eBusiness Weekly
Six Days ago, Canadian law enforcement arrested Huawei CFO Wanzhou Meng at the request of the US Justice Department, over claims she has violated provisions of US sanctions laws against Iran.The details of Meng’s arrest remain sketchy, and news of her arrest only became publicly known in the early hours of yesterday. She faces a bail hearing today, December 7th. Why is this event very significant?
Firstly, the arrest was made while US President Donald Trump was in the throes of trade negotiations with his Chinese opposite number at the 2018 G20 Summit in Buenos Aires, Argentina.
Trumps meeting with Xi Jinping managed to reach agreements for China to hold off on new tariffs on as much as $120 billion of American goods.
In the meantime Trump was standing resolute on his intentions to escalate tariffs on $267 billion worth of trade with China, the January 1 deadline on $200 billion Chinese exports into the USA facing a tariff hike from 10 percent to 25 percent fast approaching.
The arrest of Meng, a highly regarded business executive in China, throws spanners in the works. This is especially so given the timing of the action.
Huawei is a highly regarded global corporation, and now considered one of the leading technology firms in the world. It is obvious to many that while sanctions violations have been cited as the reason for the arrest, there is also a feeling that this event is closely related to the US-China trade tiff.
Trump has complained bitterly about the American economy’s exposure to Chinese technological advancement, saying at one point, that it was a growing security risk.
Amidst all the drama, pushing and pulling, the one obvious question most people are now asking is: Who will win this War?
Donald Trump has repeatedly and stoically declared that his US will win. On the other hand, his more conservative Chinese business adversaries have quietly and cautiously said in the not so distant future, China will come out of this mêlée better off.
A greater majority of players on both sides of the battle rather think that this is a war that will have no winners, only casualties.
This becomes more plausible when one factors that there is actually very little agreement on either side what a “win” would look like? To add to that, none of the two sides are clear at the moment what each country really wants when the dust settles.
Advocates of free trade, say that the only effective way to grow the world economy sustainably is through free trade. It is for this reason that for many of us who are outside the direct path of these economic giants, there is a rising fear, or apprehension, as to what the trade war and its matrix of possible outcomes will mean for global trade order.
I for one believes, and a lot of the evidence has already proven, that free trade is the best way to maximise long-run prosperity for everyone on the planet.
However, as the great economists, Keynes famously said, “we are all dead in the long run”. While this trade war will most likely end with no winners, but rather a lot of “dead” economies, both parties to the battle will be better or worse off at various points as the battle escalates. It becomes therefore difficult for observers to distinguish between “winning” and “holding a temporary lead”.
Using that reasoning, it seems that the US has some kind of upper hand now, and could hold that for another year or two. This is because the US economy is currently relatively stronger, and can for the time being, better withstand any retaliatory moves by the Chinese.
However, many economists, including myself, posit that the trade war will prove damaging to a wider spectrum of US trade and political relations, and the current policies will likely backfire on the USA in a big way.
Already, some American businesses are feeling the cost impact on their value chains on the back of intermediate goods imports from China, and American farmers are wary that reduced market access to Chinese consumers may hurt them in short order. It is also worth remembering that in this context, China has bigger shock absorbers, as it has growing trade surpluses with the rest of the world, an attribute that the US economy does not enjoy.
Those rooting for the Chinese say that within four years, China can replace most of the lost US exports by increased its trade with the rest of the world. This is a plausible argument, given that the Chinese enjoy a massive competitive advantage driven by low costs and a savvy currency strategy.
Trump’s crazy ways are also seen to be the beginning of a new technology boom for China. For products such as electronics, which rely heavily on the global supply chain, over 40 percent 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.
We can now only hope that Trumps war is really a bluff. If it is not, then we must worry about, “who will blink first”.
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 organisations that the writer is associated with.
