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The Impact Of Trade Wars On Trading And Investing
In the years since China’s entry into the World Trade Organization in 2001, the country’s economy has grown and is second only to the United States in terms of purchasing power parity. In the past decade, its influence on global trade has also spread, and China has gradually overtaken the US as the main supplier of goods to Europe, Asia, Africa and South America.
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As long as it operates like a cheap factory, China’s progress is welcomed by the United States, and its emergence as a new market for consumer products is eagerly anticipated. However, in the mid-2010s – possibly caused by China’s covert military expansion in the South China Sea and the expansive Belt and Road Initiative, as well as an ambitious plan to increase the value chain outlined in 2015 – the relationship between the developing country. and the incumbent superpower became more competitive.
With the 2016 election of Donald Trump on an “America First” platform, the gloves are off. Unhappy with the trade imbalance, the US president launched a trade war in 2018, imposing tariffs in two waves to cover about $400 billion worth of goods shipped between the US and China. The consequences for companies are huge.
This new, more combative relationship has changed the global business landscape, disrupting supply chains – especially, perhaps, in the technology sector. It undoubtedly accelerated a trend that had already begun, giving China the incentive to develop its own standards and achieve self-sufficiency in critical strategic sectors, including high technology. Perhaps the most important consequence of this is the potential for a long-term separation between China and the US and the emergence of two different, opposing spheres of influence in both trade and technology.
The coronavirus epidemic, which emerged in Wuhan in December 2019, which crippled the Chinese economy for a long time, served to show the likely consequences of a dislocation in the world’s two largest economies.
What Is Trade Protectionism?
On January 28, 2020, the Future Forum Think Tank brought together Chinese educators and experts with companies representing sectors from retail to law to discuss these evolving challenges. In this report, we discuss the impact of the US-China trade war and the implications for European and British companies.
1. Trade Diversion – The US buys goods from places other than China. This is a small plus point for the EU and the UK.
In early 2019, the National Bureau of Economics estimated that up to $165 billion in trade would need to be redirected annually to avoid even tariffs in place by the end of 2018.
Now in its second year, the trade war has effectively shifted orders from China and the US to alternative suppliers. It’s not just low-cost Asian suppliers who benefit. The United Nations Conference on Trade and Development indicated that the EU, along with Taiwan, Mexico and Vietnam, picked up some of the crumbs. While China’s exports decreased by almost $ 25 billion in the first half of 2019, the EU exported an additional $ 2.7 billion to the US, with its largest proportion in the machinery sector.
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Although this means a defeat for China, the result is not an outright victory for the US. An economic model co-authored by Robert Zymek, a professor at the University of Edinburgh and a participant in the Future Forum, predicts that increases in the US trade deficit with China will be almost completely offset by declines in the US’s position relative to others. trading partners. This raises the question of whether the US will simply watch other trade balances deteriorate without taking action?
Future Forum participant Gordon Cheung, associate professor at Durham University, says there are many Chinese students at UK universities. “[The] general impression is that the numbers have increased significantly.” He noted that this may not be sustained if US-China relations are normal.
The “Phase One” trade deal – China has committed to buy $200 billion worth of additional US goods in sectors such as agriculture, services, manufacturing and energy. This is likely to be negative for the EU and the UK.
Any increase in Chinese purchases of the US is unlikely to be new purchases, so should be diverted elsewhere. Matthew Rous, chief executive of the China-Britain Business Council, who also attended the Forum, looked on the bright side. He noted that the ceasefire signaled by the “phase one” trade deal reached between the US and China in January eliminated the risk of British companies being affected by any imposition of new US controls on products with ingredients made in China.
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He also stated that “China’s promise to encourage more agricultural imports from the US, bringing regulations on agricultural products more in line with WTO rules and standards, benefits US producers and not US”. Keep in mind, however, that China would have to dump existing trading partners like Argentina and Brazil to satisfy this US situation, and that won’t be easy.
A more likely outcome is that the coronavirus pandemic will allow China to delay implementing that aspect of the deal — or even renegotiate it. The US presidential election in November adds to the uncertainty: even a second term for Trump does not guarantee that the terms of the deal will not be changed.
While not directly related to the trade war, it has exacerbated tensions between the US and China. Supply chains are broken. Many international airlines have temporarily closed their routes to China and many more have reduced their capacity to Asian destinations. Everyone lost.
The embargoes caused by the virus have hurt many high-profile companies, from those who sell in China to those who manufacture there.
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Wuhan, the city hardest hit by the epidemic, is a hub for auto parts, so cars have been hit particularly hard. Just weeks after the start of the crisis, Volkswagen closed its factories in China and other global automakers warned that facilities in Europe and the US were weeks away from closing.
Problems for companies also mean problems for their funders. Adam Shepperson, head of origination and commercial structure at Santander, highlighted the concerns of “supply chains that are expanding into the industrial and manufacturing space”. Here, order cancellations and the resulting factory closings could damage “business models and, ultimately, customer credibility.”
Changing suppliers – with the trade war dragging on, companies should think about looking for alternative sources of inputs for their production chains. Less straightforward than buying complete products from new suppliers, switching to new component suppliers carries friction costs as well as potentially higher prices. Trust, quality assurance and logistical networks need to be rebuilt. The chain is not well lubricated, at least at first. The manufacturers lost.
For reasons that include political and commercial concerns, few companies are willing to share what they are doing to change their delivery. But consider Li & Fung, a Hong Kong-based sourcing agent, which revealed in 2019 interim results that it helped a US retailer reduce its reliance on Chinese inputs from 70% up to 20% in two years, with plans to go to another. 40% to 10% by 2020, outsourcing to at least seven other economies.
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Not all companies act quickly. A September 2019 survey conducted by the EU Chamber of Commerce in China noted that only 10% of respondents switched suppliers, although that number increased from 6% in a January 2019 survey. China is “dangerous”.
In January 2020, Citi’s Strategy and Financial Solutions Group also noted that one-third of Western European companies in the MSCI global index have “significant exposure to business risk in China driven by increased manufacturing activity.”
The coronavirus epidemic provides a clear illustration of how many companies still rely on China. For those who hesitate and are strong enough to survive, it may finally provide the much-needed impetus for supply chain diversification.
Uncertainty paralysis – Investment decisions are further constrained because companies cannot predict what will happen next in the trade war. Another negative situation.
How Are Trade Tensions Affecting Developing Countries?
The World Uncertainty Index, which tracks uncertainty around the world, shows that the situation is widespread around the world. The measure, based on the frequency of the word “uncertain” in the reports of the Economist Intelligence Unit for more than 140 countries, increased in the fourth quarter of 2019.
As usual in such an environment, companies try to do as little as possible. In May 2019, one-third of respondents to an AmCham China survey said they had postponed or canceled their investment decisions, more than a similar survey conducted last year.
The September 2019 EUCham survey also noted a surprisingly high figure