US-China Trade war: Is it worth getting tangled?

Posted on 09/01/2019 by Kulika Supcharoen

 

Highlights:

The ongoing trade war is having wide-reaching global effects with predictions of over $90 Trillion global loss of income over the next 3 years. It has become more uncertain to manufacture your products in China as the trade war intensifies. Other Asian countries with strong logistics infrastructure, geographic position, and highly skilled workforces are benefiting from the uncertainties in China.

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About The Trade war:

China and the United States are now several months into a tit-for-tat trade war and it doesn’t seem like there is an end in sight. The US has imposed ever larger tariffs on Chinese exports. In response China has levied tariffs on American imports into China, it’s probably one of the most talked about current global topics as its effects are far-reaching; and its impact will be felt for some time to come, even after it is resolved. The questions is, how will it affect you, and also how do you avoid getting caught in the middle?

Before we continue it’s worth taking the time to explain, what is a trade war? At its core, a trade war is an economic tactic used by the governments of nation states to apply pressure to foreign governments in order to force a desired outcome. They do it using tariffs which is an arbitrary tax or fee added to goods that are imported or exported from/to countries thus making them more expensive and less desirable. The increased cost of goods serves as a way to pressure markets into looking for cheaper alternatives ultimately damaging the target countries trade. It really isn’t an exaggeration to call it a war as it’s one of the most aggressive peacetime tactics that governments have at their disposal and it’s not a tactic that is undertaken lightly.

 

How did it all start?

For the US, they say it’s all about intellectual property. The United States view is that for a long time China has forced foreign companies to engage in joint ventures with Chinese companies giving them unfettered access and also permission to use, improve, copy or steal their technology. On top of that, there are many non-tariff barriers to foreign businesses that they say discriminates against foreign technology and insulates a large part of the Chinese economy from global competition. Even more catastrophic, they believe that the Chinese government fails to recognise and uphold legitimate patents and copyright; essentially creating a market where intellectual property theft is not only permitted but state advocated. However, for many who are opposing, they are still recognising that Chinese companies had a reputation for copying in the past, but this is all quickly fading into the past.

China then argues that we are at the summit of decades of US unilateralism, protectionism and economic hegemony. China also claims that the US has a history of false accusations against countries and regions, particularly China, and to use economic measures (such as tariffs) as a form of imperialism to apply pressure to China.

The rhetoric began early in President Trump’s bid for the Republican Party when he said on 2 May 2017 whilst campaigning “We can’t continue to allow China to Rape our country and that’s what they’re doing. It’s the greatest theft in the history of the world.” The statement is one of many that he makes on the trail when he discusses China’s trade practices and begins to layout his focus for his presidency under the banner of “Making America Great Again”. It’s not until 23 March 2018 that President Trump actually imposes a 25% tariff on all Steel imports (except from Argentina, Australia, Brazil, and South Korea) and a 10% tariff on all Aluminium imports (except from Argentina and Australia). This is the beginning of the trade war and what kicks off the escalation, when China responds with new tariffs on 128 categories of products, including pork, fruit and nuts, steel pipe for the oil industry, and ethanol.

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Source: Peterson institute for international economics

The US-China trade war isn’t just hurting these two countries and is even hitting America’s allies. The US 25% steel tariffs and 10% Aluminium tariffs also hit the EU when Donald Trump dropped them from the exemption list when no concessions were made on behalf of US interests. As a result, the EU retaliates with tariffs on imports including Harley Davidson, and Florida Orange Juice. Other key trading countries also are being hit by the trade war, including South Korea, Taiwan, and Singapore.

Since the initial $50B tariffs negotiations have deteriorated and Trump has increased the number of targeted goods from 1,333 to 5,984, increasing the total tariff value to $200B on Chinese imports. It doesn’t seem like there is an end in sight and the Bank of England has recently estimated that over the next 3 years there will be a global 2.5% deceleration in the GDP growth rate if the proposed tariffs were to be introduced. That might not sound like much but that could translate to approximately $90 Trillion loss of income.

We’re already starting to see how the trade war is affecting the cost of goods and the performance of businesses with the most prominent being Apple. In their latest quarterly statement Apple has had to revise down its Q1-2019 predictions  as trade in China slows. As a result, Apple lost $46B off it’s market cap, adding to the total of $460B in the last three months. That’s more than the entire net worth of Facebook! Now Apple’s woes (they’re still one of the most valuable companies on earth so woes might be a stretch) are from a number of known factors, but the trade war is certainly a big pressure that they could do without.

 

What should we do to survive this situation?

With that in mind, you might be wondering what options does that leave me? China is the biggest global manufacturer but the rising tensions, volatility, and most importantly increased cost of doing business, with the potential for further future increased costs if more tariffs are levied. Well, fortunately, other Asian countries have been quietly investing and growing their manufacturing capabilities over the last decades. As an example in South East Asia 44% of Thailand’s GDP happens to come from Manufacturing and it is fast becoming an Automotive hub in the Asia Pacific region with big-name automotive companies such as Toyota, Honda, Nissan, BMW, Ford, General Motors, Mercedes, Mitsubishi, and also Tesla. A country that hosts Automotive manufacturers and also such a wide range of Automotive companies is an important indicator to a regions viability, as a base of manufacturing, as it speaks to several important requirements for setting up manufacturing in a country. Firstly, there needs to a readily available population in large of a well trained and capable workforces who would be able to undertake the manufacturing of something as complex as a car.

 

Three words: Consider The Alternatives

If you are thinking of manufacturing in China and are worried about how the US China trade war could affect you, then it might be worth considering your options at this time. Now if you are from the US, or selling products into the US, and have plans to manufacture your products in China it is worth considering the impacts of the trade war. Be aware that there are globally competitive alternatives to manufacturing in China, however those need to be evaluated carefully. Do your research and reach out to your contact at Detekt if you require further support to de-risk your manufacturing strategy.

 

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Posted in Asia Insight