Originally published on May 24, 2019
A strange thing happened today, dear reader.
Believe it or not, it's almost three years since the British voted to leave the European Union. But those very same, long-suffering Brits just took part in an election for members of the European Parliament. (That place is a sort of waffle shop designed to give the European Union a respectable veneer of democracy).
Talk about glacial progress. Although, of course, this wasn't supposed to happen. Britain was meant to leave the EU on 29th March this year.
But the hapless British Prime Minister, Theresa May, hasn't managed to cobble together any kind of arrangement that meets sufficient approval. You know, the kind that keeps enough establishment people happy (on both sides of the Channel).
Mrs. May is still clinging on to her job… by a thread. Rumours abound that she could resign imminently. Meaning even more uncertainty, while the Conservative Party chooses a new leader and (hence) Prime Minister. And I thought Argentine politics was volatile…
Meanwhile, markets are getting their own dose of volatility due to fast-deteriorating US-China relations (courtesy of US chest beating). In the latest twists, even non-US companies in the UK and Japan are reported to be cutting ties with Chinese company Huawei, following US sanctions on that organisation.
Stocks are down… bonds and gold up. A reminder of the need to own a range of things. You never know what's around the corner.
While stocks stutter, the status quo has just been confirmed in… India, believe it or not. Prime Minister Narendra Modi just won a landslide victory in the World's biggest democracy. Which was precisely not what the opinion polls predicted… once again.
Winners in the US-China trade war
But let's get back to relations between the US and China. We hear a lot about the size of the US trade deficit with China, meaning the former imports a lot more than it exports. But what causes that deficit? What are the big categories of traded goods that lead to such a state of affairs?
The following two charts make it pretty clear. The first shows what the US exports to China. The second shows what it imports from China.
This brings things into much sharper focus. A full 44% of all US imports from China are electrical goods ("computers & electronics" and "electrical equipment").
Of the total trade deficit of $419 billion in 2018, a full $215 billion relates to electrical goods. That's over half of the total.
So again, we have to ask… who benefits from what the US is doing in its trade dispute with China?
First of all, a huge amount of electrical kit that comes from China is bound to be made by (or on behalf of) American companies, under their own brands. The obvious example is the Apple (NASDAQ:AAPL) iPhone. All of those are made in China, and they're about 40% of all the smartphones sold in the US (and at premium prices). That compares with the iPhone's roughly 15% global market share by volume.
The chart below shows the market shares by volume of the five leading smartphone companies globally. Between them they make up about two-thirds of all production. Samsung (OTC:SSNLF) is South Korean, Apple is American and the other three are Chinese. (Another Chinese firm which is not shown, Vivo, has another 7% market share.)
Phones and laptops from China aren't currently subject to tariffs. But, at this rate, they could be soon. Otherwise, what's the point?
If that happens, are the likes of Apple going to shift all production to the US, or at least the part that satisfies US consumer demand? Maybe, but it would take years. In any case, it may not result in many new jobs. I'd expect factories to be highly automated to mitigate the higher wage levels relative to China.
So who stands to benefit in all this?
When it comes to smartphones, it looks like Samsung is well positioned. I happened to replace my old iPhone with a much cheaper Samsung model a few months ago. It's about a quarter the price of an iPhone, but still does three times as much as I need. So it seemed like a "no brainer".
Looking at the fine print on the back of it, I can see it was made in Vietnam. On which note, there are already reports that some Chinese manufacturers are moving final production to Vietnam to get around the US tariffs.
So there we have two likely winners, straight away. Samsung Electronics is the only large smartphone maker that's both non-Chinese and has non-Chinese production. Meanwhile, Vietnam is an alternative, low-cost manufacturing hub in Asia.
But I'd expect all sorts of other non-Chinese manufacturers of electrical gizmos and gadgets to benefit as well. That's as US importers look to get around tariffs on Chinese goods. Now, where might they look?
Congratulations to companies from South Korea, Japan and Taiwan. You did nothing, but you are all winners. Don't forget to send a thank you note to Mr. Trump, for all the new jobs he's about to create in your countries.
Disclosure: OfWealth expressly prohibits its writers from having a financial interest in any individual securities they recommend to their readers, other than collective investments such as exchange traded funds.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.