hallowing out of blue-collar manufacturing jobs by tacking on higher prices for Made in China goods. In Trump’s world, some of that supply chain might move to the U.S.
A Chinese government advisor, who is familiar with the international trade talks, told the South China Morning Post in an article published Thursday that China needed to do more to respect WTO principles such as fairness and transparency.
“China has not opened up enough yet and it does not take complaints by foreign companies very seriously, but the U.S. is too impatient,” the advisor said.
Last month, Frontpage, an advocacy magazine for mostly Republican causes, said Trump’s trade tirades weren’t just bringing countries to the table to rewrite trade rules. It was forcing political powers to nationalism. Even the Democrats here at home are now promoting their own progressive version of economic protectionism. Free traders are in retreat.
“Trump hates reacting, he loves taking the initiative and forcing others, rivals, competitors, media syndicates or foreign dictators, to react to him,” writes Daniel Greenfield, a foreign affairs journalist more known for his attacks on radical Islam than trade. “When U.K. Foreign Secretary Boris Johnson muttered that there was a ‘method to Trump’s madness,’ that was it. The method is becoming the driving force in an escalating conflict. Instead of reacting to attacks, Trump forces his attackers to react to him. He takes the initiative and leaves his opponents sputtering.”
Trump is now in the U.K. where S&P Global Market Intelligence analyst Chris Rogers thinks the president will call the shots on trade as Theresa May tries protecting her auto and pharmaceuticals market from tariffs.
The U.S. accounted for €105 billion of trade with the U.K. in the 12 months to April 30, Eurostat data shows, making it the most important non-EU partner, at 21.6% of the U.K’s export market.
The U.S. also runs a $6.53 billion goods surplus vs. the U.K. over the same period, reducing the likelihood of hostility from President Trump towards striking a deal.
“Trump is (most) serious about punishing China, (and) is picking on the areas where it would hurt the most,” says Naeem Aslam, chief market strategist for ThinkMarkets in London and a Forbes columnist writing on the topic here today. “The market still isn’t factoring in a full trade war.”
Corporate America is getting antsy.
Yesterday, the biggest lobby for U.S. multinationals in China basically shouted at Trump through a press release, saying “enough already.”
“Enough is enough. We need to stop the needless escalation of a tariff war and start working on solutions that will address the real concerns that American companies have about China’s intellectual property protection and technology transfer policies,” says U.S. China Business Council president John Frisbie. “Those are the right issues to focus on, but tariffs are the wrong way to solve them.”
Short term, the tariffs may temporarily keep some manufacturing jobs safe and wages rising. Long term is where the pressure points remain, says Cleveland, Ohio-based market research firm Freedonia.
Tariffs on chemicals used in pharmaceuticals will undermine Chinese drugmakers, but the consequences to U.S. patent-holders such as Johnson & Johnson, Merck & Co. and Pfizer may outweigh the potential benefits, Freedonia report authors wrote in a 21-pager released today.
On the other hand, multinationals like Samsung and LG are proving Trump right.
For instance, the average cost of washing machines shot up 17% in the U.S. since April 2018. In June 2018, Credit Suisse upgraded Whirlpool’s stock from “neutral” to “outperform,” projecting a strong year for the U.S. manufacturer as a result of the tariffs. LG and Samsung will continue to ramp up U.S. production operations to avoid the tariffs. In fact, both companies have opened or plan to open new U.S. plants this year.
This won’t be the case for the majority of companies, but it appears to be part of the endgame. In the near term, the Trump Administration holds a better hand. The long term is risky business.
China will survive.
Shanghai & Shenzhen indices rose 2.16% and 2.74% respectively Thursday on strong volumes and with a diversity of winners across industries. Only 43 companies fell on the Shanghai Composite Index. China’s beloved tech stocks led the way, gaining 5% in Shanghai and around 4% in Shenzhen thanks to the once-sanctioned telecom giant ZTE, which rose 25% in Hong Kong and went limit-up by 10% on the Shenzhen.
Why is ZTE doing so well? It’s absolutely another matter of Trump trade dealers driving China sentiment. ZTE is up because the Commerce Department and ZTE are closing in on an agreement on escrowing $400 million for its breach-of-trade sanctions against Iran and North Korea.
“Investors cheered what appears to be the company regaining the ability to survive,” says Brendan Ahern, CIO of China-centric KraneShares, an ETF company in New York. Investors see ZTE’s survival as a positive signal for future trade talks.