May 31, 2019

News in Charts: Trade tensions hurt U.S. firms that do business in China

by Fathom Consulting.

Fathom’s proprietary China Exposure Index (CEI), which measures the performance of US-listed firms that do business in China, relative to that of their peers, has fallen sharply amid escalating trade tensions between the US and China.

Hopes of a breakthrough in the long-running trade dispute had pushed the index to an eight-month high on 17 April before talks stalled and a new round of tit-for-tat measures was imposed. Firms in the CEI derive between 15% and 85% of their revenues from China, which are now worth less in US dollars given the recent weakening of the renminbi.

The earnings of these firms are also vulnerable to sanctions, tariffs and a general slowdown in Chinese economic activity — on balance, they have now underperformed their US-listed peers since Donald Trump won the election in 2016.

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While the trade spat will have costs for both economies, the Chinese economy appears to be more vulnerable to a downturn from such a development. As the chart below indicates, China exports to the US account for almost 4% of its GDP, while US exports to China account for around 1% of US GDP. We had previously likened the trade negotiations to a high-stakes game of chicken, which we expected the US to win. However, thus far, China has shown little sign of backing down and a resolution to the dispute now appears some way off.

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A further escalation in tensions/disagreements would be likely to mean that those firms in the CEI continue to underperform their US-listed peers, while hopes of a breakthrough would probably push the CEI higher, as has happened in the past.

Fathom Consulting has undertaken a large project looking at US/Sino economic and geopolitical relations. As part of this work, we identified US imports of the goods that have been subjected to tariffs (in nominal terms, excluding the tariffs and freight costs) — from China and other countries.

The first chart shows the change in US imports of the goods that were subject to a 10% tariff (soon to be 25%). It shows that once the tariffs were announced, the US started stockpiling by increasing their imports of those goods from China, and it took a little bit of time once the tariffs had been implemented for imports from China to drop. There was, however, a much quicker pace of adjustment for those goods that were subject to the 25% tariff as the second chart shows. With the 10% tariff now increased to 25% on US$ 200 billion worth of goods, China’s economy is likely to feel the pain in the coming months. For more information about Fathom’s consultancy services please contact enquiries@fathom-consulting.com

In HOUSE

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In HOUSE

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The charts in this article have been created using Chartbook on Datastream. The Chartbook was initially created by Fathom Consulting in 2012 and is now a catalogue of approximately 9000 charts, covering over 170 countries, analysing up-to-date macro and financial data. Whether it is a particular topic, country or variable you are interested in charting, the Chartbook has everything you need. The Composite FVI, comprised of readings from all four underlying FVIs, is available for 176 countries in the Fathom Proprietary Indices section of Chartbook. To access Chartbook via Datastream search ‘cbook’.

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