Europe Could Gain from US Tariffs on China
The United States imposed higher tariffs on Chinese imports in strategic sectors, like electric vehicles (EVs), batteries, and semiconductors, in a pre-election bid to prevent China from monopolizing critical technologies, as it controls up to 90% of global production in certain areas.
US President Joe Biden’s tariff plan is designed to confront China’s “unfair” trade practices, concerning technology transfer, intellectual property, and innovation, the White House said on May 14. These practices are “threatening American businesses and workers,” it said.
If the mid-2018 US tariffs on China are any guide, the latest round of tariffs could bolster profits for European firms as Chinese counterpart products become pricier and American buyers likely seek cheaper alternatives from stable sources away from Asia. Trade diversion effects from the US-Sino trade war contributed nearly $3 billion to the European Union in the first half of 2019 alone.
Under US President Donald Trump, the US imposed tariffs in 2018 on about $350 billion worth of Chinese imports, and China retaliated by levying tariffs on an additional $100 billion worth of imports, a retaliatory action allowed by WTO rule. The trade dispute had a bystanders’ effect, with countries increasing their exports to the US in products targeted by the US-China tariffs.
The latest series of US tariffs will likely escalate trade tensions between the two largest economies in the world. While only targeting a modest portion of US imports from China, the latest tariffs are poised to inflate the cost of some clean energy products for years to come, until the US develops comparable technologies domestically.
With the US only second to China in renewable energy consumption, and global markets forecasted to generate double the revenues of 2023 by the end of the decade, various European companies may grow faster than before the tariffs in separate industries.
European renewable players, such as Swiss solar module maker Meyer Burger, have already started eying the US market after the US passed the historic Inflation Reduction Act (IRA). Meyer Burger announced in February its intention to wind up panel production in Germany, citing “grave market distortion,” and relocate to the US, where there are better investment conditions due to the IRA.
Uneven Playing Field
Despite US tariffs on Chinese EVs being expected to quadruple by the end of 2024, the economic impact of the tariffs should remain contained as the US currently imports only 2% of EVs from China. However, the US is the second-largest vehicle export market for the EU, accounting for about 16% of exports.
In 2022 alone, the EU exported nearly 300,000 vehicles to the US, with approximately 30% being electric, even as the bloc faces hurdles in its transitions to EVs.
Chinese EV exports to Europe comprise nearly 40% of the continent’s EV imports and may push the region to produce its own import duties to benefit further from tensions, albeit likely at lower rates than the US, at around 30%. EU Commission President Ursula von der Leyen has criticized the flood of state-subsidized electric cars and the artificial distortion of the market to the disadvantage of domestic European manufacturers.
US tariffs on Chinese batteries are set to swell from 7.5% to 25% in 2024, while solar cells and semiconductor tariffs will see a twofold increase from the current rate of 25% to 50%. Nonetheless, given that a mere 1% of solar cells used in the US are sourced directly from China and falling prices of solar panels and battery cells, the tariff sting on costs is already offset.
Despite the economic impact of these tariffs may be minimal to Europe at the macro-level, raising tariffs and reducing trade between China and the US and Europe, solar cells and semiconductor prices will likely increase and boost profits for some European companies.
Semiconductor Opportunities
The US semiconductor industry is a noteworthy area of export interest for European players. With trade tensions likely to spill over and Europe second to China in chip manufacturing capacity, European firms could lay hold of a large piece of China’s share both in the US and worldwide.
US semiconductor imports from China tallied up to just $3 billion in 2023, accounting for about 5% of total imports, according to Sanford C. Bernstein analysts. Yet, the EU is emerging as a top growth contender, with the US broadening the scope of semiconductor controls and geopolitics nudging companies and consumers toward more stable and secure sourcing regions.
US sales are also forecast to grow 10% to $77.45 billion in 2024, with global sales up 13% to a new record of $588 billion. Europe commands approximately 16% of the semiconductor market share and is expected to gain more from Asia Pacific.
Spotlight on STMicroelectronics
STMicroelectronics NV (NYSE:STM) is well-positioned to benefit from the US tariffs on China. Its global operational footprint and diversified product range can provide resilience against localized disruptions from trade tensions and make its products more pricey while attracting manufacturers searching for components, including those for solar energy systems, smart grid technology, and energy-efficient power supplies.
The company’s diversification could serve as a competitive edge and solidify STM’s role as the alternative supplier, as besides China’s monopolization, the White House focuses on combating climate change. The company is also involved in manufacturing chips for AI and cloud infrastructure. Its Edge AI Suite software solution positions it to embed AI-enabled products across various sectors, such as industrial, automotive, consumer, and communication applications.
The current market size of AI revenue is projected to grow at a CAGR of 36.6% from 2024 to 2030, according to Grand View Research, reaching nearly the $2 trillion mark. UBS recently raised its AI revenue to grow 15 times from $28 billion in 2022 to $420 billion in 2027, attributing semiconductor and software as main drivers; both areas STM is actively involved in.
With over $6 billion in cash flow on $16.5 billion in revenues, STM is expected to grow 38.10% over the next year. Its profit margins stand at a solid 20.9%, suggesting efficient management and the ability to convert sales into actual profit when the opportunity arises.
Given its current price-to-earnings (P/E) multiple of 10.80x is undervalued by three times the industry average of 32x, STM presents an attractive investment opportunity, especially when its broad product range prices rise with tariffs on Chinese imports.