When US innovation stagnates, tariffs are imposed to protect inefficient local industries. This move is not a new phenomenon. The tariffs proposed by President-elect Donald Trump harken back to his youth when the same method was applied to Japan to stop the rising number of Japanese imports into the US.
Even the same arguments were used: The Japanese were stealing US intellectual property, Japanese industries were state-subsidised, wages in Japan were lower, and the Japanese were dumping products on the US. At that time, Japan was not taking away jobs from the US because US companies were not encouraged to operate joint ventures, so there was no exodus of US companies to Japan. However, that is what is happening with China now.
How the Japanese handled US tariffs directly relates to the potential Chinese reaction to Trump’s plan to hit them with even higher tariffs next year. The reaction impacts not just the activity in the US market but also spills over into the broader global market. It impacts the ability of other countries to compete with Chinese exports and Chinese products in the Chinese dosmetic market.
The poster boy for the Japanese response is Lexus, Toyota’s luxury car brand. The name is not some name carefully derived from market research. “Lexus” is simply an abbreviation for “Luxury Export United States”.
The Lexus response was to reposition the car as a premium, high-quality product with features that were well ahead of those of its competitors. At that time, Japanese cars were the first to offer extended warranties, four-wheel disc brakes, and other safety features as standard on all their models. Even though the high US tariffs made them more expensive, these vehicles were still seen as offering value for money.
Chinese exporters have already adopted the Lexus response in the car industry and this is most easily seen in the electric vehicle (EV) sector. Contrary to popular belief, the Chinese response is to compete with a very high level of innovation and extremely cost-efficient production methods. The manufacturers do not depend on cheap labour because the skills required to assemble these high-tech cars differ vastly from those needed on the Lego-block-style assembly lines staffed by workers with low skills and wages.
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How good is China’s EV technology? Ford CEO Jim Farley imported a Xiaomi SU7 EV from Shanghai so he could test drive the competition. He told the Electric Everything Show podcast that, after six months, he did not want to hand it back. Xiaomi is better known for its cell phones, yet it can produce a vehicle that outcompetes the product of a dedicated automobile manufacturer with more than 100 years of experience.
Tariffs spur innovation by those subjected to them, hamper innovation by those who hide behind their walls and add to inflation by artificially increasing the cost of products for political purposes.
Countries that did not follow the US in imposing tariffs on Japanese automobiles still felt the impact of rising quality as Lexus was exported globally.
See also: Trump's tariffs hurt more than just China
The Lexus response results in better, higher-quality, more innovative products across the board, which changes the competitive landscape for all companies. To grab the attention of Chinese consumers, EV made by other countries have to compete with more advanced Chinese EV too.
Technical outlook of the Shanghai market
The Shanghai Index tested the support level near 3,440 but failed. The index continued to fall and is now testing the upper edge of the long-term moving averages in the Guppy Multiple Moving Average (GMMA) indicator.
This means that the position of the tentative trendline has to be adjusted. The line is now located at anchor point B and the higher anchor point is repositioned at C. This is a trend line with a shallow slope, which is often associated with very sustainable trends.
A key feature on the chart is how the long-term group of averages has remained well separated during this Shanghai index pullback. This suggests that investors have continued to support the longer-term uptrend, coming in as buyers when the market retreats.
A change of trend is signalled when the long-term GMMA begins to compress in reaction to the index dips. This compression shows that investors have become sellers due to the price retreat.
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The fall below the lower edge of the short-term GMMA shows traders taking profits. A continuation of the uptrend will rely on solid investor support and buying. As the index becomes more attractive, traders will likely enter the market again in search of trading bargains.
The short-term upside objective for a rebound rally is the peak of the September rally near 3,674. To reach this level, the index will need to move through the historical resistance level near 3,440.
Failure of support near 3,288 has longer-term historical support near 3150. This is just below the value of the lower edge of the long-term GMMA group of averages.
Daryl Guppy is an international financial technical analysis expert. For two decades, he has provided weekly Shanghai Index analysis for mainland Chinese media. Guppy appears regularly on CNBC Asia and is known as “The Chart Man”. He is a former national board member of the Australia-China Business Council
