"Worst Case Scenario" Looms As Chinese Overwhelmingly Ready To Boycott US Goods In Trade War

Despite soaring trade policy uncertainty and a collapsing yuan, "the equity market has largely looked through the marginal risk from tariffs", according to Goldman's David Kostin recently wrote:

No clear relationship exists between reliance on imports from China and recent industry performance. Among at-risk industries, Computer & Electronic Products, which include Semiconductors, have lagged the Russell 3000, while Electrical Equipment stocks have outperformed. As our Tech Hardware and Retail analysts have noted, trade headlines may overstate fundamental risk, as companies have many tools at their disposal to minimize margin pressures. Some firms may be able to switch to other suppliers, while others will pass through costs. A basket of TMT stocks with high imported COGS has also shrugged off the risk from tariffs, matching the broader Info Tech sector’s 12% rally since March.

However, Kostin cautions that this may be a mistake, however not due to the quantitative aspects of the trade war, namely the downstream impact of tariffs, but the qualitative, and thus much more ambiguous, implications. 

In other words, it's not tariffs that investors should be worried about: as the Goldman strategist writes, "a greater risk lies in potential government intervention" and lists the following examples:

Geopolitical tension can manifest itself in ways beyond tariffs. As precedent, China publicly encouraged consumer boycotts that led to a plunge in Japanese auto sales (in 2012) and South Korean products (in 2017). Last week, China issued a temporary injunction on some of Micron’s (MU) chip sales due to alleged patent infringement. The stock fell by 6%. MU downplayed the impact on sales and the share price has since recovered.

So there we have it, instead of a 10% tariff on all US imports being the so-called "worst case scenario," Goldman is warning that a much bigger problem for the US economy (and markets) is if the Chinese begin to boycott US goods, period.

Which is why the news today, via The Financial Times, that a new survey finds that a majority of Chinese consumers would be prepared to boycott US goods in the event of a trade war with Washington.

The survey found that 54 per cent of 2,000 respondents in 300 cities across China would “probably” or “definitely” stop buying US-branded goods “in the event of a trade war”. Just 13 per cent said they would not.

The remaining 33 per cent said they were unsure or did not at present buy US branded goods, according to the survey, conducted for FT Confidential Research (FTCR), a research unit at the Financial Times.

The survey was carried out between June 27 and July 10, mostly before the US imposed 25 per cent tariffs on $34bn of Chinese goods on July 6. The move elicited an immediate tit-for-tat response from Beijing.

To date, China has avoided calling for any boycott of US goods.

As, for now, analysts said Beijing was unlikely to do so because of fears over a backlash.

“The Chinese authorities haven’t done anything like they did with Japan and South Korean goods in the past,” said Kent Kedl, senior partner in the Shanghai office at Control Risks, a risk consultancy.

But, market continue to ignore the risk of this more 'qualitative' aspect of trade war. Bear in mind that Japanese car exports  plunged 32% in the 12 months after China launched a boycott over disputed islands in September 2012.

We leave it once again to Goldman's David Kostin to conclude: "All things considered, we do not think the outlook is very bright."

Comments

Harry Lightning Shillinlikeavillan Mon, 07/23/2018 - 00:17 Permalink

You hit the nail on the head. The Chinese people still need to eat, and if they stop importing US food, they will have to buy the same food from a middle man country that buys the American food, marks up the price, and sells it to the Chinese. Result : rampant food inflation in China. 

On top of that, a country that is starved for capital because of all the debt it has piled on while accumulating trade surpluses would see half a billion dollars a year of capital drained from its vaults as its trade surplus turns negative. 

The difference in all this is that the Americans can produce internally everything they import from China, but China cannot do the same. Food is at the top of that list. So while Americans would see an increase in the cost of the goods they now import from China, that would be offset by the huge savings of capital by reducing their trade deficit, along with the multiplier effect of the money spent domestically staying within the boundaries of the US. Wages would rise and then consumption would follow suit, providing a strong impetus to their economic growth.

China on the other hand would lose capital as they would see their trade surpluses reverse into deficits, and would have an inflationary spike not offset by rising wages. Consumption would plummet and production would follow suit.

Frankly I am surprised at the economic ignorance being displayed by whatever Chinese government officials who are providing source information for articles such as these. The Chinese should be shutting the fuck up, accepting the initial round of tariffs without saying a word, and going on to enjoy a continued substantial trade surplus with the Americans albeit at a lower level of profit. 

Instead, these officials are letting their nationalistic egos get in the way of more intelligent responses, which in the end will destroy their economy. 

I chalk this foolishness off to inexperience on China's part with respect to trade differences. In the twenty five years that they have become an exporting power, they never had to deal with difficulties between themselves and the clients to whom they export. They have been treated with kid gloves, basically being allowed to sell anything they wanted into America without any obstacles. So now that they have to adapt their trade policies to a more difficult situation that challenges their unfettered access into American markets, they are caught like deer in the headlamps., not knowing how to respond. It is in such times that emotion takes the place of wisdom honed by experience, and truly catastrophic mistakes are made. That is what is developing in China today, as evidenced by the report in the article above.

What surprises me also is that the Chinese nationalistic fervor, fueled by a desperate urge to be seen as a world leader in trade who can dictate the rules of transaction, is being allowed to get in the way of what many of the younger Chinese government bureaucrats were trained in American and European universities to know is the wrong response to tariff imposition. It just shows that China remains ruled by the elders, one generation removed from the revolutionaries, who feel more comfortable relying on their revolutionary reactionisms than on classical economics that were taught to their sons and daughters.

This is typical of young dynasties, they always make some critical growing pain mistakes as they develop a history. How they recover from such mistakes will determine the prognosis of their governance. The Soviet Union approached such a crossroads in the 1950s when Stalin passed, and they adapted to a new paradigm that differed sharply from the Bolshevik structure that Stalin had enforced. In so doing it allowed their dynasty to continue, only to make a lethal error some 30 years later when they faced their second major test and failed.

Many of the countries that embraced communism in the post war era ha d similar challenges and failed them. Castro's Cuba and today's Venezuela are classic examples. Depending on whether the Chinese come to their senses before it is too late, they may be the next developing dynasty to implode over a critical error. The next few months will reveal that outcome.

In reply to by Shillinlikeavillan

philipat Harry Lightning Mon, 07/23/2018 - 00:34 Permalink

China can replace all its food imports from the US by switching to Latin America (especially Brazil), Russia, the EU and other Asian countries.

And if the US wants to sanction ALL Chinese imports, does that include the largest part represented by US Corporations, for example Apple? You may have seen in the recent article in ZH that China makes a grand total of USD 8.80 from each iPhone, which provides a striking example of where the profit from low cost manufacturing in China actually accrues. In Apple's case mostly in Ireland through Irish and Dutch Companies so as also to avoid US taxes. Real patriotic?

In reply to by Harry Lightning

D Nyle philipat Mon, 07/23/2018 - 00:43 Permalink

Good point, but south American food currently rots before making it to China, they have been trying to get south America to improve and change to longer lasting produce, but the Rote system of learning (memorization) has turned a simple one to two year effort into a generation folly

Chinese not big on Bananas which is The Southern Americas money making export

In reply to by philipat

inosent natxlaw Mon, 07/23/2018 - 01:51 Permalink

Not a whole lotta consensus in re this topic at ZH, up/dn votes generally even;

Good riddance to the chinese raping the US. No more coming over here to inflate our re with money we gave them because we abdicated manufacturing, and became the cash cow that the otherwise commie govt could not get along without.

China as super power? hahaha, think again. w/o the US market they are super-crap, just like the things they make.

And I want to echo one poster who noted that these asians are like parrots and monkey's - pretty damn good imitators, but not innovators.

Had it not been for the ascension of the great minds of the west, starting, o, let's say sometime around 1200 AD on the early side, leading into the Renaissance, which led to the Rocco, then Baroque, then Classic periods, the last was Peak Age of Enlightenment, where, by the way, a flood of people from the European continent were coming to the US, more great minds (like Adams, Melville, Edison, et al), today, china would be asian crap.

They run around in suits crafted by the west, driving in cars engineered by the west, modeling finance concepts from the west, and since they don't have ANY original music at ALL, they, like the imitators they are, have their children obsessively learning Bach, Mozart and Beethoven, because they have NOTHING of their OWN.

Further, it is commonly known that at the tail end of the (((disaster))) instigated by the (((luciferians))) (1945-1950), the US literally gave away engineering secrets for manufacturing of automobiles (and other things). Had it not been for this transfer, the asians would still be getting around in rikshaws.

No doubt some sniveling 'jew' celebrates the implosion of America vis the Chinese theft of our manufacturing. They can take their chinese pride and their language and unoriginal money selves and GTFO of my country. No more easy money for these azhlz.

In reply to by natxlaw

SoDamnMad shemite Mon, 07/23/2018 - 04:29 Permalink

Australia has a horrible drought in one area and Brazil has a huge labor problem with the truckers striking over fuel.

This has caused the government to force an additional cost on to the farmers price of soybeans. This is putting China between a rock and a hard place on soybean beans and meal which will push up hog prices in China. I guess they can all just tighten their belts and skip pork consumption. 

In reply to by shemite

Harry Lightning philipat Mon, 07/23/2018 - 06:36 Permalink

#1) Even if China purchased food from other sources, countries now buying from those sources would have to buy US food then, which still would push up the overall price of food and cause China to be in a position of cutting off its nose to spite its face. The result would be global inflation in food prices, which causes financial injury to China without any perceivable benefit. 

#2) Some US companies would suffer from the loss of cheap Chinese labor. But in the aggregate, most US companies will benefit from the easier availability of capital that a sharply lower trade deficit would bring, along with the increased volume of business as American workers have more wages to spend.

In reply to by philipat

techpriest roddy6667 Mon, 07/23/2018 - 01:34 Permalink

I'm surprised you got so many downvotes. I remember on my wife's Chinese TV shows, a number of show episodes or movies to do with Chinese going to Africa. A while back ZH ran an article about deals that the Chinese were making with Mugabe in Zimbabwe as well, and that has not been the only country they are looking to "invest" in.

From a simple security standpoint, you should never have one supplier, so no one should be surprised that China is trying to do this.

In reply to by roddy6667

roddy6667 Zero Point Mon, 07/23/2018 - 03:37 Permalink

The Chinese are not so dumb that they can't switch from soybeans to other sources. They use soybeans in pig food, but that can be changed to corn and other grains. Soybean oil is used for cooking, but a shortage of that will cause a switch to rapeseed oil (the most popular), peanut oil, corn oil and others. 

You seem to be pretty simple minded about these things.

In reply to by Zero Point

Zero Point roddy6667 Mon, 07/23/2018 - 04:13 Permalink

Yep. That's why those idiot Chinese import 100 odd million tons of soybeans every year. Because they haven't considered replacing them with other food sources. Either that or you're just a genius to think of that when they obviously haven't. I mean you'd think those fuckheads would wake up one day and go "hey, why don't we fatten our hogs on that OTHER cheapest shittiest way possible to feed a hog" LOL. Fuckin idiots in this place.

In reply to by roddy6667

philipat Zero Point Mon, 07/23/2018 - 05:17 Permalink

You think you have all the answers. Maybe the reason is that the US doesn't export much that the Chinese need, so have until now imported soy beans (as a "peanuts" gesture) to placate Washington and try to maintain some US imports. You can underestimate the integrity of ZH posters if you wish (It doesn't have a cost and we don't give a shit what you think) but should not similarly do so with the Chinese, they are very smart, calculating people who think for the long-term.

And it speaks volumes that all the US can export is agricultural commodities, arms and financial services?

In reply to by Zero Point

Abbie Normal platyops Tue, 07/24/2018 - 22:12 Permalink

Contrary to Harry's scenario, what will probably happen is this:

Unable to sell food products directly to China, the US producers will have a grain glut (just like the meat glut) and be forced to sell it at a steep discount to other countries before it spoils.  They may in turn sell it to China at a discounted price while skipping the tariffs.  End result is US producer loses revenue and China purchaser gets a discount.  Still winning?

In reply to by platyops

bloofer TemporarySecurity Mon, 07/23/2018 - 07:11 Permalink

The only "farmers" getting killed by this deal will be Big Ag corporate "farmers." These people aren't farmers at all. They are government subsidy welfare queens who are also monopolists who've largely killed the American small farmer.

If Big Ag gets killed, we will hopefully see a resurgence of real farming done by real farmers producing real food for domestic consumption. (It's mainly the big corporate farmers who have inundated us with with crap poisoned GMO food, with the aid of the food-processing industry.)

In reply to by TemporarySecurity

HushHushSweet Harry Lightning Mon, 07/23/2018 - 06:48 Permalink

China is 100% under the thumb of the schnozmeisters. China is not making decisions based on Chinese "ego" or "emotion" but on directives from the schnozmeisters. Obedience to these financiers is a condition for China's ascendancy to world power. And remember that China, in addition to being under the thumb of the bankers, is also still a communist country -- if the directive is to ban all American products, a ban will take place, regardless of what the people actually want. 

The Chinese as a people are much more practical and much less emotional than Westerners. They generally don't trust their government and they think nothing of breaking laws that might infringe on their making or saving money. A directive from the schnozmeisters to the Chinese government to ban American products would likely result in some enterprising Chinese sourcing their American goods from Canada or Mexico, with Canadian or Mexican labels overlaying the American ones.

I don't think a Chinese ban on American goods will actually have much of an effect on American goods. It's all just bluff and deflection.

You must always separate the Chinese people from the Chinese government. They are two entirely different entities.

 

 

In reply to by Harry Lightning

roddy6667 HushHushSweet Mon, 07/23/2018 - 07:02 Permalink

Amazing all the theories you have about China and its people. Have you ever been there? Why have you developed such emotional opinions living in an information vacuum?

You just make shit up as you go along, then believe it. Or you believe the "What I'm Supposed To Think" handouts your handlers give you. These handouts are also known as the American media. 

In reply to by HushHushSweet

Antifaschistische flash338 Sun, 07/22/2018 - 23:46 Permalink

a big difference is that if something 'catches on' in China, a billion people will follow.  Because that's what they do.  They behave very collectively.   In the US, we are relatively independent (well not the millennials but that's another story).  American presidents can't just say "stop buying Lexus", because we won't listen to him if he does unless we have a very personal (new) issue against the Japanese.

 

In reply to by flash338

Blankone Antifaschistische Mon, 07/23/2018 - 00:11 Permalink

Spot on.
In the US we will buy based upon what serves our personal self interest.

Add - how many Chinese companies make their product in the US. How many US companies make their product in China? Will the US govt try to sell the idea to boycott products made in China for/by a US corporation? How will the US politicians react when industry lobbyists start to scream?

In reply to by Antifaschistische