China can redirect goods inactive subject to fresh advanced US duties through Asian economies and ports or (or alternatively parallel) redirect sales to the US to another markets. The second script is more likely to prevail, as it was during president Trump's first trade war, which will now mean, among another things, a 6% yearly increase in imports from China to the EU (but besides to another countries) over the next 3 years. The manufacture that does not benefit from any exemptions in the customs war – clothing and textiles can feel it most on its margins.
In short:
•Exemption of US administration (from increased rates) of products specified as laptops, tablets and smartphones will bring any relief to Asian exporters, but the work rate on China remains at a staggering 103% (-27 percent points).
•To mitigate the effects, Chinese companies may consider changing the way by neighbouring countries or turning to another export markets. Although Allianz Trade claims that it is theoretically possible to redirect up to 64% of Chinese exports usually directed to the US, this would consequence in a burden on another Asian ports, global supply chains and shipping.
•In the next 3 years, diversification of trade can increase imports from China by up to +6% per year in the EU, the UK, Vietnam, Taiwan, Malaysia, Indonesia, Mexico, Singapore, Saudi Arabia and Nigeria.
•In the end, however, American companies in the electronics, household appliances and textiles sectors cannot do without Chinese production, given their critical dependence. While geopolitical turmoil can bypass companies in the electronic sector, Allianz Trade believes that those in the textile manufacture may not be so fortunate and will likely be exposed to impact on their margins.
Decryption of the trade war: additional exemptions reduce US global import rate by -4.2 percent points to 21.4% and US customs rate for Chinese products by -27 percent points to 103%. On April 11, the White home published an extension of the list of goods that are exempt from customs increases on Liberation Day, with products specified as laptops, tablets and smartphones. As a result, the exemption now applies to 32% of imports from the US, alternatively of 24% previously, making the global US weighted average import tariff 21.4% alternatively of 25.5% previously.
In particular, Asian exporters benefited from the change in Allianz Trade's opinion: 70% of American imports from Taiwan are now exempt from the latest tariff increases (compared to 18% initially), 45% for Thailand (compared to 18% initially), 39% for Vietnam (compared to 12% initially), 58% for Malaysia (compared to 33% initially), 48% for the Philippines (compared to 23% initially) and 44% for China (compared to 23% initially). Nevertheless, we estimation that the effective US import rate from China is inactive 103%, reduced by -27 percent points thanks to additional exemptions, but inactive importantly higher than before 2 April. In our baseline scenario, an agreement between the US and China may be reached later this year, but yet the US import work rate on China will be +60 percent points higher than before Donald Trump's second presidency.
China – coping opportunities: 2 main scenarios
To mitigate this impact, Chinese companies could redirect to 64% of exports by another Asian countries with lower US customs rates. However, this would lead to an overload of ports and would likely increase vulnerability to global supply and shipping chains. Redirection of trade means that Chinese companies will trust more on neighbouring countries for the transformation, assembly or transport of goods which are partially or even mostly produced in China. In this way, these products can be re-exported to the USA within the framework of origin from another country at a lower rate of duty. Redirection of Chinese exports is feasible at tactical level, especially in the case of goods with advanced margins and tiny volumes (e.g. any household appliances and electronics, robotics etc.). However, as a large-scale strategy, including a abrupt change of routes, it faces logistical and geopolitical constraints, including limited seaport capacity and expanding control by US regulators. From a logistical point of view, the capacity of Chinese regional neighbours is simply a major challenge. In the 10 largest Asian exporting countries excluding China, weekly port calls have grown steadily since the end of the pandemic, reaching around 47 200 in the second week of April, with only 3% below the highest of 48 600 in mid-2022. This suggests the remaining capacity of around 1,400 weekly port calls, which could theoretically be utilized to redirect Chinese exports. This available bandwidth covers about 64% of the volume that China usually sends to the US, while 54% of the value of Chinese exports to the US faces tariff increases. Theoretically, ports in the remainder of Asia in the opinion of Allianz Trade could absorb redirections from China. However, this would increase their capacity and would possibly burden global supply and shipping chains. Moreover, if regions like Europe besides turn distant from US markets and encourage trade ties with Asia-Pacific countries, this will increase the force on already crowded regional ports.
Another strategy may be to transfer trade to another export markets. The EU, the United Kingdom, Vietnam, Taiwan, Malaysia, Indonesia, Mexico, Singapore, Saudi Arabia and Nigeria are likely to absorb Chinese exports, which are no longer directed to the US. Assuming this trade deviation can take 3 years, imports from China in these countries can increase by up to +6% per year. Emerging markets undergoing fast industrialisation and urbanisation can make request for Chinese machinery, infrastructure materials and consumer goods. In addition, China's production power, competitive prices and supply chain resilience make it the preferred partner for commercial, infrastructure and technology projects. A good example is the experience of the U.S.-China trade war under Trump's first administration. In the 3 years between 2017 and 2019, the share of Chinese exports to the US decreased by -2.2 percent points to 16.8%. This is simply a clear negative break in the long-term trend that preceded the first trade war, erstwhile the share of Chinese exports to the US changed by just -1.4 percent points in 18 years from 2000 to 2017. Conversely, a affirmative change could be observed for the EU28, Vietnam, Taiwan, Malaysia, Indonesia, Mexico, Singapore, Saudi Arabia and Nigeria. The share of Chinese exports to these destinations importantly increased faster between 2017 and 2019 (+3.3 percent points to 34%) than between 2000 and 2017 (+ 4.3 percent points to 29.7%). Assuming that losses in Chinese exports to the US due to the trade war could be up to USD 234 billion and that this amount would be directed to the abovementioned markets within 3 years, their imports from China would increase by up to +6% annually.
The planet (including USA) cannot do without Chinese production
Although China's function as a “world factory” has evolved by giving way to another Asian countries, the concentration of production facilities in China continues to form the basis for their central function in global trade and supply chains. erstwhile analysing the percent of production facilities located in China by sectors worldwide, it is clear that electronics (35%), household appliances (32%) and textiles (31%) have the deepest roots in the country's industrial landscape. Indeed, these 3 industries stay mostly dependent on China in terms of production, and a large part of their global supply chains are rooted in Chinese production centres. This means that they are sectors whose goods will become more costly in the US in the context of fresh higher duties, as the parallel percent of production facilities located in the US is only 6%, 3% and 9% respectively. At the same time, if US consumers are not willing to pay higher prices and China is incapable to supply alternate trading partners to offset lost request in the US, the country may face overproduction of electronics, household appliances and textiles in the coming quarters until it adjusts production levels.
When analysing the supply chains of US companies, no sector in the US has (on average) more than 12% of its production facilities located in China. This means that the hazard of production shortages in the USA is comparatively limited at an average level for the full economy, but individual sectors or companies may be more at risk. Electronics and textiles are one more time the most delicate sectors, and US companies have 10% and 11% of their plants located in China respectively, meaning that 1 tenth of both finished products and components for local production come from China. Thus, in the context of the current bilateral trade war, American companies in these sectors may face more costly or distorted access to key natural materials. In individual cases, any large American companies – specified as Apple and Intel – are dependent on production, but besides on the outlets in China is not a public secret. This allows a better knowing of president Trump's administration's decision to exempt phones, computers and chips from customs on Liberation Day. Apple has almost 11% of its plants in China (29% in the USA), and its main supplier is Hon Hai (33% COGS Apple). In the case of Intel, although only 6% of its suppliers are based in China, this country accounts for almost 30% of its full revenues! From a strategical point of view, both Apple and Intel should be protected due to the fact that they are crucial for American technological leadership, innovation and defence, as well as crucial for creating fresh jobs. Textiles and clothing so stay the only sector with advanced vulnerability to Chinese production which has not yet been protected from the effects of the trade war. Companies in this sector will have difficulty acquiring local suppliers at competitive prices, which means that US producers will gotta rapidly find alternate suppliers or face a simplification in margins.
