"So, what do you guys make of this trade war between our two great nations?" Max Baucus, the former US Ambassador to China, casually asks as he sips his wine at our latest gathering, one of many on his frequent visits to Shanghai, where he consults with his trusted local "brain" trust: The Shanghai Five.
The Shanghai Five, a name Max fondly donned upon a group of rambunctious young men, whom he befriended at a restaurant in Shanghai during his freshman year as Ambassador, when 36 years worth of Senatorial habit of spreading charisma in any room he entered still lingered. Since then The Shanghai Five has expanded to include more membership, but the name remained unchanged, paying homage to the original serendipitous encounter.
During his latest visit, the topic was firmly fixed on the Trade War and the recent G20 meeting. Did China ostensibly cave in to American demands in exchange for some breathing room from the crushing tariffs, or did Xi outfox Mr. Trump by getting more maneuver time in exchange for nothing but empty words? According to Max, the majority of Americans seem to think the latter, but we here in China believe in the former. The reality is that 200 billion dollars of goods are still subject to 10% tariff, and this is now the new baseline. Notwithstanding whether this hurts the American economy, this certainly will place negative pressure on China's industries. As China's exports to the US becomes less price competitive, sales are likely to decline, causing inventory to build up domestically, which puts downward pressure on domestic prices. So, which companies get affected and what is the scope?
In our analysis, we look at the companies that make the same or comparable products named in the tariff list. Some of them might export directly to the US, some of them might produce for domestic consumption, and some might export to other countries. And then we take a look at the up stream and downstream products to see how the tariff could potentially reverberate through the supply chains. In this exercise, we will focus on China A-share listed companies.
Products and Industries Impacted by the Tariff
We took the entire list of goods that make up the US$200 billion of Chinese imports to the US, and matched them to ChinaScope's proprietary SAM supply chain product categories. That means mapping 5,999 goods to 642 product categories under 43 GICS industries.
The following five industries are affected the most by the number of product categories subject to the Trump tariff:
- Commodity Chemicals
- Packaged Foods & Meats
- Agricultural Products
- Industrial Machinery
The above five industries cover 3,471 categories of products, contributing to 57.85% of all types of goods included in the tariff list.
We then looked at the all the A-share listed companies' revenue composition in terms of these product categories. 1,854 companies derive their revenues from the 642 product categories, totaling CNY 8.41 trillion. Of the 1,854 companies 1,192 generate more than half of their total revenues from these products.
Of the affected industries, commodity chemicals and ferrous metals comprise up to CNY 2.1 trillion of revenues from A-share companies, contributing to 25% of the total directly affected revenue pool of A-share companies.
We then look at the upstream and downstream product categories emanating from the 642 directly impacted product categories to observe any impact transfer potential along supply chains. We have identified CNY 16.0 trillion of revenue from directly upstream products, CNY 1.42 trillion from two layers upstream products, and CNY 0.47 trillion of directly downstream products.
So, what does this mean? Using China A-share listed companies as a proxy, the Trump tariff seems to have a wide blast radius. We hypothesize that in the absence of any mitigating actions from the Chinese government that is of significant breadth and depth (e.g. an across-the-board tax relief program), Chinese corporates would likely to experience moderate to searing pain, especially in a liquidity scarce macro environment. Of course, there is always the possibility of China and the US coming to some sort of mutually acceptable compromise where all tariffs are eliminated. One can dream...
And now, how the this all looks in neo4j Bloom:
About ChinaScope SAM Supply Chain Data
One of ChinaScope's flagship data sets that standardizes each business segment of companies listed in Mainland China and Hong Kong, and links them together to map out supply chain, with over 4,000 product nodes connected through over 14,000 relationships.
Find out more about ChinaScope's data at www.chinascope.com