The China – US Trade Standoff – Unwelcome development, or hidden opportunity?

Graphic Designed by: Jessie Yang

BRB Bottomline: The world’s two largest economic superpowers are set to square-off in a bout that is sure to shake up world-markets. What does this mean for everyone else on the playing field?

With President Trump’s 10% tariffs on $200 billion worth of Chinese imports going live on the 24th of September, and China ready to retaliate with their own set of counter-tariffs, the next few months are sure to be tumultuous, not just for the two parties involved, but the world economy. Most would say the writing on the wall is largely negative – stock indexes are falling in some countries; currency rates are depreciating in others as stakeholders in the market are bracing for strong economic headwinds. However, are there potential benefits hidden in the trade-war?  What does it mean to be a country with a large manufacturing sector as superpowers shift towards more protectionist policies?

Growing market unease and falling exchange rates

From a developing Asian Economy and planning a vacation in the US? Get ready for a massive hole in your pocket, more so than ever. Since Trump’s initial $50 billion tariffs on China were announced, several developing economies, especially in Asia, have seen their currencies weaken against a strong dollar, and sometimes even crash to record lows. While the strength of the US dollar versus other currencies is partly due to rising petrol/diesel prices and increasing US interest rates, trade worries and currency-trader panic have only exacerbated the issue.

Source: Financial Times

In India for example, the rupee touched an all-time-low of 74.39 vs the US dollar, which analysts ascribed to a widening trade-deficit and fear of a full-blown trade war. The Turkish Lira, already reeling under the effects of a high inflation rate and rising bank debts, fell to fresh lows as news of the trade war and US tariffs on Turkish steel and aluminium hit the markets. Moreover, stock markets across Asia are being impacted as well: in the early weeks of August, Japan’s Nikkei declined over 1.1%, Hong Kong’s Han Seng index fell 2.5% and the Singaporean Straits Times index dropped 1.27% as market sentiment was diminished by renewed trade war fears.

But, is there a silver lining?

With imminent losses across the board, it can be hard to imagine a potentially beneficial flipside to the trade war. The trade-war is especially deadly in that it disrupts complex supply chains, built from years of globalised trade. Unwinding these supply chains can force producers to relocate production to meet with demand and look for the “next best option.” This is where other economies can benefit from a US-China trade war – Chinese and American companies must look for new supply chains and production lines, and other developing economies can pitch themselves as alternatives.

Some sectors are already seeing this shift. China’s retaliatory tariffs on American farm products such as cotton forces Chinese textile manufacturers to look for alternatives, such as India. In fact, in a rare advance deal, India is set to ship 85,000 tonnes of cotton from its new harvest season.  The soybean industry in China has also tripled its Soybean imports from Russia after the imposition of tariffs on American soybeans.  On the other side of the spectrum, US tariffs on aquacultured seafood products from China, a trade roughly equal to $1 billion annually, offer opportunity to India to grab more of the US seafood market share. Rajen Padhi, a seafood consultant said to Business Standard India: “As on date, India is the largest exporter of seafood to the US. If China’s supply to supermarkets and food institutions of US drops, automatically, Indian products will be preferred.”

On perusing the complete list of China and US tariffs, one sees how other economies across Asia, Europe and South America can capture a larger market share, especially in cases where they have already established large economies of scale and have significant spare capacity of production. For developing economies which traditionally have large primary sectors, US and China tariffs on products such as honey, meat, poultry and vegetables may be a blessing in disguise. Moreover, the tariffs offer benefits to economies with growing secondary sectors as well, such as South Korea with its automobile industry and India with its mining and chemical industries.

Furthermore, the trade war may also accelerate an already burgeoning trade between Asian economies. Growth in Asian trade-corridors has seen a steady upswing for the past few years – it seems that as consumption in these semi-periphery countries, their interdependence increases as well. As Chinese manufacturers prepare to turn away from the west due to the trade-war, trade interrelationships between Asian countries will only flourish further.

The big picture

Bilateral trade wars, especially when between two economic superpowers, are similar to a  prisoner’s dilemma: cooperation is worthwhile only if it is bilateral; non-cooperation is a dominating strategy, but if everyone implements that strategy, mutual disaster ensues. However, as seen above, the US and China’s presence on the world stage means that there are bound to be spillover effects.

In an analysis of what a US trade war with Mexico and China could entail, the IFPRI (International Food Policy Research Institute) quantifies these spillover effects: it estimates that welfare gains for CAFTA (Central America Free Trade Agreement) nations, taking into account all probable gains and losses, to be around 0.3 – 0.8 percent, with similar numbers for BRICS nations and other developing economies as well. However, they maintain that the net impact of a trade war would be negative – a welfare loss of 0.1 percent for the global economy when retaliatory tariffs are involved.

Take Home Points

Global consensus seems to point that the looming trade war is objectively harmful for the world as a whole. If the situation between China and the US continues to worsen, suppliers will face higher long run average costs beyond their absorption capacities, and this will most likely result in increased consumer prices. Negative investor sentiment is likely to continue for a few more months until supply chains recover from the initial aftershock of the tariffs. However, every war has winners and losers, and in this case, manufacturing, export-centric countries have the edge. While it is unlikely that these economies come out as the new manufacturing hubs or export capitals of the world, a veritable boost in these areas would certainly not be unexpected.


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