Exiting China will cost US and European companies $ 1 trillion, says BofA

© Getty ImagesEven before the pandemic, the trend of globalization towards localization was real and structural, says BofA.

The cost for U.S. and European companies to move manufacturing out of China could reach $ 1 trillion over five years, according to a new study from Bank of America.

The bank’s global analyst survey found that companies in more than 80% of global sectors experienced supply chain disruptions during the pandemic, prompting three-quarters to expand the reach of their businesses. reassortment plans.

The research of BofA’s head of global research, Candace Browning and her team, comes as President Donald Trump on Tuesday pledged to offer companies tax credits to relocate their factories to the United States from China , in order to reduce the country’s dependence on Beijing.

“We will create tax credits for companies that bring jobs back from China to America,” Trump said in a speech to supporters in Mankato, Minnesota, according to Reuters.

On Monday, the United States said it was imposing a new round of restrictions on Chinese Huawei, as Trump renewed accusations that the company’s telecommunications equipment was being used for espionage. Huawei has repeatedly denied accusations it could facilitate Chinese espionage.

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BofA said that even before the pandemic, its January survey of global analysts confirmed that the trend of globalization towards localization was “real and structural.” Six months later, COVID-19 has “turned tectonic shifts into visible fault lines,” analysts at the bank said.

They predicted that the £ 1 trillion investment would reduce return on equity by 70 basis points (bps) and free cash flow margins by 110 bps, offset by a potentially lower risk premium. “It would be important, but“ not prohibitive ”.

Industries with structurally higher returns – such as healthcare and technology – will be able to absorb these additional investments, while others with more moderate cash flows may need to resort to external debt or equity financing.

Investors are expected to buy stocks in construction and machinery engineering, automation, and electrical and electronic equipment manufacturing to benefit from this theme, BofA analysts said.

“We expect corporate management and policymakers to aggressively explore ways to offset the higher operating costs associated with reshuffling,” the analysts wrote, adding that although they did not Not expecting a “quick fix” they were struck by the intention to use automation in future locations.

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Policymakers are also expected to help through tax breaks, low-cost loans and other grants, with recent announcements to this effect from the United States, Japan, the European Union, India and Taiwan, among others.

Banks in North America, Europe and South Asia could also benefit from increased economic activity that would result from these changes.