Opportunities for deals in an escalating trade war
BIZLINKS - Rey Gamboa (The Philippine Star) - May 16, 2019 - 12:00am

Uncertainty continues to hover over the global economy as the trade war between China and the United States deepens with new calls to raise tariff rates on more products traded by both countries.

The aspired world of free trade that had taken a phalanx of Western countries and a host of multilateral institutions like the World Bank decades to build up is fast crumbling at the instigation and continued hammering of US President Donald Trump.

The Philippines may be on the midst of tallying the results of its midterm elections, but there’s no mistaking that it is feeling the jolting effects that have shaken major financial markets around the world.

Trade talks between the two super economies have broken down once again for the nth time since 2017 when the US first initiated discussions. On the table is an attempt to stop China from continuing with policies that are deemed unfair (like forcing transfer of technology and giving subsidies to local companies) and to lower the trade gap between the two countries ($419 billion in 2018).

Full-blown trade war

Trump is clearly discouraging America from buying products made in China by slapping tariffs on imports, now ramped up to 25 percent, on more products including fish, handbags, clothing and footwear. The affected China-made products now amount to P250 billion.

Recently, Trump threatened to impose tariffs of 10 percent to 25 percent on all the remaining goods made in China mostly imported by the US, valued at P325 billion. This has changed the whole complexion of the trade war.

The way things are going, the trade war between the two countries has now escalated to a full-blown battle. Trump’s intention is clearly to discourage use of China-made products by the American market by pricing them higher through tariffs.

The imports that may face trade sanctions include telecommunication equipment, computer circuit boards, metal furniture, processing units, computer parts, wooden furniture, power converters, vinyl tile floor covering, car parts, and seats with wooden frames.

The Chinese have retaliated by raising tariffs on US products imported to China. Last year it had set tariffs at 10 percent to 25 percent on American goods worth $110 billion, and now is raising the 10 percent tariff on $60 billion worth of US goods to 25 percent by June 1.

The items that have been selected by the Chinese are mostly products that they can source from other countries, like soybeans, or are goods coming from Republican states.

Both sides suffer

The Chinese say this is the biggest trade war in modern history, and for sure, both countries stand to suffer. US businessmen are worried of an increase in American’s shopping cart, which would likely translate in the dampening of consumer demand.

Chinese exporters have not been cutting back on their prices for US-bound goods, which means that Chinese goods entering the US would be more expensive with the 25 percent tariff.

Economists don’t foresee a slide back into recession for the US economy, but agree that there could be a slight drop in gross domestic production this year. An uptick in inflation levels, however, may not happen even as most Americans are predicted to curb spending.

On the other hand, Chinese importers will be able to find equivalent American goods from other countries sans tariff, hence its consumers may not directly feel the effects of the trade war.

But the Chinese economy, being export based, will likely be more affected since the US is a big trading partner and its biggest market. If demand for Chinese products is involved in both the short and long term, a slow down in its economy can be expected.

Calls for nationalism

Both countries are calling for patriotism even as the full effects of the trade war have yet to be reflected at the consumer level. In the US, unemployment is at one of its lowest levels, and while farmers are not happy about the possibility of losing their Chinese market, they are optimistic that this is a short-term bitter pill to get China to reform its unfair business practices.

US tech companies., led by Apple are antsy about the higher cost of consumer goods that redound with Trump’s tariffs, but are already looking at plans to move supply lines from China to other Southeast Asian countries, particularly Vietnam and Cambodia. But this will not happen overnight.

Meanwhile, in China, the state-controlled media is already calling for a “people’s war” against Trump’s threat to tax all Chinese goods entering the U.S. Recounts of the opium wars in the late 1800s stressed the onerous tactics used by Western countries to get China’s Qing Dynasty to accept one-sided trade deals.

Opportunities in a shifting global supply chains

As China braces for any fallout from an intensified trade war, global supply chains are getting ready for some shifting. The Philippines is not high in the list of alternatives, what with its comparatively higher cost of doing business in terms of labor, incentives, and electricity.

But there are other areas still worth picking, even if they could be regarded as scavengers’ remains after our better-prepared counterparts in the region get the choice parts.

The trade war offers new opportunities from both the Chinese and American markets, for food products in the former and household consumables in the latter. The 25 percent tariff imposed by both countries on each other is a wonderful hedge that should cover for our higher cost of production.

Let’s review the lists and look at where we can strike some good deals.

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Should you wish to share any insights, write me at Link Edge, 25th Floor, 139 Corporate Center, Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at reydgamboa@yahoo.com. For a compilation of previous articles, visit www.BizlinksPhilippines.net.

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