The Trade War’s Winners

It’s not discussed in polite company, but there are always winners.

JAKARTA⁠—They all “tut-tut” with the same regretful tone about the mounting friction between the United States and China. The trade experts who bemoan tariffs and sanctions explain how these new costs of commerce will squelch global prosperity. Then they lean forward, with a sigh, and intone solemnly: “You know, there are no winners.”

But it’s not strictly true as business executives in the traffic-clogged Indonesian capital will tell you. Beyond the individual companies that may benefit from a tariff slapped on a competitor, there are large categories of investments whose business model can work around⁠—or under or through⁠—any tariffs or restrictions that may arise. 

The latest rounds of scheduled trade talks between Washington and Beijing suggest another glimmer of hope for agreement, but investors should just turn off their trade news alerts. Any deal that comes now will likely be limited in scope, and any tariffs that are delayed or removed can reappear just as easily. (A savvy few will also be thinking ahead to the United States’ election next year, and it’s unlikely the president wants to defend a weak China deal just as his Democratic challengers gear up.)

Meanwhile, consider these categories of likely beneficiaries. 

Southeast Asia: The economies on China’s southern rim represent a massive “de-militarized zone” as trade tensions mount. Many firms were already shifting production here as Chinese labor costs rose, but the trade friction has triggered an acceleration of some of those plans. Production facilities here can sell into both the U.S. and China with less fear of getting stuck in the crossfire. 

Indonesian executives readily admit that, even though complex labor laws and venal bureaucrats have hindered investment, their economy still seems to be benefitting. It’s wrong to draw too many conclusions from short-term trends in Foreign Direct Investment, but there do seem to be a number of important winners in this neighborhood even as flows into the United States and China have stalled. 

ANNUAL FOREIGN DIRECT INVESTMENT: ASEANSource: Haver, IMF. As of March 31, 2019

ANNUAL FOREIGN DIRECT INVESTMENT: CHINA & U.S.Source: Haver, IMF. As of March 31, 2019

Multinationals: If your business model involves low-cost production in China to sell to high-wage consumers in the United States, you will be particularly vulnerable in this brave new tariff world. If, however, you make some of everything to sell almost everywhere, you have an enormous advantage when walls go up. 

Clothing or furniture production in China, for example, can simply be sold on Chinese markets if U.S. tariffs make them too expensive to ship across the Pacific. Parts or inputs that may face tariffs in one jurisdiction can usually be sourced elsewhere if a firm has diverse international facilities. There will be glitches and adjustments along the way, but beam and ballast offer stability when the waters start to roil.

“Beyond the individual companies that may benefit from a tariff slapped on a competitor, there are large categories of investments whose business model can work around – or under or through – any tariffs or restrictions that may arise.”

Digital Services: There are also firms whose products effectively move like phantoms through tariff walls. Even as the volume of trade growth has slowed in recent years, cross-border digital flows have exploded. To be sure, 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 localization of data storage. New European privacy rules have imposed restrictions on the handling of personal information, but these activities have yet to get caught up in tariff escalation. 

WORLD TRADE VOLUME ANNUAL GROWTHSource: Factset as of June 28, 2019

CROSS-BORDER BANDWITH (TERRABITS/SEC)Source: TeleGeography, McKinsey Global Institute

“Trans-Pacific Partnership”: Other winners include countries that went ahead to sign what was rebranded as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership that President Trump renounced during his first month in office. These 11 economies, including Japan, Australia, Canada and Mexico, decided they would benefit from the deal even if it did not include better access to U.S. markets.

This means, for example, that Canadian and Australian farmers have better access to the lucrative Japanese market than their American competition. So far, the Trump Administration’s talks with Tokyo don’t seem to include much on agriculture. Meanwhile, trade among these countries has been mainly free from U.S.-Chinese tensions. Indeed, China has actually lowered tariff levels with key trading partners even as it has raised retaliatory levies against U.S. imports. 

Financial Services: Even as negotiations unraveled over the summer, Chinese authorities pressed ahead with new measures to open up to foreign competition. The rules allow international credit rating agencies to evaluate Chinese bonds and brokerages to act as lead underwriters for new issues. Foreign firms also got broader access in asset management, pension management and currency brokerage. Restrictions on foreign insurance firms were loosened too.

Just how much the new rules draw in fresh foreign investment remains uncertain, but they are a notable step opposite the current, more restrictive trends. A courageous few will surely benefit.

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