Trade concerns are weighing on investor sentiment, which impacts stock prices, but the underlying fundamentals for China remains strong. Call it a trade tiff, dispute, spat or squabble, but we believe the tariffs imposed so far by President Trump do not (yet) rise to the level of a trade war. In this note, four members of the Matthews Asia investment team explain why the new trade taxes may have a small impact on the Chinese economy and investment environment.
Andy Rothman, Investment Strategist
The tariffs announced by President Trump—and the Chinese response—are troubling but do not constitute a trade war because the macroeconomic impact is likely to be insignificant.
Trump said the U.S. will collect a 25% tax on US$50 billion of imports from China. That amount, however, is equal to only 10% of the value of all Chinese imports last year. Moreover, Chinese exports to the U.S. accounted for only 19% of total Chinese exports, so the new tax will be levied against only about 2% of all Chinese exports.1
It is also important to recognize that the Chinese economy is no longer export-driven. Net exports (the value of a country's exports minus the value of its imports) account for only 2% of China's GDP, down from a peak of 9% in 20072. In contrast, domestic consumption now accounts for the majority of China's economic growth and more than half of its GDP.
We have also considered the impact on China's economy of the reciprocal taxes Beijing will levy on US$50 billion of its imports from the U.S. Based on our estimates of the price elasticity of both Chinese exports and imports, we expect the current trade dispute to reduce China's GDP growth rate by about 0.1%. That would have reduced the 1Q18 GDP growth rate of 6.8% to 6.7%, for example, a modest slowdown that would not influence how we think about investing in China.
I am in Beijing now, and last week a senior Chinese government economist told me that authorities have reached the same conclusion about the impact on the country's economy.
On a micro level, I believe much of the impact of Trump's import taxes will not be borne by Chinese companies; about two-thirds of the 25 largest exporting companies based in China are foreign-owned. Moreover, one-third of the value-add from all Chinese exports actually accrues to firms from other countries, including U.S. partners such as Japan, South Korea, Taiwan and Germany, as well as to U.S. companies.
Finally, we acknowledge that disputes can turn into wars.
The Chinese government's tariff response mirrored the Trump taxes and Beijing has called for restraint and negotiations. There are reasons to hope that Trump will not respond with another round of tariffs, which probably would lead to another response from Beijing. Trump can claim that the tariffs delivered on his campaign pledge to get tough on China, and then move on to negotiations over issues that really matter to U.S. companies, such as better protection of intellectual property and market access in China.