Key Takeaways:

• With an escalating trade war between the U.S. and China, higher tariffs and a stronger currency could negatively impact U.S. brand spending in China.

• Higher tariffs and a weaker currency may help Chinese marketers in the U.S. because tariffs won’t necessarily apply to all of the goods Chinese marketers advertise to U.S. audiences.

• Future changes in a wide range of policies could impact spending patterns further.

U.S.-China trade war escalates. With the recent announcement that tariffs will be applied to almost all goods entering the United States from China, the Chinese yuan depreciating to an exchange rate of higher than 7:1 to the U.S. dollar – the first time it has breached that level – and the U.S. formally declaring China to be manipulating its currency, the trade war between the both countries has escalated. Further actions will likely follow with ongoing tit-for-tat actions in the near future.

If current conditions persist, foreign marketers will probably curtail spending in China. The news is significant for the advertising industry as it represents one of the looming economic risks countering recent growth trends in countries around the world. Beyond the likely higher prices for consumers in both countries, if everything else were held equal – such as consumer preferences for either domestic or foreign brands and allocations of revenues into ad spending – foreign brands that manufacture in their home countries and market abroad will become more expensive and lose market share. In China there is significant spending from U.S. brands across the media industry. Higher prices for U.S.-manufactured goods driven primarily by a weaker yuan and stronger dollar would make those U.S. brands less affordable and presumably would negatively impact their market share and their ad spend. This would be negative for China’s domestic media industry.

The U.S. and other western markets could end up with more spending on digital media from Chinese exporters. By contrast, in the United States, any impact of the trade war would not likely be observed in traditional media. There are few Chinese brands who buy television advertising, radio, print, etc.; however, many Chinese companies are large players in digital media in the U.S. and around the world. According to our estimates, Chinese marketers who are based in China but look to reach consumers outside of their home market accounted for somewhere between $4-$6 billion of ad spending on Facebook alone during 2018 and are on pace to spend somewhere between $5-$8 billion this year. A significant portion of this activity is likely directed into the United States. Separately, according to estimates published in May by Marketplace Pulse, 40% of the top sellers on Amazon’s marketplace in Europe are from China. The firm believes Chinese manufacturers have a higher share within the United States. Presumably this activity also flows through to spending on Amazon’s advertising products as well.

Weaker currency will probably push more Chinese marketing investment abroad. With a weaker yuan, Chinese products sold in the U.S. – and Europe as well, assuming the yuan stays weak against the Euro as well – will be more attractive to consumers. Further, with a weaker currency, Chinese manufacturers are incented to drive growth from regions with stronger currencies and we could see more spending from manufacturers not impacted by new tariffs. Spending would likely continue to be directed to digital media because of the tight connections that can be made between related media and e-commerce sales.

Tariffs likely won’t impact many e-commerce sellers shipping from China. In our view, it does not appear that Chinese e-commerce activity will be negatively impacted by the recent news in the short term, at least. Individual goods shipped from China – or anywhere else – to the U.S. worth less than $800 are generally exempt from any taxes or tariffs. This means that whatever tariffs are imposed, they are unlikely to impact typical e-commerce transactions unless these exemptions are changed. Consequently, we would expect most e-commerce and related advertising spending to continue as before, or to possibly accelerate because of the aforementioned currency trends.

Global postal pricing reform could have an impact next year which would curtail some Chinese activity abroad. On the other hand, the U.S. is leading global efforts to cause postal rates paid by Chinese shippers to rise. Under current international rules dictating pricing that a national mail carrier can charge foreign postal services, it is typically cheaper to mail a package from China to anywhere in the United States than it is to mail that same package within the United States. If prices were evened out – or made unfavorable to importers from China – these actions could negatively impact e-commerce platforms and related advertising spending.

Implications for large global marketers depend on what happens next. As described here, for large non-Chinese brands there are risks that follow from more competitive pricing and higher ad spend levels on digital media outside of China. Within China, non-Chinese brands will have less favorable consumer pricing and presumably this will impact market shares above and beyond pre-existing trends which have led to local brands taking share from foreign brands. These conditions may persist regardless of preferred policies from the current U.S. administration and may persist with a new administration as well.

For now, it is probably most prudent to assume the current trajectory of these policies continue. Non-Chinese brands that believe the long-term opportunity in China will prove to be more favorable than it is now will want to sustain their marketing-related investments in the region. Arguably, if currency changes or tariffs force pricing up, it becomes increasingly necessary to use advertising to position foreign brands as premium products. At the same time, many Chinese brands – specifically, those who can ship their products into the U.S. without exceeding the personal exemption cap – will benefit in the short-term with ongoing marketing activities, at least so long as changes to postal regulations are not overwhelmingly negative for them.