In the run-up to the US Presidential election, Donald Trump loudly lambasted the Chinese, threatening to attack what he seemed to see as iniquitous trade policies. Before the vote he threatened to retaliate for China ‘raping’ America on trade, to impose massive tariffs on Chinese imports and on his first day in the White House labelled China a currency manipulator. This did not deter the Chinese from trying to capitalise on Trump’s ascendency. As with Merkel, Clinton and Obama, the State Administration for Industry and Commerce says that, since the start of 2016, 80 companies have been registered under names including a common translation of the word ‘Trump’. From Jiangsu Trump Environmental Protection Technology to Trump (Shenzhen) Talent Management, he is seen as a selling point.
Nor does it seem to have put off international investors. Although none of the rhetoric seemed good for China’s prospects should the then unlikely outcome of a Trump victory occur, when Donald became the voters’ choice for America’s next President, Chinese equities listed in Hong Kong (where we have the Chinese exposure of the Liontrust Asia Income Fund) hardly fell. They lost 3.5% over a week, since when they have outperformed not just the region, but also the world.
So it raises the question if Trump was expected to be so nasty to China, why did markets not react more? Was this just a case of investors not believing Trump’s bluster? Certainly day one in the White House passed without the promised currency spat, but there was some real action while he was President-elect and accepted a congratulatory call from Taiwan’s President, Tsai Ing-Wen. This seemed to belligerently negate the long-recognised ‘one-China’ policy which is one of the core tenets of China’s international framework. Markets again sold off but again only briefly, and had already recovered by February when Donald Trump reversed his position and held a conversation with Xi Jinping, China’s President.
These market reactions reflect our view that while Trump’s unpredictability may lead to some volatility, we would be unwise to position ourselves as if he is likely to significantly damage the United States economy in an obvious way. To these ends the likelihood of an escalating trade war with China seem improbable to us, for three main reasons. The first is that if he imposes China specific tariffs, any jobs lost in China would probably go to countries other than the United States. This is evident from some Chinese companies we speak to who have already relocated facilities to cheaper production areas such as Vietnam. As China has developed and become more expensive, other alternatives are already being sought and America is not high on the list. Effectively we do not think that many jobs would appear for Trump’s voters.
Second, if a broader import duty was placed on goods the impact would be inflationary, domestically impacting the very people that you would expect Trump to want to help. As an example, HIS estimates that the costs of manufacturing an iPhone 7 in Asia is US$225, of which only US$5 are manufacturing. To assemble in the United States could increase this by US$30-40. To also make the components there ratchets this up to US$80-90. Again, this would do no favours to the consumer, nor to the businesses reliant on any other forms of technology for their operations.
Finally, China has already been clear that it would fight back, and history indicates that if broader tariffs were raised across many countries then others might do the same. The biggest exports across the Pacific to China are planes, helicopters, spacecraft, soy beans and cars. If China retaliated by placing high tariffs on these then a company like Boeing would be one of the first casualties. In 2016 alone they sold 164 planes to China for US$11.03bn, and Europe’s Airbus is an easy alternative if anyone saw fit. General Motors also has China as its largest market, selling 3.87 million vehicles there in 2016, almost 30% more than it did in its home market. Big business would surely kick up a fuss if this came to pass.
The combination of these factors means that while we do not think protectionist measures will help increase manufacturing jobs, we believe it will hurt American corporates and it will hurt American consumers. We acknowledge that Trump is unpredictable but this seems like a situation he would be unlikely to deliberately orchestrate. To our minds there are far more important areas of the Chinese economy, where bad loans lurk and overcapacity remains, which we should avoid, not the exporters of China, or more importantly for our portfolio, of Taiwan. These together make up approximately 17% of the portfolio and we do not expect to reduce them.
This blog was first published in What Investment on 27 February 2017