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Chart of the week – Choosing the other

It is a simple enough phenomenon in physics: when you push at one end of a closed tube with a bubble in liquid, the bubble will move to the other end. And so it is with trade in a (business) world marked by factors such as globalisation and ubiquitous information.

It is a simple enough phenomenon in physics: when you push at one end of a closed tube with a bubble in liquid, the bubble will move to the other end. And so it is with trade in a (business) world marked by factors such as globalisation and ubiquitous information.

  • Closing off a market to one source of exports stands to benefit substitutes
  • Canada and Europe should profit from US tariffs
  • Room for substitutes to gain

Happy bystanders?

US pressure on China in the form of import tariffs and other curbs in a bid to address the imbalance in their trading relationship, and consequently the billion-dollar US trade gap, may have dented Chinese exports. But US growth has remained solid and, despite the superpowers’ dog fight, US imports from other countries have been rising. Trade will go their way.

While the US accounts for a chunky 39% of Chinese net exports, 24% goes to Asia and 21% to Europe.[1] Chinese goods dominate many sectors of the US economy. With production in the US not always the obvious or even a feasible alternative – as a result of decades of factory closures and issues of scale – US consumers must either swallow the higher prices resulting from the tariffs (or Chinese producers have to accept lower margins) or source the products from elsewhere.

Opportunities for other exporters

In selected industries, Canadian, European and specific Asian companies have established positions and should benefit from the tariffs. Thus, in home furnishings and leisure products, for example, Canadians could build on their share of US revenues; equally in leisure products; in housewares & specialties, there should be opportunities for European companies (see exhibit 1); finally, in technology hardware storage and peripherals, companies from South Korea, Japan and Taiwan could expand their market share.

Exhibit 1: Canada and Europe should benefit from tariffs on Chinese trade

trade alternatives substitutes Data as at 9 August 2019. Source: BNP Paribas Asset Management

The room for non-Chinese substitutes to gain ground should allow shares in the listed companies in such industries to catch up with their US and other rivals. There is notable potential in consumer electronics, where US tech giants have enjoyed a bumper run, and perhaps more limited upside in housewares & specialties. In other areas, it appears US stocks have corrected already in recent weeks in industries such as household appliances, leisure products and textiles.

Beware, though, of the growth outlook

In our view, the outlook for overall demand, it must be said, is less than rosy now that the latest round of US tariffs threatens to expand the levies to the entirety of Chinese exports to the US. China, meanwhile, is apparently not shy about using its currency in the conflict and may be digging in for a prolonged fight.

The fallout from such a drawn-out struggle between the leading economies cannot but hit the global economy and, in view of the limited scope for many central banks to crank up demand by cutting interest rates (further), it looks likely that the clouds might take longer to dissipate.

In financial markets, it appears that fixed income markets in particular are anticipating such a scenario: bond yields have been falling and the stock of negative-yielding bonds has ballooned. Stock markets have swung, too, but a major correction is yet to set in.

[1] Data as at 9 August 2019. Source: National Bureau of Statistics of China, Hong Kong Census and Statistics Department, BNP Paribas Asset Management
For more posts by Daniel Morris, click here > For more charts of the week, click here > To discover our funds and select the ones that meet your requirements, click here > Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher than average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity, or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

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