eBusiness Weekly
Clive Mphambela
Us President Donald Trump has ordered the imposition of as much as 25 percent tariffs on some $250 billion worth of Chinese made goods that are imported into the United States.
Most if not all the tariffs have since come into effect — and the American President has promised even more drastic trade action, unless of course Beijing bends over and concedes to America’s demands.
The US administration’s proposed tariffs on Chinese exports have thus taken Sino-US trade tensions to a new high and the Chinese have not taken things lying down.
Beijing has crafted its own set of retaliatory measures.
China has not only accused the Trump administration of launching the “largest trade war in economic history”, but has instead retaliated by imposing levies on American exports into China on an dollar for dollar basis.
As the trade war between these two economic giants escalates, economists are beginning to debate how the trade tiff will affect those two economies but the rest of the world? We too, should begin to think about the possible spillover effects on the economies of small countries like the Zimbabwe?
The critical issues obviously are:
- Is the hostility likely to escalate further?
- What shape or form will the war take going forward?, and 3. Can the global trade system accommodate or even sustain a protracted trade war between two of the largest economies in the world.
The US Economy is worth some $19.5 trillion dollars and China is at $12 trillion. Economists estimate that the China US trade war now affects $500 billion worth of trade and will cost the economies some $30 to $50 billion in direct costs.
The blanket tariffs by the US will cover an extensive range of Chinese products. The collective economic effects of the US$250 billion worth imports, are likely to shave off between 0,3 to 0,4 percentage points from China’s gross domestic product growth.
However, the subsequent fallout on exporting companies, plus the aftershocks from the financial market correction, could amplify the second-order shocks on the world economy at large.
Already the developments have caused a sharp reaction in the markets, with both Chinese equities and the yuan tumbling, eliciting a recent response by the bank of China to take measures to shore up the yuan.
Whilst the US tariffs are not yet a done deal, Beijing as largely expected is altering its macro policies in three major ways.
Firstly, China will return fire as soon as the US has put a final list of tariffs out. Beijing after all, has a narrower universe of goods that it buys from the United States — only $130 billion last year, and can therefore easily match the value of US tariffs by imposing even a lower tax rate on US exports to China, This would still create a reciprocal shock for the US economy.
Secondly, the Chinese have access to a huge domestic market and in times of a trade war, the Chinese will simply be able to buy Chinese goods. Also, bear in mind that even without China’s retaliation, the US is going to inflict pain on itself with these round of tariffs. American firms have already raised the red flag.
Not only will cost dynamics for American firms on the homeland change for worse as they now have to pay more for raw materials and intermediate goods, pushing up local production costs Thirdly, more than 12percent of the top 100 companies that account for the bulk of US Sino trade are actually American companies that manufacture goods on Chinese soil.
Approximately 70 percent are non-Chinese firms, with Taiwanese companies accounting for more than 30 per cent of this residual. This however reflects China’s entrenched position in the global supply chain, underscoring the global ramifications of the US-China trade dispute.
So much has been written on this aspect already topic, with almost uniform conclusions: a trade war is bad for the United States and China, and will adversely affect the rest of the world through supply chain disruptions and potential fallout on financial markets.
Economists have generally put out solid work on the first aspect, but good analysis on the contagion effects has been much harder to pin down. Which could be the worst-hit countries, outside the US and China? What is the nature, scale and breadth of the spillover? And how much does everyone stand to lose?
A good starting point is China’s important position in the global supply chain, which is linked to the manufacturing of many products that have been, or will be, hit by the US tariffs. According to China’s customs, over 30 per cent of the country’s total exports in 2017 were processed and assembled products that incorporated other countries’ inputs and components. This means that even though the final goods were labelled “made in China”, the profits were not made by Chinese producers alone.
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For products such as electronics, which rely heavily on the global supply chain, over 40 per cent of the added value in mainland Chinese exports can be traced to external partners. Asia’s technology leaders, such as Japan, South Korea, Taiwan and Singapore, are important creators of the value embedded in China’s exports around the world.
If products destined for the US are considered, China, along with Mexico and Canada, has effectively functioned as a carrier of the value that originated in upstream producers, even though it has also become a strong value generator over time.
This inter-connectedness of the value chains means that the impact of the trade war will be contagious. As China’s exports to the US decline, its import of components and inputs from other partners will drop too, sending shock waves through global production lines. Japan, Korea and Taiwan appear the most vulnerable, by dollar amount. But in terms of gross domestic product, Singapore is the most exposed to the fallout from the trade war, followed by Taiwan, Malaysia, Korea and Vietnam.
Is the Sino-US trade Tiff posing a Serious Threat to World Trade Order?
The global trade order has therefore come under unprecedented strain. Whilst cracks have been evident in the trade space for a long while now, the World Trade organisation-WTOs inability to keep pace with changing business conditions, which are now increasingly shaped by nationalistic attitudes, represents by far, the greatest threat to the continued relevance of the WTO.
It is not surprising that these disagreements between China and USA over trade practices now present a real danger to the survival of this age old institution.
The genesis of the US China trade tiff is a consequence of the many failures by the World Trade Organisation, one of which has been the inability to promote truly free and open trade arena, in which all competitors are treated fairly.
While the WTO is just one element of a larger system, it is supposed to play a critical role, that of resolving disputes and arbitration of conflicts. Does the WTO therefore have capacity to intervene in the US China trade war, given the scale and potential fallout? If the WTO cannot fix the disagreements between these two large economies, will the consequences not extend well beyond the boundaries of these countries, and ultimately cause heads to roll in the offices in Geneva?
The writer is an economist and the views expressed in this article are his personal opinion and should in no way present views of any organizations that the writer is associated with.
