President Donald Trump’ decision to impose a tariff rate of 10 percent on an additional US$300 billion of Chinese products is a significant escalation in the United States (US) - China trade war - Photo: Special

JAKARTA (TheInsiderStories) – President Donald Trump’ decision to impose a tariff rate of 10 percent on an additional US$300 billion of Chinese products is a significant escalation in the United States (US) – China trade war, ending the trade war truce agreed at Japan’ G-20 Summit, Rajiv Biswas, Asia Pacific Chief Economist at IHS Markit said today (08/02).

The new tariff with effect from 1st September 2019. Trump also signaled that the tariff rate could be increased to 25 percent at a later date. The new round of tariffs will be another negative shock to China’s manufacturing export sector, which has already been hit hard by previous rounds tariff. The new tariffs will essentially extend US tariffs to all Chinese exports of goods to the US.

President Trump’s decision follows the unsuccessful conclusion of the latest round of bilateral trade talks between the US and Chinese trade negotiators following the temporary trade war truce agreed between President Trump and President Xi at the G-20 Summit in Osaka, Japan at the end of June 2019.

The export sectors of many Asia-Pacific nations have faced strong headwinds during the first half of 2019 from the transmission effects of the US-China trade war as well as the continued slowdown in the global electronics sector. Exports of many Asian countries have contracted during the first half of 2019, including Japan, South Korea, and Singapore.

The latest manufacturing sector Purchasing Managers’ surveys conducted by IHS Markit in July for export-driven economies such as South Korea and Singapore continue to signal contracting manufacturing export orders, with exports to China declining during recent months.

The latest escalation in the US-China trade war will deliver a further significant negative shock to China’s manufacturing sector, with transmission effects throughout the Asian manufacturing supply chain.

The electronics sector will be particularly vulnerable to this latest escalation, as many electronics products exported to the US from China, such as smartphones, will be subject to this new round of tariffs.

With the electronics sector already suffering from a significant slowdown in new orders, this latest round of tariff hikes will be a further negative shock to China’s electronics sector and the manufacturing supply chain.

A growing number of Asia-Pacific central banks, including Bank of Korea, Bank Indonesia, Bank Negara Malaysia, the Reserve Bank of India, the Reserve Bank of Australia, the Reserve Bank of New Zealand and Bangko Sentral ng Pilipinas have lowered policy rates in recent months, reflecting concerns about the escalating US-China trade war and the impact on weakening exports and industrial production.

The combined impact of the Federal Reserve rate cut on 31st July and the escalation of the US-China trade war will likely result in a new round of policy rate cuts by a number of Asian central banks in response to the deteriorating near-term outlook for Asian exports.

Meanwhile escalating trade frictions between Japan and South Korea have added new downside risks to Asia’s trade outlook, following Japan’s decision today to remove South Korea from its White List for sensitive technology exports.

The protracted US-China trade war has reinforced trade diversion effects with the reconfiguration of Asian manufacturing supply chains. US buyers are shifting their orders away from China to other manufacturing hubs, while manufacturers are restructuring production across global supply chains to reduce their exposure to the US tariffs on China.

Some emerging APAC manufacturing hubs are gaining export orders from the US as a result. Vietnamese exports to the US surged 36 percent year-on-year in the first five months of 2019.

Southeast Asian low-cost manufacturing hubs, notably Vietnam, are already benefiting from stronger foreign direct investment (FDI) inflows as multinationals diversify their global supply chains away from China. Vietnam’s Foreign Investment Agency has reported a 69 percent year-on-year rise in foreign direct investment in the first five months of 2019.

While the US-China trade war has intensified this diversification, this shift of manufacturing supply chains had already been underway since 2012 because of rising Chinese manufacturing wage costs and concerns about potential supply chain disruptions due to a concentration of production in mainland China.

Written by Lexy Nantu, Email: lexy@theinsiderstories.com

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