Our analysis of a trade-war scenario between the US and China suggests that the US, and especially its consumers, would be amongst the biggest losers. Given globalised supply chains, however, the ramifications would be felt by producers and consumers far and wide.
The geopolitics of commerce article series
- Unintended consequences: The impact of trade wars on consumer markets
- Amidst US retreat, China and India push ahead with clean energy
- Why everyone has a stake in cloud security
- Pandemic risk: An unhappy side effect of globalisation?
- The Italian threat to Euro zone stability
Unintended consequences:
The impact of trade wars on consumer markets
As Donald Trump was sworn in as the 45th president of the US in January 2017, a regressive era of trade protectionism seemed about to dawn. His withdrawal of the US from the Trans-Pacific Partnership (TPP – an ambitious trade agreement signed by 11 Pacific Rim nations) on his first full day in office served to confirm such a prospect. Three months later, however, and the worst – from a pro-trade perspective – has not come to pass. One signal: following an apparently positive set of meetings with Xi Jinping in Florida in April 2017, the administration declared that China would not be labelled a currency manipulator, as Mr Trump had threatened during the election campaign.
Alex Capri, a senior fellow at the National University of Singapore Business School, believes the voices of prominent US business executives serving as industry advisers are beginning to hold sway with the president. “Rationality on trade policy, at least in relation to China, appears to be setting in,” he says. “Most of the world – including most American firms – wants to remain open for business, so I’m cautiously optimistic regarding trade.”
“Most of the world – including most American firms – wants to remain open for business, so I’m cautiously optimistic regarding trade.”- Alex Capri, National University of Singapore Business School
Yet strong protectionist impulses remain evident. The White House plans to press ahead with re-negotiation of the North American Free Trade Agreement (NAFTA), for example, to the chagrin of the Canadian and Mexican governments. The president signed an executive order in April requiring the strengthening of “Buy American” preferences in federally funded infrastructure projects. And at the time of writing, the administration seemed to be laying the groundwork for the imposition of new tariffs on steel imports, the primary target of which would be Chinese producers.
Some administration signals of trade patience with China may be part of a broader effort to secure its assistance in the continuing stand-off with North Korea. Should new political tensions arise with China (as a result, for example, of developments on the Korean peninsula or in the South China Sea), or if the trade hawks in Washington regain Mr Trump’s ear, the spectre of a trade war between the world’s two largest economies could again rise.
Our analysis of a trade-war scenario between the US and China suggests that the US, and especially its consumers, would be amongst the biggest losers. Given globalised supply chains, however, the ramifications would be felt by producers and consumers far and wide.
Tit-for-tat pain
Mr Capri believes that a US imposition of duties on imports of Chinese steel products is likely in most scenarios. Our trade-war scenario (an alternative one and not our baseline, to be clear) goes further, assuming that the administration follows through on the president’s oft-stated threat and slaps steep new tariffs on imports of steel, automotive and electronic goods from China. How would China respond, and how far would the echoes reverberate?
“Beijing wants to avoid tit-for-tat,” says Mr Capri. However, if new US tariffs targeted at China were stiff (a figure of 45% has been mooted) and applied to several classes of goods, it would surely retaliate. Mr Capri believes Beijing might raise tariffs on a range of US products such as civil aircraft, agricultural products, medical products and other industrial goods. It would also find ways to make life even harder for US companies, including service providers, operating in China. “All of this would be highly disruptive and damaging to all parties,” says Mr Capri.
US consumers would bear the brunt of the immediate damage in the form of inflation, as the prices of China-sourced consumer products and components would be expected to rise sharply. “The shelves of your average US retail outlet are filled with clothing, footwear, toys, appliances and other goods produced mainly in China,” says Mr Capri. “US consumers would feel considerable pain from any kind of retaliatory tariff war between the two countries.” In this scenario we estimate US consumer price inflation overall to be 0.9% higher in 2017, and 1.5% higher in 2018, compared with our baseline US forecast. Private consumption growth out to 2021 would be well below that forecast in the baseline scenario.
US private consumption growth 2017-2021: baseline and alternative (trade war) scenarios
The impact on Chinese consumers, by contrast, would be modest. One reason is that the US is not a major source of consumer goods imports, aside from some luxury brands. Another is that private consumption growth in China is already locked in decline, and the additional hit to consumer sentiment from a trade war would not accelerate that trend materially.
Mr Capri also points out that China would find it easier than the US to find substitute sources of supply for the affected imports. It can obtain soybeans and other agricultural products from Latin America, for example. US retailers, by contrast, would be hard put to find new, plentiful sources of low-cost consumer products to replace China-sourced ones. US companies relocating production facilities onshore may eventually fill some gaps but are unlikely to do so at the same price points.
China private consumption growth 2017-2021: baseline and alternative (trade war) scenarios
Global repercussions
Of course, the effects of trade wars on this scale are bound to be felt across the globe. Should NAFTA negotiations also prove to be fraught, Mexican producers and consumers would feel considerable pain. Asian supply chains are also likely to be disrupted. Mr Capri explains: “There is a wide network of value chains that feed components, sub-components and materials into the Chinese manufacturing and assembly base. Retaliatory tariff increases on those will have a ripple effect going all the way back to suppliers throughout Asia.” Chinese and other Asian producers are also embedded in the supply chains of many US companies. With such levels of integration, there are few players in either Asia or North America that would remain unaffected.
“Retaliatory tariff increases on [components and materials feeding into China’s manufacturing base] will have a ripple effect going all the way back to suppliers throughout Asia.”- Alex Capri
A rear-guard battle
Given Mr Trump’s long-standing criticism of the US-China trade imbalance and of NAFTA, and his broader scepticism of the value of international trade agreements, an escalation of trade disputes as considered in our alternative scenario cannot be discounted during his term in office. A series of moderate, largely symbolic protectionist measures, toward China and other trade partners, is more likely as the domestic economic implications of more radical measures dictate caution. Pro-globalisation forces in Washington and around the world, however, are likely to be on the defensive for the foreseeable future.
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