US-China Trade War Could See Supply Chains Caught in ‘Economic Death Spiral’

Date: Monday, August 26, 2019
Source: Sourcing Journal

Both the United States and China appear to be delving deeper into a trade war that will have wide-reaching impacts for both economies and their respective supply chains if they can’t pull back from the brink before conditions deteriorate any further.

Tensions ran high last week as China and the United States each announced new tariffs on the other’s products, intensifying what has already been a contentious year for trade between the two nations.

In an official announcement Friday evening, following President Trump’s trade policy Twitter alert, the Office of the United States Trade Representative outlined the country’s retaliation to China’s planned tariffs targeting $75 million worth of American goods, which it deemed “unjustified.”

“In response to China’s decision, and in order to achieve the objectives of the China Section 301 investigation, President Trump has instructed the United States Trade Representative (USTR) to increase by 5 percent the tariffs on approximately $550 billion worth of Chinese imports,” USTR said.

That means, already in place 25 percent tariffs on $250 billion worth of Chinese goods, will now face a 30 percent tariff rate as of Oct. 1, following a notice and comment period. For the latest round of tariffs on another $300 billion worth of products that were set to be tariffed at 10 percent—some starting on Sept. 1 and the balance taking effect on Dec. 15—those goods will be subject to a 15 percent tariff on the same outlined dates.

Trump’s anger was apparent Friday, as evidenced by a series of tweets lambasting China for its errs on trade, saying the world’s second largest economy should not have put new tariffs on U.S. product and calling the move “politically motivated.” He also ordered U.S. companies to “start looking for an alternative to China.”

And while the president reportedly softened his stance Sunday when asked by reporters whether he was having second thoughts about the escalation, White House press secretary Stephanie Grisham has since stepped in, attempting to clarify that the only thing the president regretted was “not raising the tariffs higher,” the Associated Press reported.

When it comes to ordering U.S. businesses out of the country, however, it would take a national emergency declaration to do it, and according to the AP, Trump said he has “no plans right now” to do so.

Endeavoring to do its part to deescalate relations with the U.S., Chinese vice premier Liu He, president Xi Jinping’s top economic advisor, said, “We are willing to resolve the issue through consultations and cooperation in a calm attitude and resolutely oppose the escalation of the trade war,” Reuters reported, citing a government transcript.

Liu also promised U.S. companies would continue to benefit from doing business in China.

“We will continue to create a good investment environment, protect intellectual property rights, promote the development of smart intelligent industries with our market open, resolutely oppose technological blockades and protectionism, and strive to protect the completeness of the supply chain,” he told Reuters.

Where does that leave the supply chain?

The question now, is whether both countries can get out of their own way to resolve their respective issues on trade.

If you ask Nelson Dong, senior partner at international law firm Dorsey & Whitney and current board member for the National Committee on US-China Relations (NCUSCR), the answer is: maybe not.

“From the outside, it is difficult to see how these rapid volleys of tariffs and counter-tariffs can help the two teams of government negotiators to reach any kind of ‘deal’ that would be acceptable to both President Trump and President Xi or can avoid the spreading collateral consequences for many thousands of suppliers and customers on both sides of the Pacific or the knock-on effects in many other national economies,” Dong said.

And that means tariffs may not be going away anytime soon—which also means prices are on their way up and purchasing power is on its way down. What’s more, according to Dong, “many parties along the supply chain will either experience lower profits or more lost sales (or some combination of the two).

“The resulting damage to consumers, producers and intermediaries can only combine to erode investor and consumer confidence, stall many needed investments, and increase the risks of negative local, regional or even global consequences,” Dong said.

Some of those consequences, according to the Footwear Distributors and Retailers of America (FDRA), will spell a “continued nightmare” for footwear workers and shoe consumers.

“We’ve done the math and there is zero doubt shoe prices will rise, hurting poor families the most,” FDRA president and CEO Matt Priest said Friday. “This uncertainty may directly plunge us into a recession where we shed thousands of American footwear jobs. This is not hyperbole.”

Whether it wants a “calm” resolution or not, if China can’t get that in its ongoing negotiations with the United States, its measures could reach beyond just new tariffs.

“Apart from tariffs, China also has the ability through its formal system of state-owned enterprises and its informal system of influencing nominally private enterprises to decrease the imports of certain goods,” Dong said. “It has already used that power to sharply curtail the purchase of American-origin agricultural imports such as soybeans and other farm commodities, and there are multiple competitor countries who would eagerly replace American suppliers that have invested years or even decades in establishing their sales channels into China.”

The difficulties and displacements that could pose for American suppliers could prove a multi-year struggle, Dong said.

“If these were only short-term difficulties and one could see some kind of an ‘off-ramp’ for both sides to settle their differences, there would be more hope, but nobody in authority has thus been able to present a credible picture of what such a resolution would be that could be domestically acceptable in political terms in both countries,” he added.

For China, it isn’t as easy as rectifying what the U.S. claims are its wrongs related to intellectual property, which initially prompted the Section 301 tariffs. Cleaning up its handling of intellectual property would mean “massive revisions” to China’s economic and political system that the leadership may not want, Dong explained. And if China only makes “cosmetic fixes,” that won’t work for Trump and the wholesale changes he wants to see in their trade relationship.

“Because of their mutual interdependence and the sizes of their economies, China and the U.S. undoubtedly each has the capacity to inflict considerable economic damage on the other country and, conversely, to endure a great deal of economic pain through this struggle,” Dong said. “The question remains whether the two countries also have the capacity and will to escape some kind of ‘economic death spiral’ where they are each so locked into positions from which they cannot easily back away to allow a political resolution.

“If the high-level talks tentatively scheduled for September can still occur and could yield some progress, that will be a hopeful sign,” he continued, “but if [Friday’s] two sets of announcements from Beijing and Washington (and what happens in the next week or two) should derail those talks entirely, both the U.S. and international economic pictures could become quite murky and ominous.”

The latest from the Twitter front

In response to Chinese vice premier Liu’s comments, Trump said Monday morning that he had “great respect” for President Xi and his team’s aim of coming to a “calm” resolution.

“So impressed that they are willing to come out & state the facts so accurately. This is why he is a great leader & representing a great country. Talks are continuing!” the president tweeted.

 

Read from the original source.

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