The US-China trade war has taken its toll on US multinationals operating in China. Because the trade war encompasses tariffs on a large percentage of US-China trade, it has been impossible for many companies to escape rising costs. In this episode, we explore the costs of the trade war on US multinationals that produce goods in China.
American multinationals in China have experienced an increase in costs of doing business during the trade war. When the trade war first hit, some multinationals in China considered moving overseas to lower-cost countries like Indonesia and Vietnam but faced major challenges, as these other countries lacked the type of infrastructure and market access that China could provide. As a result, the companies incurred significant costs, part of which stemmed from direct costs of the tariffs and slowing sales of their products in China, and part of which came from indirect costs from declining share prices.
Looking at US multinationals’ exports to the US based on data from the Bureau of Economic Activity, and comparing industry categories to the detailed categories of tariffs imposed by the US on goods exported from China, we found that all categories of multinationally produced goods were strongly affected by the tariffs. American multinationals in China comprised $9.965 billion in US imports in 2016 - since we didn’t have individual product category information for multinational shipments to the US, we calculated the average tariff imposed by the US on goods exported from China in 2018 to find an approximate total tariff amount. This came out to about $1.3 billion, acting as a 13% tax on goods made in China and shipped to the US, which were $9.965 billion. While this amount is not huge, it would have risen to $2.5 billion if tariffs on 80% of goods tariffed had been allowed to rise to 25% as planned.
US multinationals were also impacted by China’s economic slowdown caused to a large extent by the trade war. If we look at S&P 500 companies with the highest levels of sales to China, including Apple (AAPL), Intel (INTC), Qualcomm (QCOM), Micron (MU), Cisco (CSCO), Texas Instruments (TXN), Procter & Gamble (PG), Western Digital [[(NASDAQ:WDC)]], Nike (NKE), Skyworks (SWKS), Applied Materials (AMAT), Corning (GLW), Abbott Laboratories (ABT), Cummins (CMI), and Amphenol Corp. (APH), we can determine the impact of tariffs on sales from quarterly reports issued around the beginning of 2019. At present, some companies lack this information, but we do have sales information from the quarterly reports of Apple (Q1 2019), Cisco, Nike, and Applied Materials. Total losses for Apple, Cisco, and Nike, the companies we have China sales information on, amounted to about $2.403 billion. More companies have announced a decline in sales due to weakness in China, but have not enumerated this amount in their quarterly reports.
There are also indirect effects of the trade war on China-based US multinationals. Some of these impacts, such as knock-on effects on firms’ capital and labor stocks, are difficult to quantify within a short period, since there is insufficient data. Other indirect effects can be quantified, such as the impact of the trade war on stock prices.
For example, between September 1, 2018 and December 1, 2018, share price declines for the firms under study averaged 16%. Even when the market had recovered, by April 1, share prices were up 4% on average from September 1, 2018, but the share prices of Apple, Qualcomm, Micron, Skyworks, Western Digital, and Corning remained down from September. Between September 1, 2018 and December 1, 2018, a total amount of $464 billion for the companies under study was lost. Between September 1, 2018 and April 1, for companies experiencing losses, the total amount lost was $157 billion. This means that the indirect effects of the trade war are potentially much larger than the direct effects.
It is important to note that we did not include the impact of the trade war on imports to the US from Chinese and non-American multinational companies in China. We also did not account for costs due to losses by US firms in exports of goods to China. Estimates of consumer and producer losses range from $1.4 billion per month to over $17 billion for a four-month period in 2018.
At the time of this writing, negotiations to end the trade war are under way. It seems unlikely that China will be willing to meet all of the US demands, as some are closely embedded in the structure of the Chinese economy (such as subsidizing particular sectors). One has to question whether the trade war will ultimately be worth the costs, both direct and indirect as well as short-term and long-term. Already, in some areas, Chinese firms have shifted to sourcing from other countries in order to avoid the cost of tariffs. Unless a final trade agreement is truly spectacular, it seems doubtful that the billions of dollars lost to American firms will be compensated for by new or expanded business. Hopefully, we will discover and analyze the results soon.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.