What to know about growing U.S.-China trade tensions

Mounting trade tensions between the U.S. and China could hurt synchronized global growth and have implication for investors.

“The trade road ahead is set to get bumpier,” says National Bank senior economist Angelo Katsoras in a trade report.

Whether or not a trade agreement is eventually struck between the U.S. and China, heightened trade tensions will be the new normal for the foreseeable future, he says.

“This is because the stakes are too high.”

For example, beyond the current trade dispute is “the battle to see which country will control the world’s next cutting-edge technologies and emerge as the dominant global power,” Katsoras says.

In this new global environment, investors must do more than assess a country’s fundamentals. “They must also look at any ongoing or potential future tensions with trading partners, as such conflicts can significantly impede access to key markets,” he suggests.

Read: Country of the month: China

Competing for market domination

Many of China’s trade policies are protectionist. For example, foreign car companies can’t buy Chinese automakers.

And “U.S. tech firms, like Apple, that want to offer cloud services to Chinese citizens are required to store the data [of those citizens] in China on servers operated by a Chinese partner. The United States has no such regulation,” says Katsoras.

The Trump administration has accused China of pressuring U.S. companies to transfer technology to Chinese companies in exchange for access to the Chinese market. The administration also claims “Chinese theft of U.S. technology is rampant,” says Katsoras.

China’s aim to become dominant in 10 advanced industries through its “Made in China 2025” plan—especially manufacturing of semiconductors and integrated circuit boards—puts the country in fierce competition with companies in the West. Thus, sector domination by China would ultimately require Western acquisitions.

Read: What investors should know about China’s evolving economy

The U.S. government, as well as governments around the world, has sought to shield industries from Chinese takeovers. In Canada, Chinese computer maker Lenovo ceased efforts to acquire BlackBerry a few years ago after the Canadian government feared national security would be compromised.

The Canadian government is now reviewing a proposed takeover of construction firm Aecon by Chinese state-owned CCCC International Holding.

“Officials are assessing whether national security would be undermined by the takeover,” says Katsoras. “The United States has also reportedly warned that Canadian companies bought by Chinese state-owned firms risk seeing their access to U.S. markets reduced.”

Winning the trade war

As it stands, China is more vulnerable than the U.S., says Katsoras.

“Exports account for about 20% of GDP in China, versus only 12% in for the United States,” he says. “Further, the United States accounts for 23% of Chinese exports, whereas only 8% of U.S. exports go to China.”

Still, the most vulnerable U.S. sectors are agriculture and aircraft-related products—the very ones targeted by China’s proposed tariffs, announced April 4.

“One out of every four planes currently produced by Boeing is sold to Chinese buyers,” says Katsoras. In 2016, 62% of U.S. soybean exports—representing 33 million tonnes—and 77% of U.S. sorghum exports went to China. (Last year, Canada sold nearly five million tonnes of soybeans to China, valued at $2.7 billion.)

Favourable for the U.S. would be an alliance among its partners—Japan, the EU and South Korea—to oppose China’s limiting trade policies.

“In an effort to prevent this alliance forming against it, look for China to announce the opening of more sectors to foreign businesses, followed by American accusations that they have not gone far enough,” says Katsoras.

Such ongoing bickering is indicative of the bumpy road ahead, he warns.

For more details on the trade dispute between the U.S. and China, including U.S. opposition to foreign takeovers, read the full National Bank report.

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