Analysis Of Sino US Trade War Risk From The Perspective Of Industry

"We believe that the possibility of a full-scale trade war between China and the United States is not high. However, this year's referendum in Britain and the presidential election in the United States have issued a warning: the traditional mainstream view may mislead us. Therefore, we need to consider some cases that have not been considered before in risk analysis. "

In this report, we mainly elaborate on the following three points:

Nominal trade figures for 2015 show that China accounts for nearly 50% of the annual merchandise trade deficit in the United States. This figure is actually misleading. About 37% of China's exports to the US are imported components from other countries and regions. If we adjust the global supply chain appropriately from the perspective of trade value-added, we find that China's surplus to the United States actually accounts for only 16% of the annual trade deficit of the United States. This is slightly higher than Japan's 13% and Germany's 11% (Figure C1). The trade war against China will be a trade war against all participants in the global supply chain, including some US companies.

If the trade war breaks out, what industries will the us take as its goal? Assuming that the ultimate goal of the United States is to reduce the trade deficit, promote domestic economic growth and "bring jobs back to the United States", we find that the most likely industry in the Sino US trade war is (Figure C2):

Electronic products, including computers and telephones.

Electrical equipment;

Textiles, clothing and leather goods;

Furniture;

Cars.

In fact, such a list of industries shows that the trade war against China is not necessarily in line with the economic interests of the United States: high tariffs on furniture, textiles and clothing may only increase the US deficit in other developing countries; the scale of China's auto exports is limited; electrical and electronic products are usually manufactured by multinational companies using imported components.

Potential winners and losers, we assess the potential impact of Sino US trade war on other countries and regions by tracking global supply chains and US import data. Assuming that the US imports from China decreased by 10%, and this gap was filled by other countries and regions according to their existing market share, we found that the most potential beneficiaries included (chart C3): Mexico (overall export growth of 3%), Vietnam (1.7%), Canada (1.3%), Pakistan (1.1%) and Philippines (0.9%).

China may take retaliatory measures. If the United States initiates a targeted trade war on specific industries, China's retaliatory measures against the United States are likely to be selective. We think the most likely target industries include aircraft, seeds and fruits, pulp and other agricultural products.

The term "trade war" may be just a threat to bring China to the negotiating table. In the end, China and the United States may be able to reduce bilateral trade imbalances by other means, including China's increased imports from the United States, or China's expansion of bilateral trade in services with the United States by removing some restrictions (the US has maintained a surplus in trade with China). In this case, the biggest winners may be the aircraft manufacturing industry, high-tech companies and service sectors in the United States.

Some figures can help explain why the campaign slogans like "China's trade war" can cater to some American voters. In 2015, the US trade deficit with China amounted to US $366 billion. This is almost 50% of the total merchandise trade deficit in the United States (Fig. 1). Moreover, this is not just a short-term problem: the US has been at a trade deficit for at least the past 20 years. Since 1999, the annual trade deficit has been over 3% of GDP, while China's share in the US trade deficit has been rising (Figure 2).

However, is China really such a huge trade surplus with the US? China is a "world factory", engaged in a large number of processing trade: it imports intermediate inputs to assemble, then exports products to the final market. A typical example is the production of iPhone: China imports chips from Korea and Taiwan, imports screens from Japan and Korea, uses American designs, and assembles these "elements" into iPhone. From the perspective of trade value added, when iPhone shipped from China to the United States, it was actually Korea, Taiwan, Japan, China and the United States themselves exporting to the United States.

In fact, nearly 37% of China's exports to the US in 2015 came from imports from other countries and regions (Figure 3). We can redistribute the added value of imports to the country of origin and get a very different decomposition of the US trade deficit (Figure 4). Although China still has the biggest "responsibility" for the US trade deficit, its share is only 16.4%, far below the figure 49.6% in Figure 1, which is almost the sum of the top four trade partners (China, Japan, Germany and Korea) on the basis of added value. In Figure 1, Taiwan is not one of the countries and regions that have the largest trade surplus with the United States. However, in the new decomposition map, Taiwan ranked sixth, accounting for 6.6% of the US trade deficit in 2015. As indicated above, understanding the Sino US trade on the basis of added value is very important for assessing the impact of Sino US trade war, especially on China's supply chain partners, such as Korea, Japan and Taiwan.

This is the first question that people should answer when assessing the potential impact of Sino US trade war. Unfortunately, so far, most analysts have ignored this problem. Almost everyone thinks there is little chance of a comprehensive trade war with China, including the fact that the US president's trade policy power is actually limited by domestic and international laws. However, almost everyone's analysis is based on the assumption of a comprehensive trade war.

We believe that the United States has three goals: reducing trade deficits, promoting economic growth and, in Trump's own words, "bringing jobs back to the United States".

Let's assume that trade wars really help achieve these goals. From the perspective of Trump, we will consider how we can achieve these goals more effectively through targeted trade wars (that is, focusing on specific sectors or sectors). Figure 5 illustrates our analytical thinking, which will lay the foundation for the next discussion (the impact of trade wars).

Since it is a trade war, let's start with the trade deficit. Chart 5.1, according to the trade deficit scale, all manufacturing industries in the United States in 2015 were sorted. For example, the trade deficit of "computers and Electronics" and "automobiles, trailers and related components" was the largest in 2015, which were 216 billion US dollars and 209 billion US dollars respectively. On the other hand, "forestry and fisheries" and "paper products" also had deficits in 2015, but the scale was much smaller, which was 9 billion US dollars and 1 billion US dollars respectively.

Obviously, in order to effectively improve trade imbalance, the United States should focus on those industries with the biggest deficit. In Figure 5.1, the deficit in the "metal products" industry accounted for 91% of the total trade deficit in the United States. If the deficit of these industries is reduced by 10%, the effect will be equivalent to balancing all other industries' deficits.

Another factor to be considered is the negative impact of imports on domestic production. In figure 5., the blue cylinder represents the size of the domestic demand of the United States, where the dark blue part is satisfied by domestic production, while the light blue part is satisfied by imports, while the orange column represents exports. An interesting contrast is "chemicals" and "electrical equipment and parts". The deficits of these two sectors were similar in 2015 ($69 billion and $61 billion respectively). However, if we calculate the ratio of domestic production to domestic demand, the "chemical" is 92%, while the "electrical equipment and parts" is only 66%. This shows that although the trade deficit is similar in size, the "electrical equipment and parts" sector is more harmed than the "chemicals" - compared with "chemicals", the United States has "abandoned" the production of "electrical equipment and parts" in China to a greater extent.

To better illustrate this point, Figure 5.3 ranked the industry according to the ratio between domestic production and domestic demand in 2015. The lower the ratio, the more serious the damage to domestic production of a department is. The most extreme example here is "textiles, clothing and leather goods". The United States obviously relies heavily on its imports: its domestic output in 2015 can only meet 1/3 of its domestic demand. In another industry, the proportion of "computers and electronic products" is the second lowest in all industries. Even if domestic products are not exported, they can only meet 60% of domestic demand.

In addition to the situation in 2015, Figure 5.3 shows changes in the past twenty years in various industries. The blue dot in the picture is the ratio of domestic production demand in 1997, while the orange point represents the proportion in 2006. "Metal raw materials" and the industries on their right not only had higher domestic production demand ratios (more than 85%) in 2015, but their proportions were relatively stable for a long time in the past. This shows that the production of these industries has not been seriously affected by imports in 2015, and their situation has not deteriorated over time. In other words, they will probably not be the most concerned industry in Trump's trade war.

In 2015, the industries with low demand for domestic production could be divided into three groups: (1) deteriorating as time went on, including "computers and electronic products", "electrical equipment and parts" and "furniture". For example, in 1997, the "computer and electronic products" produced by the United States could meet 92% of its domestic demand, down to 72% in 2006 and only 61% in 2015. (2) the "harm" of imports to domestic production mostly occurred before 2006, including "textiles, clothing and leather products" and "cars, trailers and parts". (3) the last group is "oil and gas exploitation" and "other manufactured goods". Although its domestic production demand ratio was lower in 2015, it was quite stable or even improved compared with the early stage.

Taking into account the above factors, including (a) the size of the trade deficit; (b) the impact of domestic production on imports (the ratio between domestic production and domestic demand); and (c) how the situation of imports affected by domestic production changes over time, we can draw a very narrow scope, that is, if the trade war really happens, the industry that the United States will most likely be concerned about:

Computer and electronic products;

• cars, trailers and related components;

Textiles, clothing and leather products;

Electrical equipment and parts;

Furniture.

After a better understanding of how the United States will launch a trade war, we turn now to consider how it will affect China and other countries and regions.

Figure 6 lists the top 20 export industries from China to the United States. The left picture shows the export volume of each industry. The light blue part represents China's domestic added value. The dark blue part represents the value added of imports from processing trade in China's exports. The middle section shows the share of China's exports in the US's total imports, while the right picture shows that exports to the United States account for the total export share of the sector.

The red box in Figure 6 highlights the industry that the United States may give priority to in the trade war. In other words, China's export sector is most likely to be affected by the rise of protectionism in the United States.

We also emphasized the "car" department in the chart, but with green borders. This is because although it may also be a sector that the US will try to protect, China's exports actually account for less than 5% of US imports. Therefore, if the United States lists "cars" in the trade war with China, it seems to be the wrong target.

According to the share of the added value of imports in exports, the red industry in Figure 6 can be divided into two groups. The difference between them is very important for understanding the possible impact of other countries and regions in the Sino US trade war.

• a very important sector in processing trade, with a high share of import value added to its exports.

- computer;

- telephone, including mobile phone;

- electronic products and electrical equipment.

• a small proportion of the value added of imports in exports.

- clothing, footwear and leather products;

- furniture;

- toys.

For the first category of industries, if the Sino US trade war breaks out, China's supply chain partners, especially South Korea, Taiwan, Japan and Malaysia, will also be hit. Figure 7-9 shows the value added of China's exports in terms of its country of origin and region. In all these industries, Taiwan and Korea always occupy the top two. In the telephone and computer industries, Malaysia is in the third place while Japan is third in electronic products and electrical equipment.

In theory, if the US trade war measures are aimed at products directly from China to the United States, these countries or regions can transfer assembly lines to other places, such as Vietnam or even themselves. However, due to the high technology and capital intensive characteristics of these products, the transfer of production lines often takes time to complete.

In the second industry, other trading partners in the United States will be totally different. If the United States only targets products directly from China to the United States, some countries and regions will benefit from China's losses. In order to find out who is the potential winner, we decompose the products imported from other countries and regions in China in Figure 10-12. For example, figure 10 shows that Vietnam is currently the second largest importer of textiles, clothing and leather products in the United States, followed by India and Indonesia. If the United States attacks China on such products, they will probably benefit most. In terms of furniture, the biggest winners seem to be Mexico, Vietnam and Canada, while Mexico, Taiwan and Canada will probably benefit most from the toy industry.

The overall impact of Sino US trade war on other countries and regions is also a topic of concern to many people, especially considering the positive and negative effects of different industries. To analyze this, we carried out a simple "experiment": (1) assuming that China's exports to the United States dropped by 10% because of the trade war; (2) the import of this part of the United States was filled by exports from other countries and regions and cut according to the current market share; (3) for South Korea, Taiwan, Japan and Malaysia, we will also consider their negative impact due to the link with China's supply chain (but not considering the second round effect); (4) keep everything else unchanged. Under these assumptions, the overall export of a country or region is calculated. The results discussed above are shown in figures 13 and 14.

No surprise, Canada is the biggest winner in the developed economies. As China's exports decline, its total exports will grow by nearly 1.3%. Followed by Israel (0.5%), while Japan ranked third (0.4%). Considering the close ties between Japan and China in the global supply chain, Japan's ranking is somewhat surprising. As shown, if we do not consider the supply chain relationship between Japan and China, the revenue may be even greater (0.6%). Without considering the processing trade with China, Korea and Taiwan also benefited a lot (export growth was 0.4% and 0.7% respectively), and after considering the effect of supply chain, their potential revenue decreased significantly, about 0.1%.

In emerging market economies, Mexico and Vietnam may be the two biggest winners. It can be seen that Mexico's overall exports may increase by nearly 3%, while Vietnam has an additional 1.7% growth in exports. Other potential beneficiaries included Pakistan (1.1%), Philippines (0.9%) and Indonesia (0.6%). The potential return of Malaysia is about 0.2%, but if it does not consider the link of supply chain, it may be as high as 0.6%.

If the US provokes a trade war against China and China chooses to fight back, China's counterattack will not necessarily be entirely confined to trade. But we are here to discuss only the possible measures China may take in the field of trade.

If the United States launched a trade war against individual industries, we believe that China will not escalate it into a comprehensive trade war against the United States in the process of counterattack. This means that it is very likely that China's counterattack is also a few "pain points" selectively targeting the United States.

Figure 15 lists the top 20 industries that China imports most from the US. In these industries, we have set 7 potential counterattack targets through the following criteria: (1) having a significant impact on the US market or sector; (2) China is not the key import; or (3) it is a key import for China, but it is relatively easy to find alternatives. These industries are:

Aircraft;

Seeds and fruits;

Pulp;

Animal feed;

Wood products;

Leather;

Cotton.

Another possible situation

So far, our analysis is based on the fact that the US will indeed provoke a trade war against China. But in fact, our previous discussions illustrate that the US trade war against China is actually unrealistic.

In the previously identified key industries, assuming that the United States crackdown on China's "computers and electronic products" and "electrical equipment and components", it will also hurt China's supply chain partners, including Japan, South Korea and Taiwan, which are allies of the United States in many other areas. In the clothing and furniture industries, if the US impose high tariffs on imports from China, other economies such as Mexico, Vietnam and India can easily fill the gap. Finally, for the automotive industry, China has fundamentally chosen the wrong direction: China's exports account for less than 5% of the total imports of motor vehicles in the United States.

What is the more likely situation we will see besides trade wars? We think that the wording of trade war may be just a threat, and the real intention of the United States is to bring China back to the negotiating table. The two countries can reduce bilateral trade imbalances by other means, including China's import of more goods from the United States, or China's expansion of trade in services with the United States by removing some of the current restrictions. In this case, the biggest winners may be the aircraft manufacturing industry, high-tech companies and service sectors in the United States.

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