We believe that the trade tensions between the United States and China will be an ongoing problem because, over the years, China has become a fairly large part of the world economy. As a result, we expect to see more policies from the United States designed to limit China’s economic growth. In terms of a percentage of GDP in the United States, or trade imbalance, China is now where Japan was in the late 1980s. The United States is again in a political and economic wrestling match with its biggest rival – it was once Japan and now it is China.
There are historical precedents for the current political climate. In the 1980s, the United States imposed high tariffs on imports of Japanese cars in an attempt to protect its local automakers. However, the impact of trade sanctions on the Japanese economy could be seen as positive in some ways. This has forced companies to rationalize their production efficiency and improve product innovation to stay competitive.
Toyota, for example, is the world’s largest automaker today. Despite trade sanctions in the 1980s, Toyota maintained its status as an industry leader. It has adopted new production processes to improve quality and adapt more quickly to customer demand, while achieving one of the highest levels of productivity in the industry. The company used local resources to support its global expansion. Today, it also produces cars in the United States.
We also observed more generally that strong companies, like Toyota, could learn to manage a more difficult environment and become stronger. We believe this will also be true for Chinese companies. Our goal is to find these companies competitive in the long term.
Trade disputes can create opportunities
From a political perspective, we believe that conflicts between China and the United States will continue to arise, whether over exports and trade or other geopolitical matters. Having said that, we believe that these issues primarily affect market sentiment rather than China’s real economy, which is mainly focused on the domestic market. Its exports contribute only a tiny part of the GDP.
China is keen to reduce its dependence on imports, especially for strategic items such as semiconductor chips, where there is strong interest in developing local chip supply. Chinese customers who need chips for their products would prefer to use local suppliers for added security if the quality is sufficient.
Despite various trade barriers imposed by the United States, Chinese export figures continue to exceed expectations. In fact, the pandemic has affected non-Chinese manufacturing bases more than those in China. With the recovery in global demand, China has become a reliable source of manufacturing for most of the world’s markets.
Prior to the pandemic, there were concerns that China would lose its manufacturing advantage due to labor shortages. However, this concern is slowly diminishing. Tesla, for example, built its world’s largest factory in Shanghai last year and now exports cars from China to Europe, reflecting China’s strong manufacturing competitiveness.
In conclusion, we believe that the trade war between the United States and China should not cause long-term headwinds for Chinese companies, quite the contrary. In the medium to long term, Chinese companies will be forced to strengthen their core skills and those able to adapt to the new standard are expected to emerge stronger over time, despite trade sanctions.
* Martin Lau is Managing Partner at FSSA Investment Managers (part of First Sentier Investors).
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