Our key take-aways on US-China trade war

The US-China trade war has been worrying the market for the past half year. Over the period, Natixis research team has generated a series of reports analyzing the essence and consequences of the trade war.

Here are some key take-aways of our research.

First and foremost, the trade war is not a “trade” war but the US trying to contain China’s economic development.

The first batch of US tariffs (already implemented) aims at limiting China’s high-end exports with a view to contain China’s technological advance.

-      China’s retaliation to the first batch focuses on low-end non-intermediate products (such as agro), rightly so as China should not impose tariffs on what it needs to move up the ladder (such as aircraft and semiconductors).

-      The second batch of US tariffs focus on low-end intermediate exports from China with the intention to reduce China’s role in the global value chain and push reshoring to the US and to other production locations.

-      The second round of China’s retaliation has followed a very similar pattern to the first retaliatory package although with a somewhat bigger share of high-end products as the space for China to impose tariffs is much more limited.

As regards the economic impact of the above trade measures, any reasonable estimate based on reasonable price elasticities would point to a relatively small impact, which makes it hard to justify such negative market reaction. However, the ongoing trade war has massively increased uncertainty, which is pushing businesses to delay their investment decisions. This seems to be the most obvious channel for such negative market reaction.

Lastly, other types of economic “wars” are taking place beyond trade although in a less apparent way.

A key one is investment with the US blocking an increasing amount of China’s M&A into US, especially on the high-end industrial sector.

Before embarking on the trade war, the US also lowered corporate tax with relevant cross-border consequences. This is especially a key for countries such as China which has been relying on large FDI from the US and could see their profits repatriated to the US. However, China’s reaction (offering to exempt corporate tax on foreign companies) shows how it is hard for the US to use corporate tax in its advantage.

Full reports available for Natixis Clients