Potential losses to U.S. and Chinese economies by 2030 if all U.S.-China trade is subjected to a 25% tariff.

Source: U.S. Chamber of Commerce, 2021

“

Trade decoupling means forgoing market access not only today, but ever more importantly, for years to come.”

U.S. Chamber of Commerce, 2021

China and the U.S. are at a pivotal moment in their trade relationship. Two polarized outcomes, and a spectrum between them, are possible: a decoupled relationship with long-term tariffs and an adversarial attitude underpinned by protectionism and mistrust; or a thawing in the geopolitical environment, leading to open trade, reduced tariffs and newfound cooperation. While decoupling represents a significant drag on many sectors, strategic coupling could increase overall trade to higher levels than before the trade war. But recent legislation in the US, and rhetoric going in both directions, suggests suspicion and protectionism may be more powerful today than trade. Even if the aggregate impact is one of lost growth, investment opportunities will appear along the way, not just in China and in the U.S. but from Europe to the ASEAN countries and South Asia. Cutting-edge technologies are at the center of potential disruption by decoupling but they also present opportunities to be on the right side of a compelling investment theme. These sectors include 5G, semiconductors, solar, electric vehicles (EVs) and rare earth.

TECHNOLOGY

5G, WHO’S GOT THE BANDWIDTH?

“

Technology is a foremost issue in the U.S.-China relationship. China sees a critical need for technology-led productivity enhancements, while the U.S. is unwilling to relinquish its sizable technological edge to a strategic competitor.”

Three Focal Points for the U.S.-China Relationship, PGIM Fixed Income, March 2021

5G GENERATION GAP

5G IS AT THE FRONTLINE OF TECHNOLOGICAL COMPETITION, AND CHINA APPEARS TO BE THE STRONGER COMPETITOR.

+32%

EXPECTED GLOBAL 5G SERVICES COMPOUND ANNUAL GROWTH RATE 2020 TO 2027.

Global 5G Deployment

5G networks launched

Pre-commercial 5G deployed

Source: GSA 5G Market Snapshot

Initial investment in 5G

North America

Latin America

Western Europe

5G SUBS

Central and Eastern Europe

Northeast Asia, excl. China

IN MILLIONS

China

Source: Ericsson

Southeast Asia and Oceania

India, Nepal and Bhutan

Middle East and North Africa

Sub-Saharan Africa

0

250

500

750

1000

1250

Figures and information provided are estimates subject to change.

“

How the U.S. and China internally manage their respective spectrum policies, network deployment costs, and … 5G networks will ultimately determine who is better positioned for global leadership.”

Nicole Turner Lee, Brookings Institute

5G

APPLICATIONS BEYOND MOBILE COULD BE IMPACTED BY DECOUPLING IF FEARS ABOUT SECURITY IMPLICATIONS OVERRIDE THE DESIRE FOR COOPERATION ON INNOVATIVE NEW IDEAS.

“

5G has the potential to enable fundamentally new applications, industries and business models,…via unprecedented use cases… for mobile, eHealth, autonomous vehicles, smart cities, smart homes and IoT.”

Institute of Electrical and Electronics Engineers

$300 BN

POTENTIAL REVENUE PER ANNUM OF NETWORK SLICING MARKET BY 2025.

Source: Mordor Intelligence

Network slicing allows telcos to create multiple end-to-end networks on one infrastructure platform. Decoupling limits this potential because of national security concerns and the need for global standards and access.

COSTS FOR 5G WILL RISE

AS THE U.S. LEANS ON ALLIES TO CUT OUT CHINA FROM 5G INFRASTRUCTURE, AND CHINA DE-AMERICANIZES ITS OWN 5G ECOSYSTEM.

+8-29%

ESTIMATED RANGE OF INCREASED COSTS OF RESTRICTING A KEY 5G INFRASTRUCTURE PLAYER IN BUILDING NETWORKS IN THESE COUNTRIES OVER THE NEXT DECADE: AUSTRALIA, CANADA, FRANCE, GERMANY, JAPAN, INDIA, UNITED KINGDOM, AND THE U.S.

Source: Oxford Economics

$2.8 BN

ESTIMATED COST OF REMOVING HUAWEI 5G EQUIPMENT IN THE U.K. BY 2027 IN RESPONSE TO U.S. SANCTIONS.

Source: Reuters

“

5G will be transformative for our country, but only if we have confidence in the security and resilience of the infrastructure it is built upon.”

British Secretary of State for Digital, Oliver Dowden

BOTH THE U.S. AND CHINA ARE INCREASING INVESTMENT IN TECHNOLOGY TO MITIGATE THE IMPACT OF DECOUPLING. THE TRADE WAR IMPEDES THE EXCHANGE OF IP AND EXPERTISE IN TECHNOLOGICAL RESEARCH AND DEVELOPMENT.

$250 BN

THE U.S. INNOVATION AND COMPETITION ACT (USICA) WILL INVEST HEAVILY IN DOMESTIC SEMICONDUCTORS, TELECOMS, LITHIUM, RARE EARTHS AND TECH SUPPLY CHAINS TO COUNTER CHINA’S PERCEIVED THREAT.

$1.4 TN

CHINA TO INVEST IN TECH INFRASTRUCTURE TO 2025.

Source: WhiteHouse.gov

Source: DataCenter Knowledge

SEMICONDUCTORS

WHO’S GOT THE CHIPS?

Semiconductors are central to consumer electronics. Today; China is the largest single country market for semiconductors, because it is a manufacturing and assembly hub for most of the world's smartphones and personal computers. But China doesn't have the semiconductor presence it wants. The leaders are Intel from the U.S. and Samsung Electronics from South Korea.

+14.6% OVER 2019

Source: South China Morning Post

“

The most important change in respect to decoupling is getting China’s private sector on board with indigenization and making self-sufficient chips. The Huaweis and the Xiaomis are now very focused…on helping to foster a domestic Chinese ecosystem.”

Jordan Schneider Senior Analyst, Rhodium

Source: Top 10 Semiconductor Vendors by Revenue, Worldwide, 2020 (January 2021), Gartner

CHINA IS RAMPING UP SELF-SUFFICIENCY IN SEMICONDUCTORS

China’s IC Self-Sufficiency Goals, from “Made in China 2025” Roadmap

Source: MIC 2025 Implementation Roadmap (from US Chamber of Commerce’s UNDERSTANDING DECOUPLING: Macro Trends and Industry Impacts)

Figures and information provided are estimates subject to change.

R&D INVESTMENT TSMC VS SMIC

Source: BCG

Figures and information provided are estimates subject to change.

SUPPLY CHAIN

TRUTH AND HYPE ABOUT REROUTING

Semiconductors also illustrate a broader decoupling theme: the reorientation of supply chains throughout other parts of Asia that are not subject to tariffs or uncertainty, potentially mitigating the estimated $1 trillion or more losses to both sides. Vietnam and South Asian countries like Bangladesh are frequently mentioned as nations that will benefit from this shift.

“

The shifting of supply chains doesn’t happen instantly. Diversifying away from China was already underway in industries like auto components, tech and apparel.”

Shehriyar Antia, Head of Thematic Research at PGIM

TARIFFS ENCOURAGE LOW-COST MANUFACTURERS TO RELOCATE FROM CHINA TO MARKETS SUCH AS INDIA, INDONESIA, BANGLADESH AND VIETNAM.

RESHORING AND RESHAPING SUPPLY CHAINS DOES NOT MEAN ABANDONING CHINA BUT BUILDING MORE CONTINGENCY.

Lessons learned from the pandemic have a profound impact on supply chain techniques, leading to a shift from a just-in-time approach to inventory to just-in-case, so as to mitigate uncertainties around supply.

CHINA IS VULNERABLE TO SUPPLY DISRUPTION OF SPECIALIST GOODS THAT IT CANNOT REPLICATE – NOT JUST TOP-END CHIPS FOR SMARTPHONES BUT EXOTIC SENSORS AND COMPONENTS, FOR WHICH THE U.S. IS AN IMPORTANT MANUFACTURER.

STRATEGIC COUPLING

WHILE SOME SUPPLY CHAINS RESHORE AND REROUTE, U.S. COMPANIES REMAIN COMMITTED TO THEIR FOOTHOLD IN CHINA.

83%

OF U.S. BUSINESSES ARE NOT CONSIDERING RELOCATING MANUFACTURING OUTSIDE CHINA.

Source: AmCham China 2021 China Business Climate Survey

DESPITE TARIFFS, BILATERAL U.S.–CHINA TRADE IS FORECAST TO BE STRONG FOLLOWING THE PHASE ONE AGREEMENT AND IF THE PANDEMIC ABATES.

Source: World Bank East Asia Pacific Economic Update April 2020

A DE-ESCALATION SCENARIO IS ALSO POSSIBLE

in which tariffs are gradually rolled back, resulting in considerable impact on the U.S. economy.

Source: Oxford Economics/Haver Analytics

Figures and information provided are estimates subject to change.

“

The most practical approach to ‘being tough’ would be ‘competitive recoupling’ where the U.S. and China carefully manage their differences, coordinate and collaborate on areas of common interest, and compete on equal footing in areas such as technology and trade.”

Yan Liang, Professor of Economics at Willamette University, Oregon

COMMODITIES

RAW AND RARE