Trumponomics is winning in Washington and global supply chains feel the pain

Sun Xi and Faisal Ahmed say that the course the US-China trade dispute takes will be unpredictable, but we can count on the impact on global production networks to be negative. Some are already scrambling to adjust

PUBLISHED : Monday, 06 August, 2018, 2:02am
UPDATED : Monday, 06 August, 2018, 2:02am

China says the United States has waged a trade war, while a top CIA expert says China is waging a “quiet kind of cold war” against the US.

“Trumponomics” is no longer just rhetoric. US President Donald Trump has already threatened to impose a tariff on all Chinese imports, worth almost US$500 billion – the magic number that would make it a full-blown trade war. But its spillover effect has already begun to hurt the global value chains that define the contemporary geo-economic architecture.

Today, more than 60 per cent of world trade happens in intermediate goods, with China being a major trader interlinking the supply chains of large multinationals and other firms. China has enjoyed a 10 per cent growth rate over the past three decades, and this was possible largely due to the increasing participation of its small and medium-sized enterprises in global value chains. In fact, most export-led economies are dependent on imports – of raw materials, parts, components and so on.

The escalating trade dispute will have repercussions on the multilateral trading system. It can affect export-led economies in several ways. Not only will tariffs make their products costlier in an importing country, but there will also be costs associated with supply chain disruptions, spillover effect on partner countries and sectors, plus impact on investment inflows.

Besides China and the US, some of the key export-led economies in East and Southeast Asia that have started feeling the heat include Hong Kong, Taiwan, South Korea, Japan and Singapore – all of which are participants in the electronic goods global value chains for components and semi-conductors.

Is the US trade war bent on prolonged conflict with China?

The spillover effect is gradually becoming so intense that manufacturers are now shifting their production lines outside China. This phenomenon was ongoing even before the dispute, but the number is now going up.

Some Hong Kong manufacturers have started relocating out of the mainland. One cost-effective destination now hosting such industries is Malaysia – a country that aspires to become a high-income economy by 2020.

Also, Taiwan is watching the situation very closely and fears possible difficulty in inventory management for its manufacturing sector. With its industrial production unexpectedly declining and currency weakening, Taiwan is also revising its gross domestic product growth forecast for 2018 from 2.6 per cent to 2.4 per cent.

It still stands that there are no winners in trade war

Calculating the costs to China’s economy if the trade war escalates

Even South Korea’s exports of cars and electronic goods have fallen recently and the country’s growth rate is now forecast to be lower than the earlier estimate of 3 per cent. The growing unemployment in recent months can also be attributed to the rising intensity of the trade war.

SMEs in South Korea have established links with both America and China. Trump’s policies will likely delay such internationalisation and the value chain-upgrading process for these SMEs. Even the robust electrical machinery and equipment value chains are also likely to be affected. For instance, more than half of South Korea’s global export of electrical machinery and parts thereof goes to China.

Other economies like Japan, Australia, Malaysia, Indonesia, Thailand and the Philippines are unlikely to be spared as they are either engaged in manufacturing automotive parts and components or are engaged in value-added activities pertinent to the basic metals and rare earths for this sector.

On the other side, to counter China, the US has agreed to work with the European Union towards the “zero tariffs, zero non-tariff barriers, and zero subsidies” deal. This is aimed at securing US economic interests.

How the US can co-opt the Belt and Road Initiative

In this context, the role of mega trade blocs like the Regional Comprehensive Economic Partnership, which involve 16 countries, cannot be underestimated. In the recently concluded round of negotiations for the agreement, consultations on two key issues, trade facilitation and government procurement, were completed.

With such a free-trade agreement in place, the trade war may even take a back seat. This is because most of the production lines being relocated now, owing to the fear of trade war, are going to those countries which will again come under the ambit of the agreement – thereby minimising trade costs for the participating economies.

For now, however, the trade war’s impact on global production networks and global supply chains will be devastating. Singapore’s Prime Minister Lee Hsien Loong has expressed the global anxiety in a very simple manner, saying “Nobody wants a trade war”. No matter whether Trumponomics survives the trade war, export-led economies and global consumers are already getting ready to suffer.

Sun Xi is a China-born independent commentator based in Singapore. Dr Faisal Ahmed is an associate professor and chair of international business area at the FORE School of Management, New Delhi, India