U.S. Vs China : Impending Trade War And What It Means For Businesses & Consumers

Fraught trade negotiations, increased sanctions – U.S. President Donald Trump’s belligerent stance towards China is having global repercussions.

The world did get fair warning. He had, on his campaign trail, declared that “if China does not stop its illegal activities, including its theft of American trade secrets and intellectual property, I will apply countervailing duties until China ceases and desists.”

His confrontational stance towards China is part of his ambitious plans to reform US trade policies, calling trade an enormous drag on U.S. growth.

David Kuo, CEO of Motley Fool Singapore (Source: Twitter @TheKuoKnows)

David Kuo, CEO of the Motley Fool Singapore said that whilst the Sino-U.S. trade tariffs are only meant to inflict pain on the two countries involved in the dispute, there could be unintended consequences elsewhere.

For instance, when a manufacturer in Taiwan, South Korea or Japan supplies a factory in China, which in turn exports to the U.S.: “If the U.S. importer is either unable to absorb the increased tariffs, or unable to pass on the increased costs, then there could be a direct impact on not only the Chinese manufacturer but the Taiwanese, Korean or Japanese factories, too,” he said.

On May 6, 2019, Trump announced an increase on tariffs to 25% from 10% on US$200 billion of Chinese goods, tweeting that he could levy more.

For 10 months, China has been paying Tariffs to the USA of 25% on 50 Billion Dollars of High Tech, and 10% on 200 Billion Dollars of other goods. These payments are partially responsible for our great economic results. The 10% will go up to 25% on Friday. 325 Billions Dollars…. — Donald J. Trump (@realDonaldTrump) May 5, 2019

China has responded with tariffs of its own, raising duties on US$60 billion of U.S. goods to 25% starting June 1.

Impact on businesses

In response, most major footwear companies wrote an open letter to the president asking for footwear to be exempt, saying that the tariff would be “catastrophic for our consumers, our companies, and the American economy as a whole.”

As for China, Kuo said that while previously the impact of the 10% tariff was largely softened by an 8% devaluation of the Chinese yuan against the U.S. dollar, that was no longer enough.

“It will be considerably harder for the Chinese government to engineer a similar devaluation without causing problems within China.

“The upshot is that China, which is still predominantly export driven, will try to dispose any overcapacity to other countries,” he said.

Kuo cited the example of Malaysia, that saw its foreign direct investment in the first quarter of 2019 already match two-thirds of 2018.

Similarly, countries such as Vietnam are also seeing increased investment, but the reality is that its 14.5 million-strong workforce is tiny when compared to China’s more than 200 million.

China’s sophisticated supply manufacturing chain is also not as easily reproducible in other countries.

Consumers Affected?

As for the impact on consumers, Kuo said that surplus capacity in China could be dumped into markets outside of the U.S..

“Consumers could benefit from lower prices as supply exceeds natural demand. Some items could be in short supply, though, if they require components that have been explicitly banned for export to certain Chinese entities.” He said consumers could expect to pay more for these items.

As to how pricing would be affected, Kuo said that where demand is highly sensitive to price, demand could drop. Brands that are relatedly insensitive to price, such as Apple, as well as luxury items would not be affected much unlike cheaper Chinese-made phones that compete on price.

On how else the tariffs could affect the economy, Kuo said there was a risk they could prove mildly inflationary.

“That could put central banks in a difficult position as to whether they should raise rates to counter inflation or cut rates to drive growth,” Kuo said.

While central banks are meant to function independently, Kuo said, they might feel pressure to accede to government wishes. This would mean inflation would have to pay second fiddle to economic growth.

In any case, it would be wise for both businesses and consumers to exercise caution in this uncertain climate. Analysts at Morgan Stanley said that a collapse of U.S.-China trade talks as well as the tariff hike could move the world towards a recession.

This is of course, the worst-case scenario, should trade tensions continue to escalate. There still lies some hope however – the U.S. did announce a 90-day stay on sanctions imposed on China tech company Huawei. This shows the country is not completely intractable where trade is concerned.

Mobile World Congress 2019. Photo Credit: Huawei

The U.S. political climate could also be a factor, with Trump’s tough stance with China seen as trying to demonstrate an America-first agenda in comparison to his potential Democratic competition for 2020’s presidential election.

All-in-all, expect a rollercoaster ride in the markets and a reminder to all that 2019 might not be the best year to take financial risks. Article contributed by Erin Gray.