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Roughly 5% of China’s manufacturing output is sold to the United States, overwhelmingly in low-value-added industries such as consumer electronics assembled from imported components, toys, clothing, furniture, household appliances and so forth.

If in an extreme case China’s exports to the US dropped by half, China would lose or find other markets for 2.5% of its manufacturing output. But what does that mean for investors? Stockholders don’t care about the aggregate economic impact of a trade war, but rather about the particular impact on the stocks they hold.

In the case of almost all widely-traded Chinese stocks, the impact will be zero or close to zero. Large-capitalization Chinese stocks have almost no exposure to US exports. Exposure to the US is concentrated in smaller firms with negligible market capitalization. I continue to believe that the best trade in this environment is to buy Chinese stocks on dips.

The opposite is true for large-capitalization American stocks.

The capitalization-weighted average of foreign sales for the top 20 S&P 500 stocks is 44%. In the case of the Hang Sang China Enterprises Index, the average is just 4% (I include Alibaba in the group, although it’s traded in New York rather than Hong Kong).

China’s technology giants are for the most part domestic companies. The big exception is employee-owned Huawei, which does not trade.

Tencent, Alibaba, Baidu and others flourished because China kept the likes of Amazon and Google out of the Chinese market. The Chinese tech startups couldn’t have survived competition with American companies who had a head start of a dozen years. Their revenues derive overwhelmingly from the domestic market, although that will change as they become embedded in Belt and Road Initiative (BRI) investments.

Except for the textile and apparel maker Shenzhou International, the only Chinese firms with substantial foreign revenues are oil companies. The Chinese financial giants have a negligible foreign presence, unlike their American counterparts.

The 2008 financial crisis showed China that it couldn’t rely on the American consumer as a long-term source of support for Chinese growth, and that it would have to develop its internal market rather than rely on exports. As a percentage of Chinese GDP, exports fell from 36% in 2008 to 18% in 2018. China backed high-value-added industries in the technology space and protected them from foreign competition. That explains why most of China’s high-value-added industries focus on the domestic market, while export industries are concentrated in low-value-added assembly businesses.

Even a complete blockade of Chinese products would have almost no direct impact on the most widely-held Chinese companies. To the extent that a trade war reduces Chinese growth, to be sure, the profits of domestic Chinese companies might fall.

Most economists reckon that a full panoply of US tariffs at 25% on all Chinese goods would reduce Chinese growth by about 1% of GDP, that is, from a bit over 6% to a bit over 5% – everything being equal. China almost certainly would add fiscal and monetary stimulus to the domestic market, mitigating the decline in the growth rate.

As I wrote yesterday, trade barriers are the least of the means by which Beijing might retaliate against the United States. China’s rapid progress in Artificial Intelligence-enabled chips for data processing and smartphones raises the possibility of a semiconductor price war. That would be devastating for some of America’s market leaders, including Qualcomm and NVidia.

In addition, China could quietly make it harder for US companies to do business in China while opening the door to European and Asian market entrants.

American pressure hasn’t had any apparent impact on Huawei, whose revenues grew 40% year-on-year in 2019’s first quarter. In the worst-case scenario, though, Chinese pressure could have a substantial impact on the revenues of large-capitalization US firms doing business in China.

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