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U.S. Imports from China Plunge As Other Emerging Markets Fill The Gap

Key Points
  • U.S. imports from China have plunged this year, offset by import gains for other emerging markets not subject to U.S. tariffs.

  • The rise in U.S. imports from just five emerging market countries more than offset the falloff from China, as sourcing shifts for key categories like auto parts. 

  • If this trend continues, emerging market companies may fare better than investors feared should the China tariffs continue or increase.

Last week, the April U.S. trade report revealed that overall U.S. imports are basically unchanged from the end of last year, but imports from China have plunged. Let’s take a closer look at China’s loss and which countries may be benefitting.

U.S. imports from China typically rise by $6 billion in the first four months of the year, based on the five year average. But this year, they fell over $20 billion. This plunge in imports happened before the new U.S. tariffs on Chinese made goods took effect in May.

U.S. imports from China plunged this year

Change in US Imports from China

Source: Charles Schwab, U.S. Census Bureau data as of 6/9/2019.

China’s loss seems to have been a gain for other emerging markets not subject to the tariffs, according to U.S. trade data. The rise in U.S. imports from just five emerging market countries (Mexico +6%, Vietnam +38%, South Korea +17%, Taiwan +22%, and India +12%) more than offset the falloff from China, as you can see in the chart below.

Trade shift from China to other emerging markets

Change in US Imports from China 2

Source: Charles Schwab, Factset, census.gov data as of 6/9/2019.

As an example, auto parts are a major category of U.S. imports. While U.S. imports of auto parts so far in 2019 have changed by less than 1% from the same period last year, imports from China are down $313 million, or 9%. More than offsetting this decline is a rise of imports from just two countries: South Korea ($270 million) and Mexico ($192 million), as you can see in the chart below.

Shift in sources of U.S. imports of auto parts

Change in exports of auto parts to US

Source: Charles Schwab, U.S. Census Bureau data as of 6/9/2019.

A similar shift can be seen in a wide range of major categories of imports including computers and electronics, industrial supplies and consumer goods. Many of the countries that have already benefitted from the shifts starting to take place could still have a long way to go if the trend continues, since their exports only make up a fraction of what China exports to the U.S. today.

It may seem like these smaller emerging market economies may not be as business-friendly as China and the businesses may struggle to grow. But that doesn’t seem to be the case. In fact, some of them, such as South Korea and Taiwan, have Ease of Doing Business rankings from the World Bank (which reflect business-friendly regulations) that are much higher than China and relatively near that of the United States. This suggests these businesses may be able to absorb a lot more of the U.S. demand from China, if a longer-term shift unfolds.

Ease of doing business rankings table

From the perspective of emerging market investors, the losses for businesses in one emerging market country, China, seem to be offset by gains for businesses in emerging markets elsewhere. Perhaps this helps explain the divergence in performance between China and other emerging markets which started in late May, as you can see in the chart below.

Emerging divergence

MSCI EM vs EM less China vs China

Source: Charles Schwab, Bloomberg data as of 6/9/2019.

As the U.S.-China tariffs have started to effect Chinese exports, production seems to have shifted to other emerging markets rather than those goods being produced by U.S. manufacturers. If this trend continues, emerging market companies may fare better than investors feared, should the China tariffs continue or increase.

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Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
 
All expressions of opinion are subject to change without notice in reaction to shifting market or economic conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
 
Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.
 
International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets.  Investing in emerging markets may accentuate these risks.

The MSCI Emerging Markets Index captures large and mid cap representation across 26 Emerging Markets (EM) countries. With 1,198 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

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