MONASH

BUSINESS

ECW3301
Case Studies in International
Trade

Lecture 10
Article

US-China Trade Tensions and

Potential Spillovers

Photo retrieved from https://thediplomat.com/2018/05/the-greater-danger-of-us-china-trade-tensions/

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Learning Objectives:
To understand…
1. The macroeconomic impact of trade war.
2. The impact of the escalation of trade tensions on
global growth.
3. The Effects on Indonesia, Thailand, Malaysia,
Singapore and Australia.
4. There are no winners in the trade war.

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Dijkhuizen and Diviney (2018). Trade war: Fear
versus facts. Global trade watch. ABN-AMRO.

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 What is the macroeconomic impact so far?

 US has by far the largest bilateral trade deficit with China.

 US concerns regarding China’s rise as a tech power, the treatment

of intellectual property rights, and the way the Chinese
government supports and subsidises the development of
technology sectors.

 In 2018, the US narrowed its scope on the trade and investment

front. China has become the US’s key target.

 The US has clearly stepped up China-specific trade tariffs.

 Starting in January 2018, the US announced a 30% import tariff on
solar panels, and 20-50% tariffs on washing machines (these
tariffs mainly affected Asian exporters). 5
What is the macroeconomic impact so far?

 Various contagion channels through which protectionist

measures can impact the economic outlook:
1. Tariffs will likely dampen the import and export flows
(direct effect).
2. They may lead to higher production costs and/or consumer
prices in the importing country.
3. Indirect effects result if these measures hit global supply
chains.
4. Business confidence can be hit by the implementation of
protectionist measures. This could spill over to domestic
demand, particularly (domestic and cross-border)
investment.

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What is the macroeconomic impact so far?

 Various contagion channels through which protectionist

measures can impact the economic outlook:
5. Financial markets could be hit by uncertainty over a further
escalation in protectionist measures. This could result in a
sharp correction of asset prices and hence to wealth effects
and a tightening of financial conditions, which in turn
impacts domestic demand.
6. The impact of trade tariffs on the economy and inflation will
also depend on the reaction functions of central banks.

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What is the macroeconomic impact so far?

 The tariffs implemented so far this year by the US and in

retaliation by others are not yet significant, at least not at the
global level.

 The escalation of trade tensions between the world’s two

major powers appears to have hurt business confidence.

 Despite the build-up of trade tensions, and taking into

account the various contagion channels, no sharp
deceleration in global growth and trade is expected for the
time being.

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 What is cushioning the macroeconomic
impact?
 Several reasons why the (estimated) impact of the escalation
of trade tensions on global growth is relatively modest so far.
1. Full-blown global trade war has been avoided
 Trade tensions have not really culminated in a full-blown
global trade war, but rather in a bilateral US-China one.
2. Tariff rates are not prohibitive
 Alongside other factors, such as the regular fluctuations of
exchange rates, input costs, and the flexibility of both
exporters and importers to adjust margins, a 10% tariff
would not lead to a complete standstill in the trade of the
goods that are being taxed.

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 What is cushioning the macroeconomic
impact?
 Several reasons why the (estimated) impact of the escalation
of trade tensions on global growth is relatively modest so
far.
3. Currency adjustments offset the effects of import tariffs
 In economic theory, the effects of import tariffs will be
offset by currency appreciation.
 Since the US announcement to implement China-specific
import tariffs, the yuan has weakened by almost 10%
versus USD, largely offsetting the effects of the US tariffs
so far. This has even contributed to an improvement in
China’s overall export competitiveness, measured by the
real effective exchange rate.

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State of Southeast Asia: 2019 Survey. US-China
Trade War. Issue 1/2019.

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 Effects on Indonesia
 Countries which have high levels of trade with the US, China
or the global economy will be significantly impacted.
 the impact on Indonesia will be smaller than on Singapore,
Malaysia, Vietnam or Thailand.
 Indonesia can take small comfort that its ratio of trade to
GDP is only 30% and will weather the trade war storm
with more resilience.

 Indonesia is an important source of raw materials and

intermediate products for China. Imposing duties on Chinese
products would reduce the demand for Indonesian exports to
China.
 Weak demand for these products will negatively influence
the Indonesian economy. 12
 Effects on Indonesia
 The slowing of the Chinese economy will also be a drag on
the Japanese economy, which would in turn affect
Indonesian exports to Japan.

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 Effects on Singapore and Malaysia

 Singapore and Malaysia, the two most trade-dependent

members of ASEAN, with total trade accounting for 330%
and 110% of their respective GDP.

 Imposing tariffs has direct and indirect effects.

 The direct effects arise from the reduction in trade
volumes that the surge in after-tariff prices implies.
 The indirect effects factor in how demand for inputs
into the affected products would change and the shifts
in incomes and spending associated with these
changes

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 Effects on Singapore and Malaysia

 Because the US and China are largely imposing tariffs on

trade sourced from the other country, third countries stand to
gain if export demand from the US and China diverts to their
exports.
 both the losses in the absence of trade diversion and the
gains from trade diversion are larger for Malaysia than for
Singapore
 The gains in both Singapore and Malaysia are concentrated
in machinery, chemicals, electronics and wholesale trade,
while some services sectors (health, education, hospitality
and air transport) will incur small losses due to weaker
Chinese income gains.
 However, trade redirection will take some time and the

immediate effects are more likely to be negative.

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 Effects on Singapore and Malaysia
 The tariff conflict has weakened the effects on assets markets of
confidence.
 The withdrawal of the US from multilateral free trade deals has
sparked some other countries to push for new trade
arrangements.
 For example, the original TPP went forward in an 11-country
version that includes Malaysia and Singapore, and came into
effect on 30 December 2018.

 The heightened US-China tensions also incentivise ASEAN to

accelerate making the ASEAN Economic Community a reality.
 to offset any losses to GDP should trade diversion
disappoint
 to create a more powerful political voice in a world that
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could become more fragmented
 Impact to the Thailand Economy

 Thailand’s top two export destinations are the US and

China, and so the disputes between them will weigh
heavily on Thailand’s export-dependent industries.
 China and the US, together account for 25% of Thailand’s
total trade. Almost 50% of Thai exports to the US are
dominated by two groups of product: machinery equipment
and electrical products.
 Thailand carries a trade deficit on these two groups of
product with China.

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 Impact to the Thailand Economy

 An indirect and more important impact of trade war on

Thailand comes from the slowdown of the Chinese economy.
 A depreciating yuan and declining Chinese equities led to a
gradual downturn in the number of tourists from China
beginning in April 2018.

 In the medium-term, the realignment of the global supply

chain is one expected outcome of the trade war.
 Chinese companies exporting to the US may relocate their
facilities to ASEAN member countries which are not subject
to the tariff hike .
 Chinese tires factories increased investment in Thailand, a
major exporter of natural rubber. The export of tires from
Thailand increased about 6% for six consecutive years since
2010. 18
 Impact to the Thailand Economy

 Trade uncertainty and a drop-off in tourist arrivals will be

balanced with gains from trade and investment divergence
as supply chains adjust. The result will be net positive.

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KPMG Economics & Tax Centre (2018). Trade
Wars: There are no winners

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 Impact to the Australian Economy

 Under a limited trade war with no escalation to other

countries, Australia’s GDP could be around 0.3% lower after a
couple of years, equating to a loss of A$36 billion in present
value terms over a decade.

 Losses would be greater if the US and China ramped up their

trade war.

 Australia’s GDP would end up being around 0.4% lower in the

longer term, equating to a loss of almost A$60 billion in present
value terms over a decade.

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Trade Wars: There are no winners

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 Trade Wars: There are no winners

 No country benefits from a trade war; including the nation that

starts the dispute.

 KPMG Australia’s economic modelling suggests a trade war

limited to the US and China and to goods valued at up to
US$200 billion would result in GDP losses for those two
countries of up to 0.6% in the near term and 0.2% in the longer
term.

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 Trade Wars: There are no winners

 Losses would be greater if the US and China ramped up their

trade war. Both countries could have GDP losses of around 1%
in the near term and 0.3% in the longer term.
 If limited to the US and China, a trade war would not have as
serious an impact on the global economy or on third countries.
However, if other countries joined the trade war they would all
be worse off.
 An all-out trade war would plunge the global economy into
recession. If financial markets got the jitters and over-reacted to
such a trade war, all bets would be off and a global recession
would occur.
 It would be in the best interests of other countries to stay out of
the dispute, otherwise, would bring much more harm than
good to their own economies. 24
Next Week

Revision Week

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