EnThis report summarizes five Panjiva research analyses investigating the history, outlook and impact of the U.S.-China trade war on corporate strategies and Asian economies more broadly. A 45-page version of all five reports plus this overview can be downloaded here. For more information please contact your usual S&P Global Market Intelligence representative or email sales@panjiva.com.
From S-301 to PRC-70 – a roadmap for the U.S.-China trade war (Jun. 12, updated Jul. 1)
The U.S.-China trade war has reached its 21st month with escalation rather than peace being the current position. This report identifies 34 events in five phases from the trade war so far – defined as the launch of the U.S. section 301 review of Chinese intellectual property practices – before looking at the road ahead.
The rhetoric building stage through Mar. 2018 included China applying tariffs on $12.4 billion of U.S. soybeans in response to steel duties. The opening salvo of section 301 tariffs by the U.S. and China’s retaliation through Jun. 2018 settled on 25% tariffs on $100 billion of bilateral trade. As at Apr. 31, 2019 U.S. imports of those products had fallen 28.4% year over year. The widening of coverage to $360 billion of bilateral trade at lower rates has led to over 13,000 requests from U.S. companies for leniency from tariffs, only 24.3% of which have been successful.
Negotiations that were kicked off in December 2018 struggled through to late April 2019 with an apparent agreement in sight, only to collapse into acrimony. Tariffs on the $360 billion of bilateral trade were increase to 25%. China at the same time began to indicate non-tariff methods of retaliation including restricting rare earth exports and identifying “unreliable entities”. President Trump then indicated tariffs on all remaining Chinese exports will be applied if talks were not held with President Xi at the G20 on Jun. 28.
Looking ahead the G20 talks have lead to a ceasefire in further tariffs / retaliation, but have arrived at a similar starting position to Dec. 2018 and May 2017. TEchnology is likely to be front-and-center of any deal. The lack of clarity on likelihood, content or even timing of a deal will hang over the peak shipping season for toys, apparel and consumer electronics that occur between August and October.
In August the U.S. electoral process will gather pace – the Iowa State Fair will highlight the plight of farmers and draw heated rhetoric from Democrats and the Trump administration. The run-up to the 70th anniversary of the PRC on Oct. 1 may limit the Chinese government’s appetite to compromise. A complete resolution to the trade war seems unlikely before then.
Note: This report was first published on Jun. 13 and has been updated for the outcome of the G20 summit between President Trump and President Xi.
Source: Panjiva
Accelerating the inevitable – Six corporate approaches to tackling tariffs (Jun. 14)
After 21 months of trade war, evidence from analyses of over 100 companies has lead us to identify six major corporate strategies and firms that exemplify them:
1) Stockpiling, shown by iRobot, which can have the drawback of higher costs and tied up cashflow.
2) Exemption requests, where BorgWarner has been successful, only yields relief in one-quarter of cases.
3) Price rises are the most popular strategy, particularly when focused as Kubota has shown, though can lead to lower demand and loss of market share.
4) Demanding price cuts from suppliers is bearing fruit – Chinese exporters have given price cuts equivalent to one quarter of tariff increases – but is only effective where there are alternative supplies, as was the case for Husqvarna.
5) Relocating is complex but tariffs are simply accelerating plans, such as GoPro’s in high tech, Guess? in apparel and Giant in manufacturing, that were already underway while others such as Foxconn are awaiting direction from their clients or be reactive as in the case of Lenovo.
6) High or uncertain tariffs can lead to product cancellations, which Volvo has threatened.
Finally, many companies such as Ingersoll-Rand are following an all-of-the-above approach.
Source: Panjiva
Pulling the plug on China – Manufacturers Move to Vietnam (Jun. 14)
Vietnam’s government will pursue exporters that transship goods from China via Vietnam to avoid U.S. tariffs. The government is likely acutely aware of the risk of arousing the ire of the Trump administration, given Vietnam’s trade surplus versus the U.S. reached $45.9 billion in the 12 months to Apr. 30 2019. Vietnam’s exports to the U.S. have expanded in part due of supply chains being switched to produce in Vietnam not China.
Panjiva analysis of nearly 400 product lines shows the largest example relates to mobile phones where Chinese exports fell $3.67 billion year over year in the three months to Apr. 30, while Vietnam’s exports rose by $2.73 billion.
Among lower tech products furniture and electric cables are examples where heavy switching has occurred since the implementation of U.S. tariffs against China. For furniture 72.8% of the drop in seaborne shipments from China have been replaced by those from Vietnam. La-Z-Boy and At Home have both aggressively pursued such switching.
In the case of electric cables, 43.6% of the reduced shipments from China were made up by Vietnam, with both Sumitomo Electric and Yazaki making the switch.
Source: Panjiva
Kicking away the ladder – The trade war’s long-term impact on development (Jun. 19)
The U.S.-China trade war is accelerating a shift in supply chains across Asia that could work to the long term advantage of countries that are already working their way up the development ladder and potentially locking out those that are further behind.
Vietnam is well ahead of the curve with electronics reaching 35.0% of exports in 2017 from 4.0% in 2000. More of the same likely as companies as diverse as Kyocera, Sumitomo, Brooks and HD Supply relocate. India meanwhile has not seen as rapid a development of high tech industry with machinery and electronics representing 15.7% of exports while metals and energy represent 20.2% and 15.1%.
While accessing the Regional Comprehensive Economic Partnership trade deal may help, the Modi administration will likely retain its restrictive import tariff policies to encourage domestic manufacturing.
Countries like Sri Lanka meanwhile face a development trap. Apparel still represents 41.3% of exports while machinery and electronics at 4.7% are the same level as 2000. One cure may be for the government to focus on developing specific sectors, for example in autos where exporters including Motherson Sumi and Solideal already have a presence.
Source: Panjiva
Trade recession beckons – Policy environment worsens, export economy slows (Jun. 18)
The global economy may be close to a “trade recession”, defined as two consecutive three month periods of lower exports on a year over year basis globally. The most recent trade recession started in May 2015 and did not end until Nov. 2016 with the subsequent boom driven in party by reflationary U.S. tax policies.
Global exports fell 2.3% year over year in the three months to Feb. 28 and are down 2.6% in the three months to Apr. 30. Data for May already shows seven of 11 countries having reported lower exports.
Previous trade recessions have typically started in Europe – exports from which are already down 4.3% in the three months to Apr. 30. This time around exports from Asia are also down 2.6%, perhaps reflecting weak underlying demand as well as the U.S. China trade war.
While China’s exports rose 1.1% in May that may reflect a temporary rush to beat potentially higher U.S. tariffs. The current volatility in trade policies – the next steps for which will be taken at the G20 meeting from Jun. 28 – could not have come at a worse time.
Not everyone will lose from the U.S.-China trade war though. A shift in manufacturing from China and the U.S. has helped recent export growth from Vietnam, India and Mexico.
Source: Panjiva
Note: This report was updated on Jul. 1 for the outcome of the G20 summit
