August’s G7 conference of world leaders was not as explosive as it could have been. Donald Trump, who has orchestrated an escalating tariff war with China with one eye on next year’s presidential election, at one point appeared more circumspect about one of his more contentious trade policies.
During a working breakfast, he appeared to express “second thoughts” over his latest set of tariffs, which were launched in response to China’s decision to hit $75bn (£61bn) of US goods and resume duties on American automotives. In response to China’s tariffs, Trump upped tariffs by 5 per cent on approximately $550bn-worth of Chinese imports. A US government spokesperson later clarified that Mr Trump regretted that he had not raised tariffs even higher.
Charting the impact and course of the tariff war is fast becoming a fool’s errand. Equity indices have whipsawed over months in response to the slew of Section 301 notices that have been issued against Chinese goods coming into the US. It is becoming increasingly difficult for investors to know how to react to the ongoing turmoil, as the number of companies acknowledging direct hits on earnings gets bigger.
President Trump’s communication of his economic agenda, including his erratic use of Twitter, may also be feeding into market uncertainty. Ian Williams, economist and strategist at Peel Hunt, highlighted Mr Trump’s praise of President Xi as a “great man” at the G7 meeting, despite their ongoing dispute.
“The volatile response of global risk appetite to this muddled messaging suggests that market participants are still not fully attuned to how this US administration does business,” Mr Williams said. Those sectors with direct exposure to Chinese demand, such as automotives and semiconductors, are the most vulnerable. But he added that these sectors “are less significant in the UK equity market, where the mining sector and the globally-exposed industrials stocks remain the best barometer of trade sentiment”.
The impact has nevertheless been felt among some London-listed stocks. In June, semiconductor specialist IQE (IQE) slashed its full-year revenue and profit margin guidance in response to the trade war, which wiped as much as 40 per cent off its market value in just one day.
Chinese morale is weakening. China’s gross domestic product grew at a rate of 6.2 per cent for its second quarter, down from 6.4 per cent in the first. Iris Pang, Greater China economist at ING, said that Chinese businesses are “not optimistic on the progress of the trade talk”. Chinese companies have started to explore other export destinations, as well as tapping the domestic market. The electronics sector has been heavily hit, Ms Pang says. Chinese companies that used to rely on US businesses for sections of their production lines are now attempting to become increasingly self-reliant.
Electronics specialist XP Power (XPP) has borne the effects of the tariff war across its business, which includes semiconductor work. It has historically conducted a significant portion of its production in China. Fortunately for the company, it began producing its first magnetic components in Vietnam in 2012. It is expanding production there and reducing its Chinese work, and added a second Vietnamese factory this year.
XP Power chief executive Duncan Penny has observed other companies shifting production to Malaysia and Thailand. He has also witnessed customers moving production out of the US, in order to avoid the impact of tariffs. These measures are unlikely to be temporary. “Once this stuff moves, it never moves back,” Mr Penny said. Martin Green, group business development director at camera supports manufacturer Vitec (VTC), said that his company had “significantly reduced our reliance on third-party Chinese manufacturing by sourcing products from other countries such as Vietnam”. Vitec has also passed some increased tariff costs on to customers in the form of price rises.
