Trade wars have unintended consequences… like higher prices, a drop in global trade and less efficient domestic companies when they don’t have to work as hard without competition.
The Smoot-Hawley Tariff imposed by the U.S. in 1930 slapped 20 percent tariffs on 20,000 kinds of imported products (mostly from Europe). It set off a wave of trade protectionism. Global trade fell by about two-thirds in four years.
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More recently, in 2009-2012 the U.S. imposed 35 percent tariffs on imported rubber tires from China. Average tire prices for consumers in the U.S. rose by 25 percent to US$39. In retaliation, China raised import restrictions on U.S. chicken, costing the industry around US$1 billion in sales.
So industry and investors should be concerned about what’s next in the current tit-for-tat trade battle between the U.S. and China.
And now, U.S. President Donald Trump is continuing to make good on his threats to punish China for what he says are unfair trade practices.
This week, the U.S. will begin imposing 25 percent tariffs on as much as US$50 billion worth of Chinese exports. China’s answer will be a similar 25 percent tariff on US$50 billion worth of U.S. exports.
This is just the latest salvo. There’s another US$200 billion worth of Chinese imports to the U.S. that Trump is threatening to impose 10 percent tariffs on should China act in a retaliatory fashion.
And China has been insulating its economy so that it can continue to grow even in a more hostile global trade environment.
The New Silk Route is a magnet for investment
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 in history – the markets of more than 65 countries spanning three continents.
If it goes according to plan, by 2030 nearly all of the economies in Asia, Europe and Africa will be connected to China via an intricate network of high-speed railways, superhighways, seaports and airports. (See what we’ve written about this here, here and here.)
There’s been a surge in investments along BRI countries, including China, particularly in transportation since the programme was launched. Total investment in transportation, for example, jumped from an average of just US$30 billion a year prior to the launch, to US$80 billion in 2013. It’s doubled to US$150 billion a year, on average, since then.
For example, these projects include the high-speed freight railway linking Finland to Xi’an, China, a snaking 9,800-kilometer fast freight railway to bring Chinese electronics from China to Poland and a 12,000-kilometer freigth train service linking the southern coastal Chinese city of Yiwu to London. It will pass through Xian City, the Tibetal Plateau, Kazakhstan, Russia, Belarus, Poland and Germany, and end at London’s Eurohub rail freight depot.
The world’s largest dry port – a port that handles cargo transported over land (usually by trains) – was opened last year in Khorgos in 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. Meanwhile, a new US$7.3 billion pipeline from Turkmenistan is being constructed and will bring China an extra 15 billion cubic meters of gas annually.
Meanwhile, investment in property and real estate development, a key measure of growing prosperity, grew from an average of US$24 billion a year… to US$38 billion a year from 2013 to 2016. That’s a 58 percent jump in investment.
China is investing in other countries… which is creating opportunities for other countries to invest in China. Foreign direct investment (FDI) into China has grown from US$117 billion in 2013, to US$144 billion last year. That 5.3 percent annual growth is faster than the 3.7 percent growth per year from 2008 and 2013.
FDI impact on China is huge
Rising FDI means that capital is flowing into the Chinese economy – prompting industry to grow, new companies to be launched and knowledge and technology to be shared in the process. Last year, 35,650 foreign entities set up in China – a 28 percent year-on-year increase.
When foreign investors set up a company in China, they pour money into the economy through the purchase of fixed assets, like buying an office or machinery, or building a factory. That spending figures into the country’s GDP.
Indeed, a 2016 study showed that the impact of money put to work by these foreign-invested enterprises – essentially foreign companies setting up shop in China, whether wholly-owned or through a joint-venture or partnership – on China’s overall economy is enormous.
The study found that, when taking into account the impact of FDI on the supply chain and worker spending, foreign investment into China is responsible for about one-third of GDP, and more than 25 percent of total employment.
So accelerating FDI growth is a positive indicator of China’s economic health.
In May alone, as trade war rhetoric flared up, FDI into China grew 7.6 percent to US$9.1 billion, with investments along the BRI system increasing 39 percent, according to China’s Ministry of Commerce.
Beijing understands the benefits of FDI to the country’s economy. That’s likely why the government is set to lift some restrictions on foreign direct investment in energy, resources, infrastructure, transportation, commercial and professional services within special economic zones along the BRI. So FDI into China will continue to grow.
That should continue to provide much-needed support for the Chinese economy in light of the trade war now intensifying.
Editor, Stansberry Churchouse Research
P.S. Another way – perhaps the most important way – China is preparing itself for the trade war storm is by investing heavily in a new technology that industry titans are now calling the “holy grail” of investments. Billionaire investor Mark Cuban clearly sees the enormous potential… he recently wrote a letter to President Trump urging him to invest US$100 billion into this technology, because he thinks it will spawn the next generation of billionaires, and create the world’s first trillionaires. More importantly, this new technology is opening up once-in-a-decade investment opportunities similar to those we’ve seen with the arrival of the Internet, social media and e-commerce. Go here to read more.