President Donald Trump and The Federal Reserves Governor Jerome Powell - Photo by Getty Images

JAKARTA (TheInsiderStories)–The trade wars imposed by the United States could cut Asia-Pacific GDP growth by as much as 1 percentage point in 2019, said Asia Pacific Chief Economist at IHS Markit Rajiv Biswas in a press release, Monday (9/7).

A series of decisions by the US to impose trade tariffs on various key trade partners, including China, the EU, India, Russia and the key NAFTA partners of Canada and Mexico, have catapulted the world towards a scenario of global trade wars.

An escalating global trade war scenario could cut Asia-Pacific GDP growth by as much as 1 percentage point in 2019, depending on how long these trade wars continue and how much further escalation will occur.

The APAC region is particularly vulnerable to such a trade war scenario since China is at the forefront of US tariff measures and is the largest economy in APAC. Many other APAC economies are also vulnerable to the collateral damage from an escalating US-China trade war due to the integrated East Asian manufacturing supply chain and the importance of China as an export market for other APAC economies.

As the US administration has decided to impose tariffs on various imported products from key trade partners, China is in the front line, with US punitive tariffs of 25% being applied to US$34 billion of Chinese imports with effect from July 6. China has immediately retaliated with tariffs on an equivalent amount of USD 34 billion of imports from the US, targeting US agricultural products, including soybean, dairy and beef as well as US-made autos and parts.

The US administration plans to ramp up to US$50 billion the total value of Chinese products that will be subjected to Section 301 tariff measures, which would result in a further US$16 billion of Chinese imports becoming subject to these tariff measures. President Trump has also indicated that an additional US$200 billion of Chinese imports could be subjected to tariff measures if China imposes retaliatory tariff measures, which have already been implemented by China on July 6.

The US administration is calculating that because of the large US bilateral merchandise trade deficit with China, which reached US$375 billion in 2017. China will run out of the US products to impose retaliatory tariffs on long before the US runs out of Chinese products to apply punitive tariffs on. Since total Chinese merchandise imports from the US in 2017 were US$130 billion, and US merchandise imports from China were US$505 billion, this means that China will not be able to match the proposed US tariffs on an additional US$200 billion of Chinese imports to the US.

For China, the US is its largest export market, accounting for 19% of total Chinese exports. Therefore, if the US escalates its tariff measures to an additional USD 200 billion of products, this would mean that around half of Chinese exports to the US would face significant US punitive tariff measures. China’s export sector will, therefore, suffer a significant deterioration in export competitiveness to the US compared to other emerging markets’ manufacturing exporters, such as Vietnam, South Korea, Thailand, Bangladesh, Mexico, and Brazil.

However, a trade war with China could also be damaging for the US, particularly with Congressional mid-term elections looming and Chinese tariff countermeasures targeting US agricultural exports, which could create a political backlash from US farmers. US exports to China will also likely face increasing Chinese non-tariff barriers, which can be devastating for perishable items, such as agricultural products.

While Chinese exports to the US will be hit hard by these steep US tariff measures, the impact of US tariffs will also create collateral damage for the export sectors of many other Asian economies, which are part of the Asian manufacturing supply chain providing raw materials and intermediate manufactures for China. The East Asian electronics industry supply chain is particularly vulnerable, since electrical and electronic manufacturing exports are among the largest Chinese exports to the US, and significant intermediate inputs for Chinese production of these goods are sourced from East Asian economies, such as Singapore, Malaysia, South Korea and Taiwan. Around one-third of the total value of China’s exports comprises foreign value-added. Since a significant share of Chinese exports is manufactured by foreign multinationals, the US and other foreign multinational corporations (MNCs) from countries, such as the EU, Japan, and South Korea that are manufacturing products in China for export to the US, will also be hit by these measures.

The EU, India, Russia, Canada, and Mexico are also among the US trade partners hit by the imposition of US tariffs on steel and aluminum imports, which is also triggering retaliatory tariff measures. This will create negative impact effects on bilateral trade flows between the US and many other major trade partners.

However, the dark clouds of protectionism also have a silver lining for some countries as escalating bilateral tariffs between the US and China force importers to seek alternative sourcing of imports. Chinese tariff measures are targeting US agricultural imports due to the expected political backlash among US farm lobbies ahead of the US mid-term elections in November 2018. Alternative suppliers of agricultural exports for soybean, cereals, seafood, dairy and meat products, such as Australia, New Zealand, Brazil and the EU, will be likely winners from any trade diversion effects of a US-China trade war.

Since the US is also a major net exporter of services exports to China, with an estimated USD 54 billion of annual services exports to China, US services firms could also face increasing trade diversion effects if Chinese firms switch some of their services imports to suppliers from other countries, notably the EU.

Negotiated compromise trade deals between the US and its key trade partners remain the most optimal solution to the current trade confrontations, although no early end appears to be in sight for the escalating ‘tit-for-tat’ world trade frictions and rising trade protectionism. Global trade wars have become one of the key downside risks to world growth and trade in the second half of 2018 and for 2019.