Apocalypse now

Winners and losers in a China-America trade war

A trade war would be a catastrophe; but not for everybody

ECONOMIC Armageddon became a bit more likely when Donald Trump took office on January 20th, given his threats to impose a 45% tariff on Chinese imports. “No one will emerge as a winner in a trade war,” Xi Jinping, China’s president, intoned just days earlier. He was not quite right. In any catastrophe, a few survive; some even thrive.
Tariffs that high would serve as a tax on American shoppers buying phones, computers and clothes (see chart). They might not dent their wallets too much—a study found that in 2010 goods and services from China made up less than 3% of consumer spending. Poorer Americans would be hit harder, however, as they spend a higher share of their income on tradable goods.

American importers would suffer from a tariff. Importers of electronics and clothing enjoy higher retail and wholesale margins than other importers. A tariff would eat into them. Their competitors, relying on domestic suppliers, could benefit and raise prices.

A squeeze on trade between America and China would be painful but not catastrophic for China’s economy. It has weaned itself off export-led growth. Analysts from Morgan Stanley, an investment bank, find that even in a worst-case scenario, with tariffs of 45% imposed on both directions of trade between China and America, exports would fall by almost 13% and GDP growth would be crimped by 1.4 percentage points.

The biggest Chinese firms included in the MSCI China stock index are less reliant on American customers than those in the American equivalent are on Chinese customers. America accounts for more than 10% of revenues for fewer than 2% of the Chinese firms included (though their shares would suffer in a trade war as foreign investors run for cover).

In the short run, countries woven into China’s supply chains, such as Taiwan and South Korea, would lose out from the stifled demand for their wares. But other countries could win, if any tariff was restricted to China. Toy manufacturers in Mexico and clothes-stitchers in Vietnam could enjoy a surge in demand. Numbers crunched by Deutsche Bank suggest that a 10% fall in American imports from China could leave a gap which, if plugged by Mexico, could boost Mexican exports by almost 3%. Assuming they can get through the wall, of course.

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