The Beneficiaries from the U.S – China ‘Trade War’
Development Studies at the Department of Humanities and Social Sciences, IIT Madras.
Two years have elapsed since the threat of a trade war between the biggest economic powerhouses in the world has escalated into a serious issue. The’ trade war’ was seen as panacea to tackle China’s ‘unfair’ trade practices, and ‘theft’ of American intellectual property. It has already led to U.S. imposition of tariffs on more than $360 billion of Chinese products. China’s Ministry of Commerce which labelled Trump administration’s move in 2018 as “the biggest trade war in economic history so far” has retaliated with tariffs on more than $110bn of U.S. products as of January 2020. Although both countries declared truce by signing a hard-fought agreement in January to calm the trade frictions, the extent of economic relief it could offer to the world economy is unclear. This article interrogates the strategy of the key beneficiaries in the ongoing trade war and the reasons that enabled them to benefit from an unprecedented economic crisis.
The decreased trade between U.S. and China left notable gaps to be filled and led to a diversion of trade flows away from both countries, creating opportunities for third-party economies to take ground. A trade war situation makes it easier for suppliers around the world to substitute the exports of warring nations since substitution between any two foreign suppliers is more accessible than substitution between a foreign supplier and a domestic firm. While the trade war led to the slowdown of foreign direct investment from the United States in Southeast Asia, instability of stock markets and damage of some European economies; few nations like Vietnam, Taiwan and Mexico have financially benefitted from it. Beneficiaries of the trade war currently experience a surge in exports to the United States while experiencing a shrink in exports to PRC because a majority of them are vital suppliers of intermediate goods to Chinese factories. Asia’s global value chain (barring China) has gained more from U.S. import substitution, whereas America’s (Mexico and Canada) has benefitted more from China import substitution.
There are differing views on which third-party nation profits the most, financially, in the ongoing trade war. A report published by United Nations Conference on Trade and Development in 2019, “Trade and Trade Diversion Effects of United States on China”, states that Taiwan or Republic of China is the largest beneficiary of the situation with additional exports to the U.S. of close to $4.2 billion in the first half of 2019 alone. On the other hand, another report published by the Japanese financial holding company Nomura calls Vietnam the largest beneficiary, gaining 7.9% of GDP from additional U.S. imports. Other beneficiary economies common to both the reports are Mexico, South Korea, and Canada.
As per Taiwan’s Ministry of Finance, the country’s exports to and imports from the U.S. from January to August of 2019 have grown to18.7% and 8.1% respectively, thanks to a mature domestic tech industry, proximity and a shared supply chain with mainland China. Nevertheless, this spurge in the economy could very well end up as a short-term wonder because the trade war is most likely to disrupt Taiwan’s investment production structure and functioning of international trade as the ‘triangular trade model’ of organisation from Taiwan, production in China and consumption by the United States. In order to extend the current boom to an engine for future growth, Taiwan should seize new business opportunities in the new emerging supply chain linked to digital transformation and technological innovation. As per the reports of Central News Agency, 142 Taiwanese firms had repatriated NT$610 billion worth of their manufacturing operations from mainland China to Taiwan by the end of October 2019. This trend is likely to continue as a result of mounting labour costs and IPR violations in China in addition to the “welcoming Taiwanese investment back to Taiwan 2.0” policy by the government.
Similarly, according to government data, Vietnam’s GDP in 2019 endured sturdy at 7% despite a 7% dip in the country’s exports to China in the same year. In the first nine months of 2019, Vietnam’s exports to the U.S. rose by a whopping 34.8% as a result of the “trade diversion effects”. Additionally, similar to Taiwan, trade war provides a chance for the future advancement of Vietnam in the form of relocating multinational companies. Though many companies are willing to shift their manufacturing activities to Vietnam and several of them have already moved, a rapid relocation will not be easy for them, and such a process demands ardent government support. Vietnam’s manufacturing infrastructure and supply chain are inferior to China, restricting the chances of domestic manufacturing of products that command top-class technical precision. In order to utilise the upcoming opportunities, Vietnam needs to continue to invest in hi-tech manufacturing and infrastructure and facilitate small and medium enterprise (SME) development to align further with global supply chains.
In spite of being a chief actor in world politics and trade, India, due to diverse reasons like lack of ample manufacturing capacity and focussed business policies, failed to profit from the trade tensions the way Vietnam or Taiwan did. Contrary to the expectations of UNCTAD report, “The Trade Wars: The Pain and the Gain”, which predicted a 3.5% surge in India’s exports in the year 2019-20 as a result of trade diversion effects, India’s total exports decreased by 5.06% as compared to the previous year. Since the trade war is likely to continue at least in a mild form as long as the trickiest issues continue unresolved, chances for India and other developing nations to benefit from the situation arevery much alive. If India can develop a robust supply chain with regional integration, replicate China’s labour efficiency and exploit the dwindling demand for Chinese commodities in U.S. markets, the country stands to elevate its exports in future. Identification of lacuna created by the trade war and expanding the manufacturing of product categories as per the demand is vital to trade aspirations of developing nations.
Unlike Southeast Asian economies, the immediate adverse impacts created by the trade war on the European Union and the United Kingdom are many. In the past few months, U.S. lawmakers have either passed or proposed sanctions that could delist dozens of Chinese firms from the New York Stock Exchange and the Nasdaq, thereby limiting Chinese access to U.S. financial markets. The situation also provides E.U. economies with opportunities to benefit financially and otherwise. Due to the current strained relationship with the U.S., China needs E.U. more than ever as a strategic partner and export market. This puts E.U. in a position of advantage to negotiate its future investment agreements with China that would provide European firms access to the state-protected sectors in China like infrastructure, utilities and financial services. European Union can currently enhance its political importance in the world, assuming the role of a conciliator between Beijing and Washington.
Even though third-party economies benefit from the trade war in the short term, the comprehensive consequences of the dispute could be damaging for them as many other forces are at work. Since most of the currently benefitting third-party nations are significant suppliers of raw materials to Chinese factories, higher U.S. tariffs on China adversely affect them because the taxes target not only the assembler of the commodity but also suppliers through the value chain. With the allegations against China regarding the origin of the Coronavirus and U.S. lawmakers’ push for sanctions against China for, what is perceived as, its growing hold on Hong Kong and treatment of Uiyghurs in Xinjiang, avenues for de-escalation of the trade war are increasingly sparse. In the long term, the uncertainties and complications caused by a full-blown trade war do good for no nation.
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the position of IIT Madras China Studies Centre)