As well as hitting Chinese exporters, the escalating US-China dispute will have an impact on many Asia-Pacific economies
Aseries of decisions by the United States to impose trade tariffs on various key trade partners, including China, the European Union, India, Russia and the key NAFTA (North American Free Trade Agreement) partners of Canada and Mexico, have catapulted the world toward escalating trade protectionism amid rising retaliatory ‘tit-for-tat’ tariffs as well as nontariff measures.
The Asia-Pacific (APAC) region is particularly vulnerable to such rising global trade protectionism, given the high share of exports in the overall GDP of many East Asian economies. Many APAC economies are vulnerable to the collateral damage from an escalating US-China trade war due to the integrated East Asian manufacturing supply chain and the importance of China as an export market for other APAC economies.
As the US government has decided to impose tariffs on various imported products from key trade partners, China is in the front line. With effect from July 6, the US imposed punitive tariffs of 25 percent on US$34 billion of Chinese imports, in relation to its Section 301 investigation of China’s treatment of US intellectual property rights. China immediately retaliated with tariffs of 25 percent on an equivalent amount of US$34 billion of imports from the US, targeting US agricultural products, including soybean, dairy and beef as well as US-made autos and parts. Tariffs on an additional US$16 billion of imports from China are currently being considered by the US administration as part of its Section 301 investigation.
On July 10, the Office of the United States Trade Representative announced that US President Donald Trump had ordered the USTR to begin the process of imposing tariffs of 10 percent on an additional US$200 billion of Chinese imports.
Total Chinese merchandise exports to the US reached US$505 billion in 2017, so the extent of US punitive tariffs will hit around 50 percent of total Chinese exports of goods to the US.
The impact of the US tariff measures will hit the Chinese export sector hard. Chinese exports of electrical and electronic products such as auto parts, printed circuits, refrigerators, vacuum cleaners, industrial machinery and electrical lighting equipment are among the products targeted by the US tariffs planned or already implemented. Chinese textile products, including cotton and woolen fabrics and yarns, and steel, copper, nickel and aluminum products are also affected by the tariff measures.
The US punitive tariffs on China will also have transmission effects to the rest of the Asia-Pacific economies. Many other APAC economies will be hit by collateral damage from an escalating US-China trade war due to the integrated East Asian manufacturing supply chain providing raw materials and intermediate manufactures to China, given the importance of China as an export market for other APAC economies.
The East Asian electronics industry supply chain is particularly vulnerable to the US tariff measures. Electrical and electronic manufacturing exports are among the key Chinese exports targeted on the new US list of US$200 billion of Chinese products. Significant intermediate inputs for Chinese production of these goods are sourced from East Asian economies, such as Singapore, Malaysia and South Korea. For example, China is the most important export market for South Korea, accounting for 25 percent of total exports, while 13.5 percent of Malaysia’s merchandise exports go to China.
Around one-third of the total value of China’s exports comprises foreign value-added. Since a significant share of Chinese exports are manufactured by foreign multinationals, US and other foreign multinational corporations (MNCs) from countries such as Japan and South Korea that are manufacturing products in China for export to the US will also be hit by these measures.
For some places, however, the dark clouds of protectionism could also have a silver lining, as escalating bilateral tariffs between the US and China force importers to seek alternative sourcing. Alternative suppliers of agricultural exports, such as Australia and New Zealand, will be likely winners from any trade diversion effects of a US-China trade war.
Chinese tariffs on US imports will also result in MNCs switching sourcing of intermediate goods and raw materials for their Chinese factories away from US sources toward alternative hubs in their global supply chains. The electronics industries in South Korea, Singapore and Malaysia could also benefit from some trade diversion effects as Chinese technology firms switch sourcing of electronics products away from US suppliers.
Although the APAC region showed continued strong growth momentum during the first half of 2018, the impact of the US-China trade war and other global trade frictions are creating increasing downside risks to regional trade flows in the second half of the year and for 2019. Many APAC economies are particularly vulnerable to a US-China trade war as their manufacturing sectors are integrated into China’s manufacturing supply chain.
Negotiated compromise trade deals between the US and its key trade partners remain the most optimal solution. However, with no early end appearing to be in sight for the escalating ‘tit-for-tat’ world trade frictions and rising trade protectionism, global trade wars have become one of the key downside risks to world growth and trade in the second half of 2018 and for 2019.
By: Rajiv Biswas