Trade War Winners?

We look at who could potentially benefit

Who wins if the trade war between the US and China escalates further? In March, President Trump told us via Twitter that “trade wars are good, and easy to win”. Whilst the President’s definition of “win” is unclear, we have been thinking about the potential effects of heightened escalation between the superpowers. In the medium term we believe the losers will be US consumers, through higher prices, and Chinese manufacturers, through reduced revenue. Longer term though this could be a golden opportunity for the nations of Southeast Asia as corporate supply chains are recalibrated along paths of least resistance.

China’s textile and apparel exports, which at $257bn, ($39bn went to the US) accounted for 36% of global textile exports and 35% of global clothing exports in 2016. By contrast Vietnam exported $31bn worth of textiles and garments in 2017 ($12bn to the US), so it already has expertise and infrastructure in place to take market share from China, with estimates of exports growing to $50bn in 2020. Moving up the value chain, Samsung has already invested $17bn into Vietnam and its factory in Thai Nguyen, employs 60,000 people, who churn out more mobile phones than any other facility in the world. Vietnam is now the second biggest exporter of smartphones.

Interestingly, macro indicators in the region have ticked-up materially. Exports from Singapore and Thailand were up 20.1% and 8.7% in October respectively. In Vietnam, the November PMI reading of 56.5 pointed to the second strongest pace of expansion in factory activity since the series began.

On the ground we’ve been meeting companies that are poised to benefit from the tensions. For example, Hana Microelectronics, a Thai listed semi-conductor assembly plant, has seen a significant increase in contract enquiries. In addition, they won a major account for their Cambodia facility, whose utilisation rate is running at a mere 10% and as mass production begins, capacity is expected to reach 40-45% by  the middle of next year.

Returning to the tensions, the 90-day truce announced by Messrs Xi and Trump at the G20 summit is good for global trade in the short term but the most difficult sticking points between the two parties, namely intellectual property rights and market access, remain unaddressed. We have yet to see any material evidence of Chinese willingness to make concessions that go beyond promises to step up imports from the US by adding to their strategic reserves of certain key commodities. Although the Chinese may be calculating that it will be enough to allow President Trump to declare a great victory and move on to some other area of focus.

Whatever the outcome, the genie is out of the bottle with mounting evidence that managers are seriously weighing up the risks of building extra capacity in China. The nations of Southeast Asia are a well-positioned alternative.

By Douglas Barnett

Data sourced from Bloomberg as at 30.11.18

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