EXPERT EYE

With tensions still running high between the powerhouse economies of China and the US, the wider consequences are being felt around the world

Assessing the impact of the ongoing US-China trade war

Businesses around the world have been caught up under multiple developments – Brexit, market mayhem, volatile oil markets, slowing growth rates, protectionist policies and trade wars rhetoric.

At the heart of all this are two of the biggest global economic powerhouses – the US and China, increasingly bolder in testing each other’s waters. While tensions escalate between the two, the larger consequence is to be felt by the rest of the world.

The Trump administration is currently attempting to rewrite global trade routes and transactions by promoting a nationalistic agenda, and it has in all seriousness escalated globally with other friendlier markets as well – NAFTA with Canada and Mexico, and the Transatlantic Trade and Investment Partnership (TTIP) with Europe.

At heart, the rise of protectionist

policies is logically understandable – they are intended to support and revive the failing rustbelts and factory towns in advanced economies, reeling under cheaper competition from developing economies. But what they fail to account in their logic is the shifting trends in technology and manufacturing that the world is moving over to. Therefore, it would be irrational to expect a coal town in Kentucky to be revived over tariffs on China or a wall to be built with tariffs on Mexico.

This rhetoric doesn’t work in isolation and it has detrimental consequences on the rest of the world as it directly impacts the trade and transactional routes. The ongoing US-China trade war has already seen incredible declines in emerging markets; and coupled with a slowing global growth rate, volatile oil markets and rising dollar rates, currencies including the Indian Rupee, Turkish Lira and Argentine Peso have been drastically impacted.

Undoubtedly, Asia has suffered significantly as a result of this dispute as China struggles to find a foothold as it battles with its own economic woes. The country is facing falling investment, and its stock market was the worst performing throughout

2018, finishing with a loss of 28 percent as demand fell.

Keeping up with the changing times

One of the critical factors for companies to invest in a country is the associated costs involved – both at the production level and the market level. With rising labour costs, manufacturers do not find labour intensive tasks to be cost efficient in the developed world.

Therefore, it would be unwise to assume tariffs would promote local manufacturing, without contributing to compounding supply chain costs on the product, and thereby increase national inflation. Besides, due to the technological advancements, industries are already automating to deliver high quality products and at far lower costs.

Manufacturing industries in developed economies have increasingly adopted automation when they move their production lines back home. For instance, German shoemaker Adidas has set up highly automated sneaker

factories in Germany and outside Atlanta, bringing back production from Indonesia and Vietnam to the west. Tariffs may force companies to bring back manufacturing into the country, but under the changing wave of technological transformations, it is unlikely they will result in any job creations.

Economic interdependence

We have already started the next chapter of globalisation – it is no longer a case of exchanging of goods and services from one part of the world to another, but that of an intertwined complex socio-political order constructed over many years of international collaborations and synergy.

It is the same reason why physical wars between most countries are improbable. For example, China and the US may provoke each other across many fronts, but they would never imagine going into direct physical combat. They are mutually dependent on each other’s economic output and success that their stability is a prerequisite for both their economies. Chinese investment in the US and the US’s dependence on Chinese manufacturing output are so very closely entwined that a slowdown of either would be economically catastrophic for the other.

Therefore, a trade war is never a sensible answer. The US trade tariffs on steel and aluminium imports, at 25 percent and 10 percent respectively, intended at creating and maintaining US jobs in the metals industry, had a negative impact on the rest of the employment market.

A trade partnership analysis found that tariffs, quotas and retaliation would increase the annual level of US steel and aluminium employment by 26,280 jobs over the first one to three years, but reduce net employment by 432,747 jobs throughout the rest of the economy, for a total net loss of 400,445 jobs. The analysis found 16 jobs would be lost for every steel/ aluminium job gained.

The operative cost of metals production in the US is also higher compared to China, and therefore it stands to directly impact US consumers with higher costs on allied metals dependent industries – from cars to soup cans.

It is time we understand the selfharming nature of trade wars and tariffs, and fully appreciate the interconnected nature of our economies.