Chief China Strategist
Summary: The article examines Trump's threatened tariffs on Chinese exports and their impact on investors, highlighting bipartisan agreement in Congress on China policy and increased legislative activity. It notes the securitization of economic policies, especially concerning data security and restricting China's access to critical technologies. Investor opportunities may lie in economies and industries benefiting from supply chain reconfiguration and Chinese companies in import substitution and advanced manufacturing. The article also discusses the potential effects of a Trump presidency on the renminbi.
Biden's recent victory in Georgia solidified his position as the presumptive Democratic nominee, set to be formally declared at the party's convention in August. Meanwhile, Trump's accumulation of delegates from victories in Georgia, Mississippi, Hawaii, and Washington cements his status as the presumptive Republican nominee. Despite the dominance of the two major parties, independent candidates such as Robert F. Kennedy Jr. and the emerging no-label movement present a potential wildcard in the election. However, with the electoral landscape still predominantly shaped by Biden and Trump, the likelihood remains that one of them will clinch the presidency in the upcoming US presidential election in November 2024.
Trump's recent pronouncement of a potential 60% tariff on Chinese exports, along with a threatened 10% tariff on goods from the rest of the world entering the US, has stirred apprehension among investors. While campaign promises often differ from actual policy implementation, the potential impact of such a plan warrants careful consideration.
Although the power to regulate commerce with foreign countries primarily lies with Congress, a portion of this authority is delegated to the White House. Trump's previous utilization of retaliatory authority under the Trade Act of 1974 during his presidency from 2017 to 2021, which allowed him to impose tariffs of up to 25% on many Chinese products, underscores the potential for further tariff increases under his leadership. President Biden's decision to retain Trump’s China tariffs after assuming office in 2021 further suggests the possibility of such measures not facing challenges. Thus, it appears plausible that Trump, if re-elected, may resort to retaliatory measures to increase tariffs across a broader range of products, despite potentially the tariff rate and scope being somewhat reduced.
Regarding the proposed 10% tariffs on goods from other countries, the situation is more complex. It may be challenging to justify retaliation against the entire world, requiring resorting to the more generalized power of regulating international commerce delegated by Congress to the administration. In his previous term, Trump withdrew from the Trans-Pacific Partnership as he had pledged to do during the campaign but did not follow through on his election rhetoric to withdraw from the WTO.
As ludicrous as the hypothetical scenario depicted in French economist Frédéric Bastiat's renowned satirical masterpiece, where candlemakers petition the government to block sunlight to shield their business from cheaper competition, protectionism frequently prevails in political arenas. Protectionism, as outlined by Mancur Olson in his influential work, "The Rise and Decline of Nations," favours organized interest groups to the detriment of a broader population of consumers. It often leads politicians to advocate for protectionist measures, such as tariffs, despite their adverse effects on overall economic welfare.
An increasing probability of a return of Trump to the White House is likely to weigh on the Chinese equity market and potentially favour the supply-chain reshoring beneficiary markets, such as Southeast Asian countries, India, Mexico and so on, elevating the trends of China exporting more intermediate goods and capital goods to these countries while the latter are exporting more consumer goods to the U.S.
Regardless of whether Biden or Trump occupies the White House, a complex fragmentation dynamic has been underway between China and the U.S., showing no signs of abating. It's imperative to recognize the trend of dual convergence in US-China policies since 2016, as noted by Medeiros (2023). This convergence refers to the alignment of both the executive and congressional branches, as well as the Democratic and Republican Parties, in their approach towards China.
Moreover, three significant developments have unfolded over the past decade, irrespective of the presidential occupant. Initially, China wasn't a focal point in election campaigns until 2016, when it emerged as a prominent issue in both presidential and congressional elections. Candidates competed to demonstrate toughness on China to bolster their credentials as guardians of US economic and security interests, often accusing opponents of being weak on China.
Congress has also become a pivotal actor in shaping US-China policies, with legislative activity, hearings, and investigations related to China surging, reflecting bipartisan concern. Despite shifts in party control, Congressional activism on China remains consistent. For instance, data compiled by Medeiros shows a tripling of US Congress’s legislative activity, hearings, and investigations related to China, from around 100 in prior decades to over 450 in the 117th Congress from Jan 2021 to Jan 2023.
The securitization of economic policies has become prevalent in both China and the US, with economic issues increasingly viewed through a national security lens. This reflects a broader geopolitical strategy aimed at safeguarding US interests, particularly concerning China.
Most notably, on October 7, 2022, under the Biden administration, the Bureau of Industry and Security (BIS) rolled out additional export controls on advanced computing and semiconductor manufacturing items to restrict China’s access to advanced semiconductors. Subsequently, the BIS implemented additional rules on October 17, 2023, broadening the control’s technical parameters, extending the licensing requirement to more countries, imposing end-use control, and extending restrictions on activities of U.S. persons.
Prohibiting foreign countries from obtaining state-of-the-art critical technology has been a recurring theme throughout economic history. For instance, in the 18th century, while the textile industry held a position similar to today's semiconductor industry, Britain prohibited the export of any "machine, engine, tool, press, paper, utensil or implement" and any "model or plan…part of parts thereof" used in the cotton, linen, woolen, or silk manufactures of the kingdom”. Additionally, woolen workers faced severe penalties, including confiscation of property and loss of citizenship, for leaving the country (David J. Jeremy, 1973).
The tightening of control based on national security extends beyond semiconductors. Woes in the contract research organization (CRO) sector have persisted for months. More recently, the Chairman and a Ranking Member of the US House of Representatives Select Committee on the Strategic Competition between the United States and the Chinese Communist Party introduced the BIOSECURE Act in January 2024. This act aims to restrict federally funded medical providers from using biotech companies from foreign adversary countries of concern, including BGI Group and its subsidiaries, MGI, and Complete Genomics and “WuXi Apptec. In February 2024, these lawmakers, accompanied by a couple of senators, called for the Biden administration to investigate WuXi AppTec and its subsidiaries for their alleged ties to the Chinese military. In March, the Senate’s Homeland Security Committee approved The Prohibiting Foreign Access to American Genetic Information Act of 2024 which would ban BGI, MGI, Complete Genomics, WuXi AppTec, as well as their subsidiaries given their alleged ties to the Chinese Communist Party.
The national security concerns go beyond semiconductors and human genetic data. Last month, Biden issued an executive order titled "Preventing Access to Americans' Bulk Sensitive Personal Data and United States Government-Related Data by Countries of Concern," which covers not only personal data such as genomic, biometric, and health data but also financial and geolocation data. Furthermore, the Biden administration established the Office of Information and Communications Technology and Services (OICTS), to implement the Information and Communications Technology Supply Chain Rule. This rule, which began during the Trump administration and expanded during the Biden administration, aims to address the risk of supply chains controlled by a ‘foreign adversary’. The OICTS conducted a probe into connected vehicles and their related supply chains for data security. The term ‘connected vehicles’ encompasses vehicles equipped with sensors, cameras, battery systems, onboard computers, or even as simple as GPS systems that can collect, process, and transmit data.
On the Congressional side, last week, the House of Representatives passed a bill to force ByteDance to divest TikTok with an overwhelming vote of 352-65, with 90% of Republicans and 75% of Democrats assenting, reflecting widespread support across the political aisles.
Therefore, while a status quo Biden administration may offer some positivity in the arena of trade and tariffs, broader geopolitical trends and bipartisan consensus on China policy suggest continued challenges in many aspects of the economic relationship between the U.S. and China. The rising emphasis on data security in the U.S. is likely to persist under both a Biden and Trump administration, posing significant risks to the Chinese equity market.
The securitization of economic policies has expanded beyond trade and semiconductors. The emerging focus on data security brings the front line of conflicts to electric vehicles and their entire supply chains, encompassing batteries, sensors, and numerous other industries and products where China currently holds significant global market shares, anticipating robust growth in the coming years. These sectors now face challenges that extend beyond the US market to global markets. US laws potentially possess extraterritorial capabilities, denying access to the US market for European and other automakers using Chinese-supplied parts or Chinese automakers’ subsidiaries elsewhere. Additionally, data security concerns regarding TikTok could readily extend to Chinese company-controlled e-commerce platforms operating in the US, such as PDD’s Temu and Nanjing Lingtian Information Technology’s Shein.
Businesses worldwide, including those from China, the US, Europe, and Japan, are reevaluating their risk exposure by rerouting production and supply chains to countries with better trade relations with the US, such as Southeast Asian countries, India, Mexico, and Eastern European nations. This trend is evidenced by the increase in Chinese exports to countries like Vietnam and India for intermediate products, while these countries export more consumer goods to the US. Investors may find diversification opportunities in some of these markets.
In the Chinese market, investors may discover opportunities in companies benefiting from import substitution, particularly those involved in producing parts and equipment for tech products. Moreover, China's industrial policies aimed at promoting innovation and self-reliance are likely to benefit companies in technology hardware and advanced manufacturing. Investors should explore this space. These shifts will unfold gradually, both leading up to and following the election. Investors should conduct thorough research and remain vigilant as developments unfold.
Furthermore, as the likelihood of a Trump presidency increases, the renminbi may weaken, particularly if tariffs on China are raised. Experienced foreign exchange traders may consider positioning themselves for this scenario by betting on a weaker renminbi against the US dollar or Japanese yen through spot or options trades.
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As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Uncover the shifting focus in 2024's FX markets towards growth resilience and relativity, away from bond yields and inflation stories.
Embrace the metal revolution on the commodity market in the coming year, with a focus on gold, silver, platinum, copper, and aluminum.
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The disheartening cycle of unresolved geopolitical conflicts, the rise of polarizing political parties, and the stagnation of productivity.
Understand China's political landscape in Q4 2023 and the impact on counter-cyclical initiatives, with a focus on the pivotal Q1 2024.
