In this webinar, Dr Jayant Menon examines how the US-China trade war has impacted the region through global supply chains. It will try to answer two inter-related questions: Why did the restructuring of GSCs happen so soon after the first tariffs were raised? And how can a relatively small bilateral tariff disrupt GSCs, causing seemingly costly restructuring?
REGIONAL ECONOMIC STUDIES PROGRAMME WEBINAR
Friday, 11 September 2020 – ISEAS – Yusof Ishak Institute hosted a webinar on “Assessing the Impact of the US-China Trade War in an Era of Global Supply Chains” which was delivered by Dr Jayant Menon, a visiting senior fellow at ISEAS. Prior to his appointment at ISEAS, Dr Menon was the lead economist for trade and regional cooperation under the Economic Research and Regional Cooperation Department at the Asian Development Bank (ADB).
Dr Menon started off his presentation with an overview of the US-China trade war timeline which started in July 2018 and has become more politicized since the outbreak of COVID-19. He commented that global supply chains (GSCs) are dynamic in nature. GSCs have been restructuring in response to changes in regulations and increases in wages in China long before the trade war occurred. Trade war is an accelerator of restructuring rather than an inducer.
Dr Menon contends that the trade war is mostly a symptom of larger underlying forces. Tensions have been rising as a result of significant shifts in the distribution of geopolitical and economic dominance. These tensions are unlikely to be resolved even with the rectification of the trade war. Dr Menon exemplified his point by noting the shift in focus from trade to intellectual property (IP) issues, currency and technology. He commented that if new forms of expressions are found for the dispute, then it is unlikely to be a transitory phase. Dr Menon remarked that the quicker companies adjust in response to the changes, the lower the costs. However, relocation should only be justified if costs are sufficiently large, regardless of the length of the conflict.
With regards to the reason companies should adjust even though the tariff applied to the total value of the product is relatively low, Dr Menon argues that taking into account the value added (VA) share from China amplifies the effects of bilateral tariffs imposed. Dr Menon proposes the concept of the Effective Rate of Spillover Protection (ESPR) which captures the rate of protection provided to competing locations for activities currently undertaken in China within the GSCs as a result of trade war tariffs. The ESPR is inversely related to the share of VA generated in China. Thus, products with low VA shares from China would have a very high ESPR which encourages the producing firms to move out of China.
Using data from ADB, Dr Menon estimated that the domestic VA for Chinese exported goods to the US in 2018 is less than one-third. There are significant variations across sectors – the share is highest for leather and footwear, electrical equipment and textiles, but lowest for transport equipment, food and beverages and chemical products. Dr Menon mentioned that labor-intensive industries like footwear, textiles, have low sunk costs which enable them to be more mobile, less costly to relocate and more likely to be transferred out of China to avoid tariffs. This is unlike the more complex and capital-intensive manufacturing industries such as machinery and transport equipment.
Dr Menon further remarked that the presence of GSCs undermines the use of tariffs to achieve the goal of assisting US producers or penalizing Chinese firms. Drawing from the case of Japan and the Plaza Accord, Dr Menon opined that China can restrict the impact of harsh tariffs by shifting activities within the GSCs to other countries. He argued that the trade war has made both parties worse off and reduced the world’s welfare even though some countries that compete for activities carried out in China in GSCs may benefit. Managing risks may involve decoupling from China and US, de-globalizing, reshoring and near-shoring.
The webinar concluded with Dr Menon answering several questions posed by the audience. Some of the questions discussed the effect of COVID-19 on GSCs that include China, factors that influence companies to move out of China, the potential impact of a Biden victory, the impact on the ASEAN community and the impact of the GSC restructuring on SMEs.