As the US trade war with China accelerates, Beijing is preparing to use one of its most effective weapons – people power. There is likely to be boycotts ahead.
The US trade dispute with China escalated this week, after Beijing deployed a powerful weapon in its armoury – people power. The Chinese government warned its citizens against traveling to the US due to “frequent shootings risks and potential harassment” by immigration officials. Such boycotts have worked in the past against countries such as South Korea, but will playing the tourist card really have impact on an economy the size of the US?
Such boycotts have been effective in the past. In 2016, supermarket group Lotte allowed the South Korean military to deploy a US Terminal High-Altitude Area Defense (THAAD) anti-missile system on a golf course that it owned near Seoul. The deployment was in response to North Korea’s nuclear programme, but the placement of the missile so close to Chinese territory caused much bristling in Beijing.
Lotte had heavily invested in China and the government organised a successful boycott of its stores in the country and local authorities hassled the business through frequent safety and hygiene inspections. The boycott was a success, with Lotte sales plummeting resulting in the group selling most of its stores in China to local operators. South Korean carmaker Hyundai also saw its sales slump by around two-thirds in the second quarter of 2017, with the boycott costing the economy some 7.5 trillion won in 2017 (£5bn), according to South Korea’s National Assembly’s Budget Office.
In 2018, 3 million Chinese people visited the US, where they spent $36.4bn. Chinese tourists spend a significantly higher amount of money than other tourists so, although Chinese people were the fifth largest source of tourists, they were the US’s biggest source of travel revenues, according to the US National Travel and Tourism Office.
The trade war has already resulted in Chinese consumers changing their spending habits. Last week, analysts at Citi warned that an unofficial boycott of Apple could slash Chinese iPhone sales by half, as consumers turned to domestic brands. Goldman Sachs also warned of a “worst-case scenario” where official retaliation by the Chinese government blocked iPhone sales in the country. The investment bank calculated that this could result in a 29pc drop in Apple’s total global profits. There have also been appeals across Chinese social media to shun other US businesses such as McDonald’s and KFC.
Trade in goods is the biggest weapon that the US has against China because the quantum of imports is greater. However, targeting services including tourism could give the Chinese much more leverage. Indeed, the number of Chinese tourists travelling to America in 2018 fell 5.7pc year on year to 2.9 million – the first time there has been a fall since 2003.
Tiffany hit by lower numbers
The impact of this was highlighted this week in results from Tiffany & Co, with the luxury retailer revealing that sales to Chinese tourists slumped in its latest quarter. “The tourists in the US represent a low double-digit percentage of our total sales in the US and we have seen a sharp decrease in sales to tourists in the US in the range of 25%. Even sharper for Chinese tourists,” chief executive Alessandro Bogliolo said. As a result, Tiffany cut its full-year profit guidance to low-to-mid-single-digit growth from mid-single-digit growth. Tariffs are also hitting its margins as Tiffany had been hit by China’s retaliatory measures. “The recent imposition of higher tariff rates on jewellery products that we export from the US into China and our decision to not meaningfully increase our retail prices in China at the present time” is also hitting its performance, Tiffany said.
Concerns are also mounting that the trade war could have a significant impact on Hollywood. China could easily stop the screenings of blockbusters in the country should the dispute accelerate – a move that some Chinese state-owned newspapers have already endorsed. In the dispute with South Korea, music venues cancelled concerts by major K-pop stars and stopped approving TV shows featuring Korean actors for broadcast. This contributed to the impact on South Korea’s GDP.
However, it is important to note that all these measures introduced against South Korea did not result in Seoul changing its mind about THAAD. The boycotts are unlikely to bring out a change in US policy by themselves, but could cause damage to specific companies and sectors. The fall in tourism is bad for luxury goods companies, but an escalation of a US corporate boycott in mainland China could hit a semiconductor companies such as Micron and Intel, gambling groups with significant business in Macau such as Wynn Resorts and MGM Resorts. Other companies with a large exposure to China include General Motors, Ford, Nike and 3M.
The trade dispute has had little impact on the US economy so far. When the current administration proposed tariffs on China, many commentators said it would result in soaring domestic inflation, a significant fall in major indices such as the S&P 500 and a large hit to employment – but none of these have come to pass. Inflation remains below target, the S&P 500 is within 5pc of its record high set at the end of April and the US jobless rate is at a 49-year low. However, should China decide to really escalate if Donald Trump continues to embarrass its leadership, a mass boycott could do some real damage to sentiment at a time when the economic cycle is long in the tooth.
The above article was previously published by Charles Stanley on 10th June 2019