The US-China trade war has produced more losers than winners

The agreement between the United States and China at the G20 summit to resume trade talks has brought a sense of relief to global markets. While the evolution of upcoming negotiations will continue to grab investors’ attention, the chance of a material escalation of tariffs has subsided for now.

Markets can breathe a sigh of relief but the global economy is not out of the woods yet. Without the rolling back of tariffs, the protectionist acts by both China and the US will continue to weigh on the global economy and darken the growth outlook.

Much research has been done to quantify the impact of the trade war on the two countries. Our analysis shows that China’s exports to the US have contracted by more than 7 per cent in the first five months of this year, down from double-digit growth before the tariffs came into effect. But if one focuses only on the tariffed goods, China’s shipments to the US have fallen by as much as 30 per cent.

On the US side, the pain is concentrated on two groups. Firstly, exporters are bearing the brunt of the shock from Beijing’s tit-for-tat retaliations. US data shows that tariff-hit exports to China plunged by 38 per cent after three rounds of tariffs. US farmers were hit the hardest, with soybean exports to China reportedly grinding to a halt last year. Under pressure to offer relief to his constituencies, President Donald Trump has demanded that China purchase a large sum of farm goods as a precondition to resuming trade talks post-Osaka.

The other victim of the trade war is the US consumer. According to recent research by the Federal Reserve Bank of New York, the tariffs imposed last year had reduced US household incomes at a rate of US$1.4 billion per month. An updated analysis predicts that the latest tariff hike on US$200 billion of Chinese goods would cost the average US family an extra US$831 annually due to higher prices and loss of economic efficiency.

Sadly, the pain does not stop there. As the saying goes, when two elephants fight, it is the grass that suffers.

Beyond China and the US, trade flows across the globe have suffered from a forced adjustment of the global supply chain. Our own research, which focuses on Asia’s trade flows, reveals a lopsided distribution of winners and losers from the trade spat.

The spoils of trade war: the Asian winners and losers in US-China clash

On the one hand, China’s loss of market share in the US has been picked up by some of its neighbours. Vietnam, Taiwan, South Korea and Japan are among the big gainers, with their US-bound exports growing faster than could be explained by natural US demand.

On the other hand, given China’s position in the regional supply chain, a reduction in Chinese exports to the US — due to the tariffs — has also curtailed China’s demand for components from the rest of Asia. We found that the reduction in China-bound exports from Asian countries cut across the board, with many suffering more than just from the natural slowdown of the Chinese economy.

The stand-out beneficiary is Vietnam, with its exports to both China and the US growing to almost 2 per cent of its gross domestic product. Vietnam’s trade surplus with the US has also risen by about 30 per cent in the first five months of the year compared to a year earlier. Unsurprisingly, Trump has imposed tariffs on Vietnam.

In contrast, nearly everyone else in the region have found themselves on the losing side of the ledger (with India falling somewhere in between). China-bound exports from South Korea, Taiwan and Japan, for example, have fallen significantly over the past year, more than can be offset by trade gains with the US.

Also, while these economies may have benefited from short-term substitution, once the global supply chain has readjusted fully, they may not be able to compete with emerging markets, where production costs are considerably lower.

It is incorrect to say that no one gains from a trade war. Some have benefited from the global rebalancing of trade and production. However, there is such an uneven distribution of winners and losers that it suggests the world as a whole has suffered from the suboptimal allocation of resources. If protectionism is allowed to continue, we could find ourselves mourning a permanent loss of output for the global economy.

Aidan Yao is senior emerging Asia economist at AXA Investment Managers