#This is our exclusive Asia-In-Focus Monthly Report for our email subscribers. This report was first published on the 31st March 2017.

Asia-In-Focus

March 2017 Edition

Will The US Start A Trade War With China?

Many economists and investment commentators have assumed that newly elected US President Donald Trump would tone down his approach after entering the office. However, it is now clear that Donald will remain as Donald, regardless of whether he is staying in the white house. For Asian investors, one of the biggest concern is the constant blaming of China for the slow economy in the US. Donald Trump has, again and again, blamed China for currency manipulation and unfair trade deals.

It could be a lose-lose-win situation

All these led to a very real possibility of the US planning to start a trade war with China. Will it happen? How might it happen? And what might be the result?
In all economic sense, the US should never start a trade war with China. In fact, the economies of the two countries are so integrated together that a trade war will only be a lose-lose event. Here are some reasons for it.
  • The US is a consumer-led economy. Therefore, without a good source of cheaper imports (from China), it might lead to consumers in the US taking a hit, causing a slowdown in the economy.
  • The US an indebted nation. It needs credit to fund its economy. And China being one of the largest trade creditors of the US, has the power to hurt the US credit system (real bad).
  • China is transitioning to a consumer-led model slowly, but it is still predominately an export business. So, any attempt by the US to reduce that export would hurt China as well.

For these reasons, it is not in the best interest for both countries to start any form of a trade war. However, sometimes global policies are made not for economic reasons but rather of political ones.

Who is the winner?

So, who might be the biggest winner if there is indeed a trade war happening? For one, countries that are currently in competition with Chinese exporters might stand to benefit. Exporters in Southeast Asia or North Asia might fill the gap when the US restricts more Chinese imports. It is not hard to imagine a garment factory in Vietnam or a steel exporter in India taking over the roles of garment and steel exporters in China. In fact, Apple Inc has already started expanding its manufacturing base, together with its key supplier Foxconn, in India. The factory is scheduled to start operation in a few months’ time. So you see, a trade war might hurt the export in China, but that does not mean the Chinese companies could not easily set up another base outside of China. Policies can change, but so can the companies.

Secondly, the US would not be able to start a trade war with China without creating barriers or incentives of its own. For example, Fuyao Glass, the largest automotive glass manufacturer in the world, has expanded a manufacturing facility in the US to save cost! Listen to the irony in that. According to its Chairman, Cao Dewang, the tax incentives and grants given by the US government are more than enough to offset the higher labour cost in the US (compared to China). So, the US government is manipulating its tax and grant structure to attract more companies in setting up manufacturing facilities in the country, to fight off the manipulation it claimed China has used to be profit from. Talk about a pot calling a kettle black.

However, this kind of policies might further expand the US budget deficit and cause more problems for the US economy in the future. In term of politics though, it is a problem for another day (or another administration).

What does it all mean?

It means that as investors, we can worry about how government policies might impact our investment. Yet, we must not forget that the companies we have invested in can be fluid in its approach as well. When an environment turns hostile to them, management would just have to look for friendlier markets or change the environment, (like moving production overseas), to suit its customers.

So our energy might be better served if we focus on finding great companies with flexible managements who are able to change with the changing times. Rather than fearing how macro situation would affect our investment. If the companies and the managements are truly great, these issues would most likely just be temporary.

When practice correctly, value investing is an investment philosophy, that should allow you to sleep soundly at night, regardless of what Donald Trump is tweeting.

Till we speak again.

Yours Truly

Stanley Lim
Chief Editor

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