Who gets hit by a Trump trade war with China

January 31, 2017

1557

By Charlie Robertson

TUE, JANUARY 31, 2017-Trump’s executive order on a temporary “muslim immigration” ban presumably means he is serious about re-election in 2020. Simon Kuper wrote a provocative FT Saturday piece suggesting that populists are happy to lie to the electorate when it does not matter if the lie is discovered – ie, lying about Brexit doesn’t matter as there won’t be a second referendum – and he said Trump was breaking his promises too, implying voter anger and his rejection at the next election. Now Trump is partially delivering on his muslim ban promise, and has ordered building of the wall.

We should now assume he is “hard Trump” not “soft Trump” and we should examine the impact of the trade war he has regularly threatened against China and Mexico. Won’t his commerce or treasury secretary advise against this? I’ve been reading some Trump biographies that suggest the opinions of his cabinet appointments will matter little to him; it is his own advice he values above all others. One report suggests the secretary of homeland security found out about Trump closing the temporary immigration ban by watching TV.

It is China that matters for the world, not Mexico. A trade war with Mexico should have little or no direct impact on EM or Frontier markets (more graphs on that below). The market which most obviously gets his by a trade war with Mexico is the US (HK too if we count it as a % of GDP).

The big deal is the potential trade war with China. For the 22 MSCI Emerging Market countries, investors would need to hide in EEMEA, and sell Asia and Latin America.

The three countries whose GDP are most sensitive are Taiwan, Malaysia and Korea. Based on IMF and UNCTAD export data, Korea and Malaysia are most likely to be impacted as their exports to greater China (China, Hong Kong and Macao) are worth 12% of GDP, while for Taiwan the figure is 10% of GDP (using UNCTAD data). But IMF import data for greater China show that Taiwanese exports to these countries add up to a value that is 69% of total Taiwanese exports (not 21%) and 34% of GDP (not 10%). For Thailand, exports to greater China are worth 9% of GDP, and for the Philippines is 4%.

Asian exports, particularly Taiwan’s, are most likely to be part of China’s supply chain, so fewer Chinese exports to the US should mean fewer Taiwanese exports to China, and worse GDP. It is the supply chain countries that should be most affected by a fall in Chinese exports to the US.

Non-Asian countries that would be hit, such as Chile (7%), Peru (4%), SA (3%), Brazil (2%) or Russia (2%) – will be more about commodities and overall global supply and demand of commodities. How badly they are hit will depend on the market’s response to the trade war. We imagine the knee-jerk reaction would be a fall in commodity prices.

Central Europe and Greece should be the least affected, and would get a small benefit from lower commodity prices. Ironically, Mexico is the Latin American country most immune to a US trade war with China.

In the Frontier space, the main link to China is commodities, not via producing components in China’s export supply chain. The only partial exception is Vietnam. It’s biggest exports to China in 2014 appear to have been commodities such as refined petroleum ($1.5bn), rice ($0.9bn), rubber ($0.8bn) and wood ($0.7bn), but it also sells footwear ($0.5bn) and clothing ($0.4bn), so would be sensitive to Chinese consumer demand and not just the impact on Chinese exports to the US.

So Frontier investors should be positioned in either emerging European countries that do not export to China (from Estonia to Romania), or in countries that might benefit from the knee-jerk fall in commodity prices (eg Pakistan or Kenya).

Among Developed markets, it is again Asia that gets hit most by problems in China.

To do an in-depth analysis is far more complicated than any of these graphs suggest at first glance, leaving aside the fact that a) we don’t know if there will be a trade war and b) we don’t know how broad a tariff/tax will be on US imports from China.

1-China may divert exports directly to other countries

2-China may indirectly export to the US via other countries (just as EU food found its way to Russia via Belarus)

3-Other countries may capture Chinese or Mexican market share in the US eg perhaps Samsung phone exports from Vietnam could boom to the US, if an import tariff was placed on iPhones produced in China.

4-China might respond by boosting domestic demand which might limit downside to commodity prices.

CONCLUSION: If Trump delivers on a trade war with China, the most immediate investor response should be to sell Asia within EM, and hide in EEMEA, particularly central Europe, Greece and Egypt. We imagine there would also be a hit to commodity prices, which again would favour central Europe and Greece. In Frontier markets, we see Kenya, Pakistan and Emerging European countries like Romania or Estonia as the relative beneficiaries of a China/US trade war.