US-China trade war: How the winners in this brave new world of tariffs get ahead

Trade war is bad for the world economy but, even so, there are winners: Southeast Asia, CPTPP members, suppliers of digital services and financial services, and multinationals with strong and flexible supply chains. How do they do it?

Christopher Smart

Published: 11:00am, 30 Sep 2019

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As trade friction rises between the United States and China, there are trade experts who bemoan tariffs and sanctions and insist there are no winners.

But this is not strictly true, as business executives in Jakarta will tell you, for one. Beyond the companies that benefit from a tariff slapped on a competitor, there are large categories of investments whose business model can work around⁠ tariffs and restrictions.

The latest scheduled US-China trade talks suggest a glimmer of hope for agreement but any deal is likely to be limited in scope, and any tariff delayed or removed can reappear just as easily. (A savvy few will also be thinking ahead to the US election next year, and it is unlikely the president wants to defend a weak China deal just as his Democratic challengers gear up.)

Meanwhile, consider these likely beneficiaries.

Southeast Asia

The economies on China’s southern rim represent a massive “demilitarised zone”. Many firms were already shifting production here as Chinese labour costs rose but trade friction has triggered an acceleration. Factories here can sell into both the US and China with less fear of getting stuck in the crossfire.

Without drawing too many conclusions from short-term foreign direct investment flows, there do seem to be some winners in the neighbourhood as flows into the US and China stall.

Multinationals

Those counting on low-cost production in China to sell to high-wage consumers in the US are particularly vulnerable in this brave new world of tariffs. If, however, you make some of everything to sell almost everywhere, you have an enormous advantage.

Clothing or furniture produced in China, for example, can simply be sold in Chinese markets if US tariffs make them too expensive to ship. Parts or inputs facing tariffs in one jurisdiction can usually be sourced elsewhere if a firm has diverse international facilities.

Digital services

In recent years, cross-border digital flows have exploded and there are firms whose products move like phantoms through tariff walls. These include a lot of cute cat videos, but a growing share represent important services, analyses and even the remote operation of industrial installations.

Cumbersome Chinese regulations sometimes require localisation of data storage. New European privacy rules impose restrictions data handling but these have yet to be caught up in tariff escalation.

Trans-Pacific Partnership

Renounced by President Donald Trump during his first month in office and rebranded as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, the deal involves 11 economies, including Japan, Australia, Canada and Mexico, whose trade has been mainly free from US-Chinese tensions.

For example, Canadian and Australian farmers may have better access to the lucrative Japanese market than their American competition, depending on the exact details of the US-Japan trade deal, which does not seem to include much on agriculture. Indeed, China has lowered tariffs with key trading partners even as it raised retaliatory levies against US imports.

Financial services

Chinese authorities have pressed ahead with measures to open up to foreign competition, allowing international credit rating agencies to evaluate Chinese bonds and brokerages to lead-underwrite new issues. Foreign firms also got broader access in asset management, pension management and currency brokerage. Restrictions on foreign insurance firms were loosened too.

How much foreign investment will be attracted remains uncertain but they are a notable step against more restrictive trends. A courageous few will surely benefit.

The sour experts are surely right that trade wars are bad for the economy and the world, but there are still clear beneficiaries. Global commerce is not necessarily a zero-sum game and investing is still a relative pursuit where some will do better than others.

Christopher Smart is chief global strategist and head of the Barings Investment Institute

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