Trade war damage
As reported by Bloomberg, Citigroup economists think that the damage to the Chinese economy is already done. The damage can’t be reversed even if there’s a resolution. In the 2019 economic outlook report, Citigroup economists, led by Liu Li-Gang, gave several reasons for the argument. The tariff war led to increased labor costs in China (FXI). The job market is under pressure. The economists estimate that the ongoing trade war could cut China’s export growth by almost half in 2019, which would put ~4.4 million jobs at risk. Citigroup’s baseline scenario is that the 15% additional tariff will be levied on Chinese exports after March 1.
In Winners and Losers as China’s Steel Exports Cool Off, we discussed that China’s steel exports declined ~9% in the first 11 months of 2018 to 63.8 million tons.
Shifting supply chains
Citigroup economists also stated that China is losing its cost competitiveness, especially in labor-intensive sectors. China’s cost competitiveness has been the major reason why many global companies, especially US technology (XLK) and semiconductor (SMH) companies, have been outsourcing their assembly and manufacturing operations to China. The companies might not be able to feasibly shift their supply chains quickly. However, if the tariffs last longer than expected, the companies will have to weigh their options.
Despite these concerns, Citigroup economists think that the trade war could help accelerate the growth and open up the economy in the long run.
The trade war’s impact on China can also be seen in its equity markets. The equity markets have fallen ~20% from the highs in 2018. China’s “BAT stocks”—Baidu (BIDU), Alibaba (BABA), and Tencent Holdings (TCEHY)—have fallen 27%, 20.7%, and 30%, respectively, year-to-date based on the closing prices on December 10.
The trade war isn’t just taking a toll on Chinese companies and the economy. Many US companies (SPY) (VTI), including Amazon (AMZN), Walmart (WMT), and Alphabet (GOOG), have also been opposing the tariffs due to the negative impact on their financials and outlook.
To learn more about how the trade war impacts China and how it’s trying to recoup some of the losses, read Why China Needs More Than a Trade War Truce to Buck the Slowdown.