US-China Trade War Winners, Talking Points:
- Trade conflict shows no sign of ending and may well be deepening
- However, it has already thrown up some surprise winners as businesses negotiate tariff barriers
- Spotting future beneficiaries could be well worth investors’ time
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An escalating US-China trade war stands tall in a crowded field as the pre-eminent global economic risk. However, it’s not bad news for everyone as foreign exchange traders might do well to remember.
Admittedly good news is hard to spot. The two global titans are drifting into mid-year trading accusations of bad faith. Each promises swift retaliation to any further trade barriers erected by the other. From its Washington eerie the International Monetary Fund offers stark warnings that trade war jeopardizes global growth. It’s hard to remember now that some in the markets had hoped for a deal by the end of May!
Trade conflict is palpable in the hard data too, with China’s heavy manufacturing sector already back in contraction after a very modest recovery.
Tariffs Force Substitution
That good news is there though, especially if you are Vietnam. According to a report from Nomura the Southeast Asian nation has gained hugely from substitution effects, with importers buying from it rather than China to get around tariffs. The US has apparently started importing far more electronics from Vietnam, rather than China but, in a nice little two-way win for Hanoi, China is reportedly also taking more timber boards, cotton and appliances from it, rather than the US.
Admittedly the Vietnamese Dong doesn’t loom large in any chart of foreign exchange traders’ favorite currencies, but its home nation won’t be alone in this sweet spot even if it currently stands out.
Chile, Malaysia, South Korea, Argentina and Taiwan are also benefiting. Now we are getting closer to some more interesting and tradable currency options. The longer trade war goes on, the more countries are likely to join this list as it just makes more and more sense to abandon supply chains based on tariff-hit goods and buy elsewhere.
The very efficiency of the supply chains set up largely to facilitate US/China trade makes switching far easier than it would have been even a few years ago.
Trade with both? Trade with Neither?
However, this sort of switching may well not be the only potential benefit for third countries. Very many nations have strong links with both China and the US. The two are after all very hard to avoid, accounting for more than 40% of the world economy between them. The likes of Australia and New Zealand as well as countries in Southeast Asia come to mind here, but they are far from alone.
If the trade war intensifies China and the US will increasingly start to, as it were, enforce loyalty- each perhaps discriminating against those who favor the other. Ironically it may then make sense for third countries to defend their current position with both by trading with neither where possible. Nations with broad export offerings such as Japan and Germany could stand to win more orders that it’s become just too risky to place with the US or China.
Of course, the trade war could end at any time, and if it does the entire global economy will benefit and investors will sleep easier. On the other hand, it could endure and lead to a whole new, fragmented trade picture. Investors may like this a lot less overall, but it will produce unexpected stars as Vietnam is now proving.
Forex investors need to watch how this plays out very closely. Parsing trade data much more carefully could be the way to start.
Resources for Traders
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--- Written by David Cottle, DailyFX Research
Follow David on Twitter@DavidCottleFX or use the Comments section below to get in touch!