The global economic impact of the US-China trade war

In 2018, China and the United States started a trade war when they levied additional taxes on $50 billion worth of each other’s goods. What should have led to the negotiating table instead sparked the biggest trade war seen in the last half-century.

Today, both countries have levied tariffs of up to 25% on goods worth a combined $360 billion. According to various economic bodies, including  Kevwe Yerifor of Capital Intell, this trade war between the world’s two largest economies will not only hurt their economies but hurt those of other countries as well as the overall global economy.

Kevwe Yerifor is the chief investment officer for Capital Intell, an investment company that primarily focuses on alternative investments with a keen interest in private equity, real assets, and venture capital. With over twenty years’ experience in the financial services industry, he understands the ramifications of the US-China trade war. He shares some of the impacts he sees the trade war having if a deal is not reached quickly.

Impact 1: Global economic slowdown

Both the International Monetary Fund (IMF) and the World Bank agree on one thing, that the US-China trade war is slowing down global economic growth. Bloomberg estimates the global economy could shed as much as $600 billion by 2021 if the impasse is not resolved quickly. This estimate is based on current tariffs in place. However, if President Trump makes good on his threats to tax all Chinese imports to the US, this figure could go up significantly. But, how is this trade war affecting the global economy? The answer lies in the domino effect the trade war is having, says Kevwe Yerifor.

First, the trade war will slow down both the US and China economies’. Bloomberg estimates show that if the US and China imposes a 24 percent tariff on all bilateral trade, China and US GDPs will fall by 0.9% and 0.7% respectively. However, global GDP will also fall by 0.6%, equivalent to $600 billion. Such an economic slowdown will be indicative of combined slowdowns in markets affected by the trade war. Countries caught in the middle of the trade war will also experience contractions in GDP, as Kevwe Yerifor explains next.

Impact 2: Shifting trade

When a tariff is attached to a category of goods, it not only affects the source market of the finished product (China/US), it also affects all other companies involved in the item’s entire supply chain. China relies heavily on East Asian supply chains that include countries like Taiwan, Vietnam, Thailand, and Indonesia. Current new tariffs enforced will have the effect of making these countries, much poorer than the two countries fighting, unable to absorb the additional costs of doing business. The result will be a shift in trade as manufacturers look elsewhere for more competitive markets.

The result of losing their competitiveness will shift trade to other areas, most unlikely mainland China as Chinese companies will also struggle to remain competitive. US companies that rely heavily on Chinese imports are also feeling the heat. General Motors, a major importer of steel and aluminum from China, announced that Buick Envision sales fell in the United States by nearly 27% to 30,000 last year and fell another 21% in the first three months of 2019 the Envision, is one of the only GM vehicles made in China but sold in the USA.

Fiat Chrysler followed suit. Further afield, Jaguar Land Rover, the largest car manufacturer in the UK, also reported a loss due to stagnated sales in China. All these factors, says Kevwe Yerifor, point to a shift in trade as the US-China trade war continues.

Impact 3: Growing protectionism

When Donald Trump announced he wanted to make America great again, many took it as a call to nationalism. However, what the US-China trade war now shows is that it was a call to protectionism. Protectionism is the opposite of globalism, an important factor in understanding how the trade war is unraveling hard-won globalism gains. As the US pushes for tougher trade conditions for importers, it hopes to buoy local companies by helping them sell cheaper than imports. The outcome; however, is less than ideal. In retaliation, China has also fired its salvo, showing it too can protect its companies.

A bigger tragedy is unfolding, however. As the US and China grandstand against each other, other countries are following suit by introducing their versions of protectionism. Take India, for instance. Historically protectionist, today, India is emboldened by the current rise in protectionism, creating an atmosphere that encourages even more protectionist policies. Other countries too are starting to sense the change in how business is done, a dangerous precedent, especially for developing countries where protectionism can easily escalate into full-blown social, economic, and military turmoil.

Impact 4: Unlikely beneficiaries

As trade shifts away from China’s East Asian supply chains, it is unlikely that this trade will land on the US’s doorstep. Instead, countries with strong economies and favorable macroeconomic conditions will absorb this trade. Likely beneficiaries include Europe, Japan, Canada, and Mexico.

A UN Conference on Trade and Development (UNCTAD) study found that of the $250 billion Chinese exports subject to US tariffs, other countries will capture about 82% while Chinese firms and US firms will capture only 12% and 6% respectively. Similarly, of the $110 billion US exports subject to Chinese tariffs, other countries will capture 85% while US and Chinese firms will only capture 10% and 6% respectively.

The main reason for this is bilateral tariff wars alter global competitiveness in favor of firms in other countries. That is, the US-China tariff war will affect the US and China adversely to the advantage of other countries not affected by the bilateral tariff war. As such, UNCTAD sees countries that are more competitive and have the economic capacity to replace China and US firms as being the main beneficiaries of the trade war.

Kevwe Yerifor’s final thoughts

Unfortunately, it seems unlikely that the trade war is about to end any time soon. With the recent sanctions President Trump placed on the Chinese electronic company Huawei, it is clear that both sides are digging in for an even more bruising battle. However, there remains hope for a bilateral deal that puts an end to the trade war. It may not yet be clear what it will take to bring both parties to such a deal, says Kevwe Yerifor, but it is clear that the stakes are too high for them not to pursue this course of action.