In Trump’s Multifront Trade War, Mexico’s Okay, China’s Definitely Not

The multifront trade war being waged by the Trump administration does have winners and losers, at least in the relationship game. Mexico is winning. China is losing.

Mexico agreed to help the U.S. fight a relentless flow of migrants across the border, killing tariffs for now. China’s Xi Jinping may or may not meet with President Trump at the G20 in Osaka, Japan, in two weeks, causing Trump to tweet that if he gets the cold shoulder, tariffs are going up on $300 million worth of goods.

In the trade war, Mexico is looking more like the partner it’s always been. China, on the other hand, is still on the skids.

One can only imagine what tariffs against Mexico-based companies would have meant for the U.S. For starters, higher prices for those goods here at home. Over time, would those price increases have caused U.S. importers to look elsewhere for the same item or would Mexican firms lower their prices to compensate? What would be the outcome for U.S. companies facing tighter profit margins? Does it translate to cutting costs elsewhere and laying people off or no longer hiring?

But when it comes to China, a yearlong trade war has produced some numbers to see where China’s taking its lumps.

Companies are indeed looking to source material elsewhere. Chinese companies, already considering a move to cheaper parts of southeast Asia, are relocating ahead of schedule. This is not a mass movement, but it’s a movement nonetheless.

As far as economic data goes, China’s PMI looks no different from PMI data out of China two years ago. Sometimes it’s 48.9. Sometimes it’s 50.5. Anything over 50 is seen as a positive. Below 50, however, is not the signal of a hard landing the China bears have been waiting for since at least 2010.

China’s Latest Trade Figures

China’s export growth rose to a stronger-than-expected 1.1% year over year in May from -2.7% in April. That’s in dollars, so the numbers are even better in Chinese yuan.

Meanwhile, import growth slumped to a weaker-than-expected -8.5% from 4.0% growth in April, also in dollars. Measured in yuan, imports were also negative in May.

Still, China’s position as the world's go-to manufacturer means its trade surplus is high and rising. It hit $41.7 billion in May versus $13.8 billion in April. The monthly average in 2018 was $29.2 billion.

Exports are seen remaining strong due to front-loading of U.S.-bound exports by companies not yet exposed to tariffs. Nomura’s senior China economist, Ting Lu, said export data should deteriorate in the third quarter. He suspects tariffs on $300 billion more Chinese imports to be implemented at some point this autumn.

As a result, China will step up its support of the local stock market and maybe provide more tax incentives for economic sectors with a lot of manual labor to keep people employed.

Based on Nomura's analysis, export growth in dollar terms declined to 0.2% in the first four months of the year from a 9.9% gain in the first four months of 2018. They estimate that the slowdown of export growth should have had around a 1.3 percentage point negative impact on China’s real GDP in the first four months of this year.

China’s GDP forecast for the year is growth of somewhere between 6% and 6.5%.

Moreover, since some of China’s imports are of components for assembly and re-export back to the U.S., weak import growth could be an indicator of softer export growth to come.

China's telecommunications systems giant, Huawei, is the world’s lowest-cost producer of high-quality 5G telecom systems. Huawei has also totally dethroned Apple in China and is poised to do the same throughout Asia.

On the telecommunications systems side, Huawei is the 5G provider of choice for nearly every frontier and emerging market nation. Brazil recently said it was not going to let Trump talk them out of having Huawei build out their 5G system. Who can compete with Huawei on price?

China's also been targeting new export markets, expanding throughout its backyard in southeast Asia and into countries off-radar in Central Asia along their Belt & Road Initiative.

Growth of Chinese exports to the EU are still up 6.1% year over year in May after rising 6.5% annualized in April. Despite slower growth in Europe, their mature economy is still buying Chinese parts and products. China is the indispensable provider.

Only the U.S. is showing signs of retreat.

Combined January to May export data shows exports to the U.S. fell 8.7%. China’s exports to growth markets throughout southeast Asia rose 6.8%.

Portfolio managers are not giving up on China despite all the headaches caused by trade uncertainty.

“When China’s stock market falls, it’s time to go in there and look for good companies and pick some up based on valuation,” says Kim Catechis, a fund manager and head of global emerging markets for Martin Currie, a U.K. wealth manager.

Chinese equities were up on Tuesday morning in New York. Maybe investors are hopeful that China will one day follow in Mexico’s footsteps.