Trade Conflict, Doom or Boom? – LogiSYM November/December 2018
The US-China trade conflict has been portrayed by experts to be a disaster for the global economy. On one side we have the pre-eminent global power, in relative decline but refusing to admit it and attempting to stage a disorganised and disjointed revival. The other, an incoming superpower keen to assume its place on the global stage – using many of the very same economic weapons used by the declining global power over the last decades. The relationship has deteriorated to a point of open political and economic confrontation. In just a few short months, the US and China have transformed from rivals and competitors to outright adversaries and the world is waiting with bated breath to see the result of the current 90 day armistice.
Realistically though, will this be all doom and gloom for supply chains or will we see a positive outcome at ‘the end’? Will the balance of world trade and economic power shift with an overall positive effect and could we see a revamp or a totally new system, a true alternative to what many consider a broken and ineffective plurilateral and multilateralism system of trade that is the WTO?
We are by no means promulgating a trade conflict or escalation of such a conflict but we do think that what comes out at the end may not necessarily be all bad, especially for some Asian countries.
The trade war was brewing and has escalated in the last few months. The US slapped a total of US$250 Billion worth of tariffs on China and is looking to increase tariffs further unless both sides come to some sort of compromise or consensus.
Is the general idea on the tariff implementations true? Many believed that there would be undesirable consequences such as a rise in costs and a retaliation by China through the imposition of tariffs on American goods which will, in turn, harm both economies.
The idea became a reality when China reacted by imposing tariffs on US goods. However, has it really resulted in a marked economic benefit to American workers? The imposition of tariffs was done hastily and a deeper study on how the tariffs would affect sectors should have been done. The US claims the imposed tariffs were to protect and create job opportunities for American workers. This has not been the case in many scenarios and the imposed tariffs even proved to be detrimental for certain sectors. An example would be the renewable energy sector which took a big hit and had to cancel or freeze investment causing thousands to lose their jobs.
espite people’s fears becoming a reality with tariffs being imposed by both sides, the cost of shipping from China to the US continues to increase.
There is a strong correlation between shipping prices and the demand for products. Logistics is a derived demand. If the demand for products were low there would be no demand for shipping services which would have led to a decrease in prices however based on trade data freight rates are heading northwards.
Reduction of freight capacity could be a reason why freight prices have increased, but according to the US Census Bureau, imports from China grew from USD38,230 million to USD50,032 million over this period. This clearly shows there is growth in demand for goods from China and not a reduction of freight capacity to the US as some might suspect.
Another reason for the increase in freight pricing is the year end peak season which typically see volumes increase due to significant increase in demand over the festive season and New Year. Consumption in this period is usually higher and this results in an increase in capacity. Moreover, the growth this year is substantially greater than the previous years despite the trade war. This could be attributed somewhat to the boom of e-commerce and the increase in transactions from online platforms. With the expectation that higher tariffs would be implemented come 2019, some companies are also stockpiling product in anticipation of this.
The imposition of trade tariffs could perhaps also help as a “cooling measure” for financial markets? Many markets look to be overheated and there are signs that this could be a bubble. This will undoubtedly lead to a correction period. The implementation of trade tariffs are making investors more cautious with their investments due to uncertainty in the markets and this could act as a necessary curb.
China took a defensive measure and devalued their currency to protect the demand for Chinese products. Many Chinese companies are also taking a short term measure of absorbing the tariffs in their pricing. Obviously, this will reduce margins but it will enable Chinese companies to retain their market share in US trade. It is not a defensive stance that will be viable in the long run but is an adequate stop-gap measure until we are all more certain as to what will eventuate.
Companies with an existing supply chain through China will start to look at other alternatives, if they have not already done so. China has limited resources and imports a large number of raw materials to produce goods. The implementation of further tariffs might outweigh the benefits of establishing supply chains that include China. Labour costs for example have been increasing over the years and this trade war could therefore be a boon for many Asian countries. Companies looking at new countries to establish manufacturing sites will weaken the Chinese economy but this will inversely strengthen the economy of other developing countries, hence it will not be a zero-sum game for all players.
The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) also comes into effect from January 2019 and this could further incentivise companies to re-examine and redesign their supply chains – and potentially look elsewhere for significant volume or margin growth.
The end of the trade war seems distant, and it still remains unclear at this point in time if the pros of the tariff implementation outweigh the cons.
Having a rules based system allows many to participate on a so-called level playing field but as many Logisticians and business people would agree, where there is a lack of rules or where there is chaos in a particular system, this is where the largest opportunities exist. Let’s not forget that as we enter into 2019.
1 Max Henry. “Infographic of the week”. Last edited 18 Nov 2018. Accessed 19 Nov 2018 http://www.supplychain.asia/issues/supply-chain-asia-november-18-2018-142667