We believe trade tensions between the US and China will be an ongoing issue. Over the years, China has become a rather large part of the global economy and as a result, we expect to see more policies from the US designed to limit China’s economic rise.
In terms of the percentage of GDP to the US, or the trade imbalance, China now is where Japan was in the late ‘80s. The US is again in a political and economic wrestling match with its biggest rival – this was once Japan and now it is China.
As such, there are historical precedents for the current political climate. In the 1980s the US levied high tariffs on Japanese car imports in a bid to protect its own home-grown car manufacturers. However, the impact of trade sanctions on the Japanese economy could be seen as positive in some respects. It forced companies to streamline their production efficiencies and improve product innovation in order to remain competitive.
Toyota, for example, remains the world's largest car manufacturer today. Despite the trade sanctions in the ‘80s, Toyota managed to maintain its status as an industry leader and used local resources to support its global expansion. Today, it also produces cars in the US.
Toyota’s manufacturing process has one of the highest productivity levels in the industry. It adopts a “just-in-time” concept, with manufacturing equipment that can be easily set up to make different components as needed. This allows the company to remain nimble and react quickly to customer demand. Additionally, smaller lot sizes and faster communication on the assembly line tends to mean better quality products, as production mistakes can be quickly picked up and corrected.
From a political standpoint, we believe conflicts between China and the US will continue to arise, whether on exports and trade or other geopolitical issues. That said, we believe these issues primarily affect market sentiment, rather than China’s actual economy – China’s economy is predominantly domestically driven and its exports contribute only a tiny part to GDP.
Not only that, despite various trade barriers imposed by the US, China’s export numbers continue to beat expectations. In fact, the Covid-19 pandemic has affected non-Chinese manufacturing bases more than those in China. As global demand recovers, China has become a reliable manufacturing source for most markets around the world.
Before the pandemic, there were concerns that China might lose its manufacturing edge due to labour shortages. However, that concern is slowly diminishing. Tesla for example, built its largest factory in the world in Shanghai last year and it now exports cars from China to Europe – this reflects China’s high manufacturing competitiveness.
In conclusion, we believe that the US-China trade war should not lead to long-term headwinds for Chinese companies, in fact quite the opposite. In the medium-to-long term, we believe Chinese companies will be forced to strengthen their core competencies and those that are able to adapt to the new norm should emerge stronger over time, despite trade sanctions.
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