The U.S.-China trade war has already impacted China’s economic growth.
With 25 percent tariffs on US$50 billion worth of Chinese exports (and 10 percent on another US$200 billion) bound for the U.S. since July 10, 2018, China’s manufacturing activity has been contracting.
Its manufacturing purchasing managers index (PMI) – a key gauge of manufacturing activity – slid to 49.4 in May from 50.1 in April. (A reading below 50 signals contraction.)
The trade war intensified in May, as the U.S. accused China of reneging on trade commitments made during previous negotiations. So as of June 1, 2019, tariffs went up on those US$200 billion of Chinese exports from 10 percent to 25 percent.
US$250 billion of Chinese exports are now subject to 25 percent tariffs as they come in to the U.S.
The U.S. has also banned China’s major technology companies, such as Huawei and Hikvision, from selling to the U.S. market and even accessing U.S. technology vital to make their products.
Huawei, China’s largest smartphone and mobile communication equipment manufacturer, is no longer able to use Google’s (Exchange: New York; ticker: GOOGL) Android smartphone operating system – which is used on 75 percent of all smartphones sold around the world.
Surveillance camera manufacturer Hikvision is now completely shut out from the U.S. market.
Memory chip manufacturer Fujian Jinhua Integrated Circuit is also prevented from purchasing crucial U.S. and Japanese-made semiconductor equipment for its products.
So in the short term, the trade war has definitely impacted Chinese businesses. But I think China will be just fine in the long term…
China is innovating
Many Chinese companies are developing ingenious solutions to overcome the trade war.
For instance, companies are relocating their operations to other parts of the world unaffected by tariffs – like Vietnam and Cambodia. These countries have lower labour costs and the companies can eventually repatriate their profits back to China.
Other companies are reportedly shipping their goods through neighbouring countries like Vietnam – making them appear to have been made or assembled there – to skirt tariffs.
Meanwhile, Chinese tech companies are pouring large sums of money into developing their own proprietary systems and products.
Huawei has already advanced the development of its smartphone mobile operating system that will rival Google’s Android and Apple’s (Exchange: New York; ticker: AAPL) operating systems.
Called HongMeng, Huawei’s operating system is said to be compatible with all Android applications, making it more attractive to consumers who have grown accustomed to Android applications.
This new operating system has enormous potential.
Nearly 1 billion smartphones were manufactured in China last year, equivalent to 70 percent of the world total. And many of the world’s largest smartphone manufacturers are Chinese.
If Beijing mandated that all Chinese-branded smartphones use Huawei’s new operating system, Android could lose more than half of its market share almost overnight… while HongMeng becomes the world’s most popular OS by default.
China is creating new markets
In 2013, Chinese President Xi Jinping launched a grand infrastructure programme called the Belt and Road Initiative (BRI) (previously called the One Belt One Road Initiative).
It’s a US$4 trillion program to integrate – through the largest buildout of infrastructure ever seen – the markets of more than 65 countries spanning three continents.
If it goes according to plan, by 2030 nearly all the economies in Asia, Europe and Africa will be connected to China via an intricate network of high-speed railways, superhighways, seaports and airports.
For example, a high-speed freight railway linking Finland to Xi’an, China, will bring Chinese electronics from China to Poland. A 12,000-kilometer freight train service will link the southern coastal Chinese city of Yiwu to London.
The world’s largest dry port – a port that handles cargo transported over land (usually by trains) – was opened in 2017 in Khorgos, Kazakhstan, just on the border with China. It already facilitates the transport of nearly 100,000 TEUs (twenty-foot equivalent containers) of goods between China and Europe per year.
The trade war will only speed up the development of the dozens of BRI projects designed to improve the land, sea and air access of China to a region comprising 60 percent of the world population and 40 percent of global GDP.
China isn’t slowing down
China today is much different than the China before the dot-com era. Today, China is an economic juggernaut that comprises the world’s largest consumer market by population and the second largest by value.
It’s also an innovation powerhouse. The number of Chinese STEM (science, technology, engineering and mathematics) graduates dwarfs the number of U.S. graduates by a ratio of four-to-one.
China also has the second largest number of global patent filings, next only to the U.S. In 5G (5th generation of mobile communications) technology, China has the most patent applications (one-third of the total) and will launch commercial 5G services by the end of 2019.
So while the U.S.-China trade war may cause some headaches for Chinese companies (and Beijing) in the short term, it will only accelerate their creative avoidance of tariffs and development of new technology.
In short, China will be just fine – despite this trade war.
Editor, Stansberry Pacific Research