Karishma Vaswani* says that while the US and China will be the biggest losers from a trade war between the two countries, many other economies are also likely to be affected.
What happens when the world’s two biggest economies go to war?
Ok, so it’s not a real war — but the US and China are at the beginning of a trade war — and no-one knows just how bad it could get.
So here’s how a US-China trade war could hurt us.
Tit-for-tat
A list of Chinese products were hit with a 25 per cent tariff from last Friday — effectively making them 25 per cent more expensive for US consumers:
- Technology goods like semiconductor chips assembled in China. They’re found in consumer products used in everyday life such as televisions, personal computers, smartphones, and cars.
- A wide variety of products ranging from plastics, nuclear reactors and dairy-making equipment.
- According to the Petersen Institute of International Economics more than 90 per cent of the products on the US tariffs list are made up of intermediate inputs or capital equipment. That means stuff that you need as raw material to make other products — so it could have a knock-on effect on many other goods too.
What the US really wants to target though are things produced under China’s Made in China 2025 policy.
In retaliation to the US moves, China has hit these sectors:
- American agriculture — hitting at American farmers and ranchers, a political vote bank that US President, Donald Trump relies on. Some 91 per cent of the 545 products China is placing a tariff on are from the agriculture sector.
- The car sector — companies such as Tesla and Chrysler manufacture in the US and their products going into China would be affected.
- Medical products; coal; petroleum (but only marginally).
‘Getting scary’
And while Beijing is really good at the chest-thumping, fist-wagging rhetoric, the reality on the ground is much more serious.
“Our industry contacts in China have said things like ‘seems pretty serious,’ or ‘this is getting scary’, even ‘I think there’s a chance of things getting worse’,” says Vinesh Motwani of Silk Road Research.
He’s recently returned from a trip to the mainland, and as part of his research routinely talks to China-based firms to gauge business sentiment there.
These worries, he says, can translate into “increased caution and lower confidence” for businesses as they try to navigate the uncertainty ahead.
Which means: expansion plans could be put on ice.
And if Chinese expansion is on hold that has a direct impact on the rest of us in the Asia-Pacific.
Shift manufacturing?
Obviously, the US and China’s economies are most at risk, although they’re not the only ones.
According to DBS’s Chief Economist, Taimur Baig, an all-out trade war could shave 0.25 per cent off the gross domestic product (GDP) of both economies this year.
It gets much worse next year — with both countries seeing a reduction in growth of about 0.5 per cent or more.
Mr Baig adds that “considering China grows at 6–7 per cent and the US at 2–3 per cent, we believe the damage would be greater to the US than on China”.
But countries like South Korea, Singapore and Taiwan could all be affected too because of disruption to supply chains.
If history is any guide, then past trade wars have led to deep economic malaise.
In particular, the US Smoot–Hawley tariffs enacted in 1930 are thought to have inspired a trade war and led to a massive decline in global trade.
As one study points out, world trade fell by 66 per cent from 1929 to 1934, while US exports and imports to and from Europe each also fell by about two-thirds.
While no one is saying we’re there yet, businesses are getting more concerned than they have been in the past, especially because of all the uncertainty.
The tit-for-tat mentality between Beijing and Washington could just end up antagonising both sides to a point where they cannot climb down from their hostile positions for fear of losing face.
“You start with protectionism and isolationism,” says Victor Mills, Chief Executive of Singapore’s International Chamber of Commerce.
“And then you don’t just beggar your neighbour, you beggar yourself.”
What many businesspeople are hoping, of course, is that this sound and fury are just the start of another series of negotiations.
But the worry is that if it’s not — it will escalate, and everybody will be the poorer.
And that includes you and me.
* Karishma Vaswani is Asia Business Correspondent for BBC News in Singapore. She tweets at @BBCKarishma.
This article first appeared at www.bbc.com.
