How the U.S.-China trade war affects multinationals

Are companies being “chased” from China?

Like many of their international counterparts, Dutch companies based in China will need to move at least part of their operations out of the country as a result of the ongoing trade war between the U.S. and China. Where will they go and who benefits?

RaboResearch set out to investigate: what is the best destination for these businesses in Southeast Asia, and which country is likely to benefit the most?

For many companies, Thailand would appear to be the most favorable of the various alternatives to China. But, in truth, the China–United States trade war will have no real winners in the end. A relocation is likely to be a viable option for only one-quarter of Chinese-based Dutch multinationals.

President Trump announced new tariffs on Chinese imports, only to put them on hold again earlier this month. Amidst this recent twist in the China–United States trade war, Rabobank explored where Dutch and other non-Chinese companies with production operations in China should move next. The “Where Will They Go index” (WWTG index) shows which Southeast Asian countries have the most to offer in this regard. The timing is just right – with the higher U.S. tariffs and rising wages in Chinese factories, staying put is costing companies more and more. And as previously concluded by Rabobank, negotiations between the two countries – and, therefore, a possible end to the trade war – are likely to grind to a halt sooner rather than later.

Thailand on top

Thailand ranks at the top of the 2019 WWTG index. All told, the country offers the most favorable conditions for a relocation of production operations. Malaysia and Vietnam are both viable alternatives, while the Pakistan, Myanmar and Bangladesh appear near the bottom of the list. RaboResearch’s Raphie Hayat, who focuses on Global Economics & Markets, sheds light on the various factors investigated in the study.

“The wages of factory workers are important, of course, as is the country’s investment climate. In other words: how easy is it to do business in this country? To establish that, we investigated, among other things, to what extent there are restrictions on buying land, and how easily and quickly you can establish a company or acquire a majority stake in an existing business.”

Hayat continues: “The quality of a country’s institutions is another important factor. We mainly look at the quality of the legislative process and at government efficiency. Can you rely on the country’s courts of law to be impartial? Is there corruption at all? Are policymakers quick to make decisions, and how long does it take for new policies to actually be implemented and enforced? How likely is it that corporate income tax will be raised overnight?”

“Not all companies are able to bear the additional cost of tariffs”

- Raphie Hayat, RaboResearch

Granted, these are all relevant issues for any company considering a relocation, but Hayat emphasizes that a lot also depends on the type of production process involved. “The manufacture of semiconductors, for example, requires people with specific skills and expertise, along with specific materials and equipment. I’m talking about local engineers and specialized suppliers. You’re not going to find semiconductor experts in Thailand, even though it’s the highest-ranking country in our WWTG index. Whereas Thailand specializes in automotive manufacturing, Pakistan and Bangladesh are strong in textile production. These countries are therefore worth considering for textile producers despite their low rankings.”

Uncertainty

Rabobank’s researchers analyzed the implications for Dutch companies that maintain at least some of their operations in China, and noted that not all multinationals stand to benefit from exiting the country. A survey conducted among these companies by the Netherlands Ministry of Foreign Affairs found that 68 percent are based in China on account of its large domestic market. These companies will not be significantly affected by the U.S. tariffs on imports, and are likely to stay put. The roughly one-quarter of businesses surveyed that also serve the U.S. consumer market from China, however, will be hurt by the tariffs, which will increase their production costs for this market by 10 to 20 percent, according to Hayat’s calculations. “Not all companies are able or willing to bear the additional cost. For the majority of Dutch companies, the probability of further tariff increases alone will prompt them to start looking elsewhere. The WWTG index can help them find suitable alternatives.”

We are not likely to see a mass exodus of Dutch companies from China anytime soon, although the report does note that, in a world marked by growing protectionism, Dutch multinationals are likely to spread their production processes across multiple suppliers and countries.

No big winner

Numerous countries in Southeast Asia stand to gain from these corporate relocations. Hayat has also looked into the impact on these countries: “When international companies start manufacturing in these new markets, we refer to that as ‘foreign investments.’ These investments generally fuel the economy as a whole. New factories create new jobs for the local population. This means people will start earning higher wages and will spend this extra disposable income, which will benefit local retailers and, indirectly, the government due to higher tax revenues.”

“We are not likely to see one country emerge as the big winner”

- Raphie Hayat, RaboResearch

Yet the positive effects will be limited, of short duration, and scattered across the region. This means we are not likely to see any one country emerge as the big winner of the trade war, Hayat predicts. “First, because the companies moving their production operations out of China are not all relocating to the same country. And if one country in particular does end up ramping up its exports to the United States, Trump will simply impose tariffs on that country’s imports as well.

“Also, China is and remains a major market for most countries in Southeast Asia. More than 10 percent of total exports out of Vietnam, Thailand and Taiwan, for example, are shipped to China. If the Chinese economy slows down, which is the expected outcome of the current trade war, this will also affect countries exporting to China – something that will likely not be balanced out by the new foreign investments.”