Trade War

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Impact of trade war

China along with Germany, Canada, Mexico, and some other nations share the reliance of auto industry from the side of USA. In USA, China has heavily invested in buying many factories, building facilities, and creating thousands of jobs. However, Donald trump do not treat them economic power, rather he treats them economic enemy and has accused China for stealing technology, trade secrets, jobs from domestic companies. To punish, he imposes tariffs and other restrictions in order to be competitive and lessen dependency on China in several sectors like Autonomous vehicles, AI, and Robotics.

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Jerry Xu, “You’re going to kill the industry if you try to separate”, in response to Trump’s plan. (Jerry Xu, former president, Detroit Chinese Business Association) The president of Henniges, Larry Williams said, “China are not coming here to steal technology or steal intellectual property but to learn and to create global companies.” However, The Trump administration has taken a far more pessimistic view of Chinese investment, particularly in technology and manufacturing, and is supporting legislation that would make it harder for foreign companies to invest in American companies like Henniges (NY Times).

In the golden era of world’s economic growth with 3-4% estimated growth rate, the global economy revived from a paralysed global trade arised from 2008 Sub-Prime crisis. It is believed that the imposition of tariffs is bad economic policy and the ramifications of it can be far reaching. The risks of the trade war between America and China, Canada, Mexico, EU is assumed to directly raise the costs of inputs for goods in America and subsequently lower job opportunities and global growth rate.

Asian supply chains are also likely to be disrupted, very few players Asia or North America would remain unaffected. (Editorial, The guardian, June 02)

American farmers are the worst sufferers. Close to 60m tonnes are gathered annually and almost half is usually exported. As the harvesting season begins, China, Mexico, Canada and the EU are all threatening retaliation over Trump’s tariffs on steel and aluminium. US agricultural exports are worth about $140bn a year. Canada and Mexico import about $39bn worth, China’s share is $20bn and the EU around $12bn. All those countries have threatened retaliation over metal tariffs. Soybeans are down 40 cents a bushel — a $1.7 billion loss to the value of U.S. soybeans. China isn’t the only market for pork and soybeans. Competitors in Argentina and Brazil must be celebrating their good luck. If USA quit NAFTA, the loss will devastate all of American agriculture, no matter what happens in trade war with China.

The U.S. exports 30 percent of the soybeans it grows to China every year. Only Wisconsin farmers exported $7.2 million worth of the crop in 2017. Without exporting to China, farmers will need to sell those products domestically, flooding the market. Prices are expected to drop, and the state's economy would take a hit as a result. Due to the tariffs imposed by Mexico, local dairy producers have lost out on business to cheaper producers from the European Union. With the collapsed prices of milk, grain, and other commodities, farmers are losing money in milking cows, caring for livestock, and planting and harvesting crops. “Firstly, it has a direct effect which happens at firm, then it happens to the labor, then the next effect hits the economy because farmers are in disastrous position” (Mark Stephenson, Director of Dairy Policy at the University of Wisconsin).

Dock workers, soybean farmers, and manufacturers has started to give complaints, claimed by several republican and democrat senators. This war is treated as a reckless campaign (Senator Robert Menendez, D-N.J). People like farmers are losing money and started to be hurt (Senator Bob Corker, R-Tenn). American workers who already are being hurt by retaliatory action from foreign leaders responding to Trump’s tariffs. Dock workers in Delaware, soybean farmers in Virginia and manufacturers in Maryland fear the tariffs will result in massive job losses. However, Trump seeks to reassure the farmers that he will open things up better than before, but it will take time. Vice president Mike pence reiterated the tweet posted by Donald Trump. (Washington Post, 11th July following Trump’s tweet).

Similar to China, US imposed tariffs of 10% and 25% on imports of certain aluminium and steel products from Russia. In retaliation, Russia imposed tariffs of between 25% and 40% on a number of U.S. products in response to the tariffs adopted by the United States on imports of Russian aluminum and steel. This will affect certain industries such as road construction machinery, equipment for the petroleum sector, tools for working metal and rock drilling, as well as optical fibre. Russian exporters’ losses from U.S. tariffs are estimated at $537.6 million. Countries such as Taiwan, Hungary, the Czech Republic, South Korea, and Singapore could also be as vulnerable or more vulnerable to the risk of trade dispute.

Slovakia is EU’s leading car and car part exporter to the United States. The car making sector has a 44 per cent share of Slovakia’s total industrial production and 35 per cent of its exports. Last year, 1,001,520 cars rolled off assembly lines in Slovakia and exports were worth 3.7 billion euros. According to the IMF, a new tariff on cars could cost Slovakia approximately 90 million euros. “Hong Kong’s economic health and GDP will slow down under dark cloud oftrade war and put on jobs and financial markets.” (Paul Chan Mo-Po, Financial secretary, Hongkong). Trade and logistics which employ 800000 people is vulnerable to risks.

However, CEO of DBS Bank, Singapore, Piyush Gupta thinks that this war is harmful to china most as targeted goods include number of finished products which can be replaceable. “The total impact is probably price increases of magnitude of 5 to 10 percent, it will take at least two or three years to reduce China’s export volume.”, he stated. Meanwhile, trade reliant countries like Singapore, South Korea, Taiwan etc. have experienced a slowdown in growth. China understands that foreign firms operating in China would suffer and urges US firms to lobby over trade war. The situation of Japan and South Korea is also vulnerable in the sense that intermediate goods used in home appliances, computers and communications devices could be caught in the crossfire (8th July 2018, Reuters)

If U.S. exports are cut by a third in an all-out trade war, the United States will lose about $50 billion of exports annually. About 250,000 U.S. workers will lose their jobs. An all-out trade war could cut China’s exports to the United States by about a third, some $200 billion annually and 4 million Chinese workers could be laid off, and many Chinese firms will go out of business. (Gary Hufbauer, Senior fellow, the Peterson Institute for International Economics) US firms will locate its production in countries like Vietnam, Malaysia, Indonesia, Mexico, and Peru which are known for low cost production. Chinese tech firms will do business with South Korea, Canada, Australia, and even with home companies.

The ongoing trade war would lead to reduced demand which could result in increased price for the consumers, slower corporate earnings growth and GDP growth. Beside this, Interest rate will increase, dollar will be weaker in future. Companies like Apple, many hardware makers, Agro firms will be worst sufferer of the war. U.S. firms with the largest percentage of sales coming from China, and thus most likely to suffer from a trade war, are Ambarella Inc., Texas Instruments Inc., Marvell Technology Group, Genco Shipping & Trading Ltd., and Diana Shipping Inc. (Bloomberg)

Trade war affects company’s supply chain beside Cyberattacks, earthquake, IT outages, and floods. However (Richard Wilding, Professor, Cranfield School of management). US brands such as Boeing, Apple and Intel, along with industries such as soya beans, could be vulnerable to reprisals, though China is likely to be wary of damaging its own economic interests. Steel companies of Germany, Japan, and South Korea would be hit. These companies must know where their suppliers, arrange backup suppliers. They may avoid dependence on sole suppliers and collaborate with logistics companies. If Trump imposes tariffs on networking equipment, it will cost companies like Google, Facebook, and Amazon to buy Chinese components for their global cloud computing operations. Chip makers US companies could face tariffs on computer chips. Restrictions may disrupt supply chain.

Impact on markets

"We do worry about sentiment in the stock market." (Mike Reynal, chief investment officer for Sophus Capital in Des Moines). The global trade wars that followed the harsh tariffs imposed by the Hoover administration in the early 1930s following the stock market crash of 1929, deepened the trough of the Great Depression and leads to World War II. Similar incident was happened in 2002 when George W. Bush imposed steel tariffs ranging from 8% to 30%. Two years later, he was forced to withdraw since WTO had said its verdict against USA. However, history shows that trade conflicts are rarely good for markets The International Monetary Fund upgraded its global growth forecasts for 2018 and 2019 by 0.2 percentage points to 3.9% in January. A trade war would probably force them to revisit those numbers. Meanwhile, China could start selling U.S. treasury securities but it will hurt their own dollar reserves. China has been reducing its Treasury purchases all year (Forbes, 23rd March).

China shows no willingness to buckle under US pressure. Canada has retaliated with 25% tariffs on $12 billion of US goods and the EU would contemplate concessions only if the US I pose tariffs on imported light pickup trucks and van. Leading models of the US economy, in particular, imply that a 10% increase in the cost of imported goods will lead to a one-time increase in inflation of at most 0.7%. Interest rate will be raised by Fed to offset higher cost of imported intermediate inputs (Commentary, July, Project Syndicate). This trade war will reduce M&A activity in the M&A epicenter of America and China. FDI will fell more than 90 percent in the first half of 2017, to $1.8 billion. Chinese investors also sold $9.6 billion in U.S. assets, resulting in overall negative FDI flows from China to the United States. Global FDI flows fell by 23 percent in 2017, to $1.43 trillion from $1.87 trillion a year earlier. Flows to developed economies dropped by one-third, while investment into the United States fell by 40 percent, to $275 billion from $457 billion in 2016 (CNBC, 5th July 2018).

Impact on Bangladesh

Unlike the previous global financial crisis, Trump's war will have far-reaching consequences for Bangladesh's trade and economy. However, the first effect of the war was first stroked in Bangladesh's steel industry. The price of rod is increasing for the last few months and as a side effect, imposed tariff on steel and aluminium will add more price hike. Bangladesh basically import scraps, a raw material, from USA. Since China imposed reciprocal tariffs on American agro products, it will open its trade policy to lower or cancel excess tariffs on goods from Bangladesh, India etc. However, as a soybean importing country, Bangladesh may not take advantage from China, but people will be benefitted from the declining price in US of agro products. As tariffs on Chinese clothing would escalate price, US may lower existing tariffs on imports of clothing from Bangladesh and Vietnam. US may end the unfair practice of imposing highest US duties in Bangladeshi products. “If China is somehow managed to reduce its surplus with US, the surplus would simply be shifted to countries like Bangladesh and Vietnam”, Jim O’Neil, the former chief economist at Goldman Sachs Group. “Bangladesh and some other low cost garments and show producer countries might be benefitted from the trade war.” (Professor Shakhawat Ali Khan, Dhaka University, Editorial, The Daily Star)

Strategies and Recommendations

To profit from trade wars, one of the ways investors could do is tactically shorting stocks. Since US is an exporter of beef, pork, soybeans, and fruits, making portfolios of agro based businesses will not return much. China holds a strategic card in rare earth metals which are refined in Malaysia and China. The minerals, with such strange names as neodymium, praseodymium, lanthanum, and cerium, are vital for “personal electronics like smartphones, televisions and hair dryers, and electric and hybrid cars (NY Times). American businesses in China are remarkably optimistic as profits have stayed steady and “eighty-one percent expect revenue growth in 2018. (Survey report, American Chamber of Commerce). However, since the trade war is a worldwide phenomenon and all the companies of the world have linkage to the participating countries, they might have to alter their strategies to stay in the competitive business world. Specially, companies operating in USA, China, EU and other countries will have to look for efficient strategies for coping with the situation. Hereby, we can provide some clues that can be used for recommendations for the affected companies:

Since US and China has been following Tit-For-Tat tariff imposing activities, it’s disastrous for the firms which depends on raw materials like steels, aluminium, agricultural products like soybean and cottons etc. It disrupts the supply chain activities like materials planning, procurement and integration. In that case, US automakers may expand capacity in China (Peter Bible, CAO, General Motors). U.S. companies, such as GM and Ford, build production capacity in China to match in country demand (Dec Mullar key, managing director of investment strategies at Sun Life Investment Management).