These are two big trade war winners

No one wins trade wars. Except for… those countries that do win.

Right now, the U.S.-China trade war will get worse before it gets any better.

For one thing, it plays well to the domestic supporters of U.S. President Donald Trump. There’s little downside to beating up on China.

And China isn’t going to give in.

During a speech earlier this week, Chinese President Xin Jinping promised to cut tariffs, open up Chinese sectors to foreign investment and import as much as US$45 trillion in goods and services over the next 15 years. That’s the opposite of putting up trade barriers – it’s paving the way for the free flow of goods.

He also said – in what was probably a veiled reference to Trump’s trade war – that “great winds and storms may upset a pond but not an ocean. After 5,000 years of trials and tribulations, China is still here. Looking ahead, China will be here to stay.”

He added, “As globalisation deepens, the practices of law of the jungle and winner take all are a dead end.”

So who loses in a trade war? In the short term, everyone.

This is what happens if the trade war continues

Trade wars distort global trade flows by increasing the cost of raw materials. And higher production costs for consumer goods translates into higher prices, which is bad for consumers and for the economy as a whole.

Also, trade war disrupts supply chains. They push production to manufacturing locations that weren’t the first choice. So they screw up manufacturing schedules and expose buyers and sellers to a new set of risks. This introduces problems and challenges – and costs.

Trade war also hurts investor confidence. Companies that are uncertain about trade regulations, costs and flows are going to be slower to invest. (Or… they’ll look to invest in countries that aren’t caught in the crossfire… see below.)

The economies of the U.S. and China will suffer the most. But some economies could benefit from an ongoing trade war.

Two big winners in Asia of the trade war

With tariffs on both Chinese and U.S. suppliers, importers are now looking for alternative suppliers around the world. Many of these will be in Asia. And two countries stand out: Vietnam and Malaysia.

Vietnam and Malaysia are both low-cost manufacturing hubs with stable power supplies to support growth in industry. Both countries have good road, rail and port infrastructure and strong local logistics and shipping networks to support trade. Vietnam and Malaysia are also both signatories of a number of free trade agreements, including the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and the ASEAN Economic Community.

Both countries also have positive business environments. Malaysia, for example, has a clear and stable system for corporate law. And Vietnam has special economic zones that will make it attractive to companies considering investment there, thanks in part to a low corporate tax rate.

So which industries will each country benefit from the most?

How Vietnam will benefit

One big industry Vietnam will benefit in is information and communications technology (ICT) products. ICT products store, retrieve, manipulate, transmit or receive information in a digital form – like computers, phones, digital TVs and robots.

China is a big supplier of ICT products to the U.S. and elsewhere. In fact, ICT products make up the largest amount of U.S. imports from China. Electronics and related components made up US$150 billion of Chinese imports to the U.S. (of a total of US$526 billion) in 2017. That’s why the U.S. has focused on ICT products with its tariffs.

The U.S. is also trying to hit China where it hurts – by targeting its Made in China 2025 development agenda, which is focused on cultivating Chinese tech, particularly in robotics, artificial intelligence and pharmaceutical research.

So ICT makers will have to look for other places to manufacture products. And one of those places will be Vietnam. The country already makes ICT products like smartphones and cameras, along with the tiny components that go into these gadgets. And major electronics companies like Samsung and Intel already have a presence there. So it would be easy for them, and other companies with operations in China, to switch production from China to Vietnam.

Vietnam’s garment industry should also benefit.

You see, although China has been diversifying out of the low-end apparel industry, it still dominates the sector. Its textile and apparel exports were US$257 billion in 2017 – with US$39 billion going to the U.S. market.

With tariffs on Chinese garments, suppliers will be looking for other low-cost producers – like in Vietnam.

Vietnam is the world’s third-largest exporter of ready-made garments. It’s also now the world’s second-largest exporter of shoes. And it already has strong trade ties with the U.S. In 2017, Vietnam exported US$12.3 billion worth of garments to the U.S. – representing 50 percent of its total ready-made garment exports. Except this number to grow if the trade war continues.

How Malaysia will benefit

Malaysia will also benefit from the ICT industry. Like Vietnam, the country already makes ICT products like smartphones and cameras. And major electronics companies like Dell, Sony and Panasonic have plants in Malaysia. So it would be easy for them to switch production from China to Malaysia.

Malaysia’s automotive industry is also highly developed. It’s the only country in Southeast Asia to develop its own car brand (Proton) capable of competing with South Korean and Japanese autos.

Malaysia also has over 800 auto component manufacturers that stand to benefit from suppliers looking for cheaper finished vehicles and auto parts to import. So its auto industry will also be a beneficiary of the trade war.

That’s because China accounted for almost 20 percent of U.S. finished vehicle exports in 2017 (making it the second-biggest car export market for the U.S. after Canada). And the trade war has already cut that by half this year. Malaysia could very well fill in the gap left by U.S. car manufacturers.

Meanwhile, China’s auto parts exports – which account for 8 percent of the global supply – is also going to take a hit. That’s another gap that Malaysia’s auto industry can hope to fill.

In short, if Vietnam and Malaysia aren’t on your investment radar yet – they should be. If they profit from this trade war, expect their markets to head higher.

Good investing,

Kim Iskyan
Publisher, Stansberry Churchouse Research

P.S. one of the biggest mistakes you can make as an investor today is to ignore the potential of emerging markets.

Investing in emerging markets, when done right, can be highly profitable. In Strategic Wealth Confidential, we uncover opportunities in some of the most-disliked, unloved and ignored markets in the world… and with them, the chance for life-changing gains. Find out more here.

About Kim Iskyan

Kim Iskyan has nearly 25 years of experience as a stock analyst, hedge fund manager, political risk consultant, and financial commentator in more than half a dozen emerging and frontier markets.