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Global Supply Chain News: US Better Positioned than China for Trade War, Economist Says

 

China has Much More of Its Economy Connected to Exports, while State Own Newspaper Threatens Apple in China

Aug. 7, 2018
SCDigest Editorial Staff

The trade war between the US and China continues to escalate, with the Trump administration saying it may levy new tariffs on hundreds of billions of dollars of additional Chinese exports to the US if it can't get some relief from China on trade and intellectual property issues.

Supply Chain Digest Says...

"China is fighting a losing battle unless Beijing concedes to Trump – an unlikely outcome," Brown concludes.


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But China is also playing trade hardball – and using Apple as leverage.

Apple has benefited from cheap labor and a strong supply chain in China and needs to share more of its profit with the Chinese people or face "anger and nationalist sentiment" amid the on-going trade war, an article the state-backed publication Global Times commented last week.

The editorial noted that Apple made $9.6 billion in revenues in China in the Q2, which helped the company to reach a $1 trillion market capitalization.

The continuing trade war between the U.S. and China could leave Apple and other US firms vulnerable as "bargaining chips" for Beijing, according to the article.

The editorial – certainly known in advance by the Chinese government and perhaps instigated by it - goes on to say that "China is by far the most important overseas market for the US-based Apple, leaving it exposed if Chinese people make it a target of anger and nationalist sentiment. China doesn't want to close its doors to Apple despite the trade conflict, but if the Us company wants to earn good money in China, its needs to share its development dividends with the Chinese people."

It's idea of how that "sharing" might happen were not detailed.

So far, the trade war seems to have had a very minor impact on total global trade. For example, the largest ocean container carrier, Maersk Line, noted this week that the actions by the US and China had thus far negligible impacts on volumes – but that the effect could be much worse if trade skirmish turns into all-out war.

Yet, one global economist believes that in the event of escalation, the US is in the stronger position than China.

Writing last week in the South China Morning Post, David Brown, chief executive of New View Economics, said that China's "annual gross domestic product growth in the order of 6-8% cannot go on forever and there is a very real chance growth could slow very sharply to 5% or even lower in the next few years, unless Beijing takes strong steps to mitigate the risk."



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Brown notes that the greatest danger in the short term is the specter of the US-China trade dispute spiraling out of control, which could hit economic growth on both sides. However, Brown believes President Donald Trump is unlikely to back down, especially since he likely feels he is in a position of strength, with the US economy expanding at its fastest pace in nearly four years, at 4.1% in Q2.

The simple reality is that the Chinese economy is much more dependent on exports to the US than the US is on its exports to China, as shown in the graphic from Brown below.

 

As can been seen, nearly 4% of China's total GDP comes from US exports, versus under 1% for the US on exports to China. This means China has a lot more to lose if trade between the countries slows.

"China's export reliance on the US market is much greater than American dependence on China, by a multiple of five times. It is the president's trump card," Brown notes.

According to estimates by the International Monetary Fund, a full-blown trade war could knock as much as 1-1.5% off China's growth rate, while the impact on the US might be more limited, to the tune of only 0.1-0.3 per cent shaved off growth, thanks to the US economy's greater domestic dominance.

"Given the rapid pace of US growth right now, it is a price Trump probably thinks worth paying to intensify pressure on China," Brown comments.

But the risks for the global economy are still large.

 

"If the tariff wars expand, China's domestic demand would suffer as multiplier effects sweep through the economy. If the crisis escalates, China could end up caught between a rock and a hard place in terms of available policy options," Brown adds.

And that could lead to a global economic slowdown that impacts everyone, including the US.
Brown comments that "Retaliating against US tariffs is not in China's interest. Reform is." But whether China will operate like that is another question, especially if reform is seen as giving Trump a victory.

He adds that the odds are that Beijing has to bite the bullet and accept an inevitable slowdown in growth towards 5% from 6-8% now.

"China is fighting a losing battle unless Beijing concedes to Trump – an unlikely outcome," Brown concludes.

How do you see these trade wars playing out? Does the US hold the stronger hand? Let us know your thoughts at the Feedback section below.

 

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