As the US-China tariffs come into force, it is clear that China and the U.S. will be the biggest losers of the rapidly escalating trade war. The parallel Talking Trade post from today highlights the current situation between the world’s two largest markets.
Experts have also warned of collateral damage to emerging markets (EM). Even if this trade war is between the world’s giants remains confined and tariffs are applied only to some specific industries and goods, emerging markets will definitely bear some of the brunt.
As an example, the United States put boats on the list, subject to 25% tariffs if imported from China. Since many of the individual parts and components in a boat, ship or floating structure (HS89) are sourced from EM countries, the damage from the US-China dispute will be felt beyond the two countries alone.
Small, open emerging economies like Taiwan and Malaysia will be the most at risk due to their role in global supply chains.
If the dispute continues and deepens, American and Chinese growth could be dented. A slowdown in China’s economy is also likely to mean lower demand in commodities, and this is not good news for oil producing and mineral exporting EMs.
Partly as a result of rising risk and uncertainty, capital outflow from emerging markets has already begun to take place. The benchmark MSCI Emerging Market Index saw a staggering $5.39bn of net outflows over May.
However, not all is lost.
Many EMs have been focusing on domestic consumption, shielding them from this trade war to some extent. With strong macroeconomic fundamentals and government initiatives like “Make in India,” emerging economies with relatively large domestic markets should remain resilient in face of a trade war. The retail sector and inter-regional tourism might be the least affected.
EMs could see a rise in FDI and the number of new jobs created. As tariffs hit, more firms may offshore their operations get around these trade barriers. It is expected that these firms will be relocating to EMs which have a lower costs and decent existing business infrastructure.
Harley Davidson has already announced plans to move manufacturing to Thailand where they can not only avoid erected (retaliatory) tariffs and duties but also take advantage of the upcoming RCEP and existing ASEAN trade relations.
Fiat Chrysler Automobiles has been formulating contingency plans for its manufacturing operations for quite some time. It would not be surprising if other carmakers like G.M. and Ford, the greatest opponents of trade wars, start relocating production or distribution facilities to EMs that will welcome them with open arms.
However, this is contingent on the length of the trade war – if firms expect it to only be temporary, a measure as drastic as shifting factories is unlikely.
EMs could see a rise in exports in some sectors. Agricultural producers in EMs could stand to gain from China's counter attack to impose a 25% tariff on American farm commodities. The U.S., being the biggest exporter of cotton and soybeans to China and the world, will be greatly affected. However, this means that EM producers have a chance to play.
China has already sought alternative sources of cotton months, in preparation for a possible trade war. India, the world’s second-biggest cotton exporter, has already signed contracts to ship 500,000 bales (85,000 tonnes) of its new season harvest to China, in the rare advance deal. India’s total cotton exports for this season is expected to be up 20%, to 7 million bales.
China has also turned to other sources of soybeans, which is integral to make animal feed. It is likely to buy more from the other three top exporters – Paraguay, Argentina and Brazil. China’s share of South America’s regional soybean exports is expected to increase to 90% from June to December this year.
These alternative sources of commodities will be insufficient to satisfy China’s demand. Commodity prices will thus rise and farmers could actually benefit from the trade war. Again, this depends on the length of the trade war. If prices are sustained at high levels, there might be a wider effect on other sectors (e.g. textile and poultry). Depending on how trade corridors shift, EMs could also face a net fall in exports. The trade dispute has already inflated Brazilian soybean prices, turning away EU importers.
Nevertheless, over-arching risks exist – higher oil prices, currency volatility, and increasing inflation among the EMs might bring them down if the trade war continues. Eventually, benefits are very much dependent on the duration of the trade war.
Thus, while trade wars generally have no silver linings, for some EMs, this one might bring benefits.
***This Talking Trade was written by Dorothy Tan, Research Intern, Asian Trade Centre, Singapore***