Caught in the Crossfire: An Analysis of Sino-American Trade War Implications

Caught in the Crossfire: An Analysis of Sino-American Trade War Implications

By Pranav Ravikumar | April 18, 2018

On March 22nd, global stock markets were shaken as President Donald Trump announced an imposition of tariffs on up to $60 billion in annual imports from China. China retaliated the next day with around $3 billion worth of tariffs on US imports. All in all, the world’s two-largest economies are embarking on a bare-knuckle economic brawl.

The trade-war definitely hurts the US and China on multiple levels. Chinese smartphones use chips from Qualcomm, an American manufacturer, while many American iPhones are made in China. China is America’s largest trading-goods partner as a major buyer of American aircraft, vehicles and electrical machinery, among other products. A trade war could also disrupt China’s goal of doubling GDP growth by 2020 from 2010 levels because a loss of exports, especially from the United States (considering that it accounts for around 20% of Chinese exports), would hinder Chinese economic growth.

However, though China and the United States are the only ones fighting in the ring, economic implications exist for other countries as well. According to ING Asia Pacific chief economist Robert Carnell, “Although this trade dispute is largely a US-China one, it has the potential to embroil much of the Asian region”, which is a comment that certainly lends credence to the fact that other countries will suffer the consequences in a growing tit-for-tat trade war. A similar statement by the UBS Wealth Management division stressed the importance of not underestimating the “direct impact” of the tariffs on markets worldwide.  

30% of the value of Chinese exports to the United States is added elsewhere, meaning that countries involved in Chinese supply chains will definitely be negatively affected. In an absolute sense, Japanese suppliers will be the worst hit as they export mostly to firms in China who then export onwards to the United States. But some smaller countries, namely Taiwan, Malaysia, South Korea, and Singapore, will be hit relatively worse since these countries have between 1-2% of their total output exported first to China and then to the United States. If Chinese exports fall, it could unintentionally cut back on the economic growth of these countries.

Furthermore, Hong Kong’s stock and capital markets would be dealt a heavy blow if a full-blown trade war develops. According to David Wong Yau-kar, a former US Federal Reserve Bank economist who is now deputy to China’s legislature, “Hong Kong is such a free economy that it is dependent on trade. Any trade wars could have profound impacts on the city. In the end, investor confidence, the stock market and the capital market would be affected.” While the earlier aluminum and steel tariffs passed in February did not affect Hong Kong as much due to neither product being a major component of trade between Hong Kong and the US, any sort of retaliatory tariff action could deeply unsettle the Hong Kong economy.

China’s competitors such as Germany or Mexico may benefit from this trade war. Other relatively cheaper countries when compared to China will also benefit as companies will choose to manufacture there instead as a result of the tariffs. However, too many countries are caught in this economic crossfire. A trade war would hurt China and the United States, the two largest economies in the world, while hindering overall global growth. In the end, this sort of “lose-lose” scenario does not help anyone.

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