US-China Trade War: Still Grinding On

US-China Trade War: Still Grinding On

But the US-China trade war continues to grind on. While coronavirus takes the headlines, the economic damage from more than two years of trade hostilities between the two largest global economies continues to take a toll. Worse, US President Donald Trump appears eager to escalate the fight all over again for the rest of this year. Many people seemed to have stopped paying attention the trade conflict back when the Phase 1 “deal” was signed in January and implemented on February 14 (both dates seem like a lifetime ago already!). As we noted at the time, the Phase 1 deal was never likely to hold. The agreement had promises in a variety of areas from intellectual property rights to financial services. But the most important element was a promise to purchase goods. The US insisted that China buy $200 billion in products ranging from soybeans to energy in a two-year time frame. This target was never realistic. It was nearly double any previous purchases made by China for US exports and it was coming off extremely low export figures across the duration of US-China tariff escalation. The Phase 1 deal arrived just as the COVID-19 situation was taking off in China. With factories and shops shuttered across the country (and not just in Wuhan at the epicenter), Chinese imports from everywhere sagged. Meeting the series of purchasing targets went from impossible to never-going-to-happen. So what was the appropriate US response? There were two options available to Washington. First, to acknowledge that the scale and depth of the crisis made previous commitments unattainable in the short term and either recalibrate the expectations, adjust the target levels, or shift the timeline. Second, to complain loudly that China had failed to meet the purchasing targets and start the whole conflict all over again.

Shifting Supply Chains in Disruption

Shifting Supply Chains in Disruption

The extreme level of disruption appears to have caused firms to finally think seriously about their existing supply chain footprints. Companies in multiple sectors have now vowed to develop more resilient chains. In many cases, firms have supply chains that have evolved organically, with little coherent planning. Staff, to pick one example, often run disparate parts of global firms from locations that may not make sense if viewed from the perspective of today. Companies might have an office in one location that was originally set up because a key staff member liked the area, only to watch it evolve into a much larger operation than ever anticipated at the outset. Companies typically do not design supply chains from scratch, but bolt on different parts over time, as the firm grows or acquires new companies or moves into new sectors. The net result is often supply chain footprints that actually make little rational sense. Warehouses might be located in places that no longer have the transport links originally intended. Traffic, as an example, could be so heavy that goods are stuck in transit much longer than planned. With so many staff locked down in houses or slowly venturing back to offices, it makes sense to seize the opportunity to re-examine supply chains and determine whether and how the existing footprint can be adjusted to cope with new stresses.

Shattered and Shuttered

Shattered and Shuttered

All this chaos has upended growth prospects for millions of smaller firms. Some challenges for small firms are obvious. The bubble tea shop in Singapore, as an example, was already suffering from declining sales after months of increasingly tight movement restrictions. The announcement of a 6 week closure of all bubble tea shops, along with cake shops and other specialized food and beverage stores, is likely to push many companies right over the edge. As our survey indicated, most Asian SMEs have no more than 2 months of cash reserves available. The rapidity and depth of this crisis means that many have already run out of money. Governments can step into the breach, by providing a wide variety of temporary support measures. We have been tracking the various government SME schemes on our AMTC website. (Connect with us at contact@amtctrade.org if you have anything to add to our database. Please share the results with struggling SMEs.) Many of these programs will provide a critical lifeline to firms, like the bubble tea shop, facing a liquidity crisis. Although many patterns of behavior will likely change in the wake of the coronavirus, demand for tea will probably return. Hence, most tea shops may need only a temporary infusion of cash to cover running expenses and will survive. Smaller firms are well-known for their ability to pivot quickly. Many are having to do so on a weekly or even daily basis.

Three Questions for Policymakers on the Future of Trade

Three Questions for Policymakers on the Future of Trade

Dematerialization should be a high priority in addressing climate change, which is an existential threat that even outweighs COVID-19. Headline numbers from the UN IPBES report cite the potential extinction of over 1 million species. The report demands fundamental transformative change across “technological, economic, and social factors, including goals, paradigms, and values.” In this context, “global commons” issues require upgraded transnational frameworks for promoting development of less material-intensive production and consumption. Where, how, and by whom can these demands be met? Our go-to institution for the past decades, the World Trade Organization (WTO), is ill suited to these forthcoming tasks. Suffering from geopolitical pressures and energy-sapping incremental deals, WTO members have shown an unfortunate inability to adapt to the changing nature of trade. In the context of the climate challenges noted above, one of the WTO’s bedrock principles of “like products” will become increasingly untenable as a basis for tariffs. The erosion of the WTO’s dispute settlement function and its apparent inability to blunt protectionist actions on goods augurs against hope for leadership from its members. The WTO’s General Agreement on Trade in Services (GATS) was originally designed as a highly flexible instrument but it has remained static in terms of freeing services flows: a flexible instrument in the hands of inflexible negotiators. The WTO TRIPs agreement on intellectual property rights, advanced a framework for cooperation, has ultimately has proven to be divisive.

Supporting the Small in a Pandemic

Supporting the Small in a Pandemic

The impact of COVID-19 continues to threaten the global economy, with the effects keenly felt in communities, businesses and homes. The challenges are disproportionately borne by smaller firms, as our survey of AMTC firms in Asia this week clearly indicates. Close to 50% of businesses have only a month or less than a month of cash reserves. Nearly 30% expect to have to lay-off more than 50% of workers. These figures are unlikely to be different from the experiences of smaller firms around the world. With both supply and demand crashing at the same time, companies are in a struggle for survival. The World Trade Organization (WTO) has just released an updated global trade forecast and the numbers are equally grim. Trade is expected to fall by 13-32% this year. This is the steepest contraction since 2008, with the strong possibility that COVID-19 results in worse outcomes than the Great Recession. But perhaps the most serious damage of collapsing trade flows to smaller firms can be found in the disruption to services.  Many small companies are engaged in services.  Some, of course, are obviously affected, such as restaurants, travel and tour companies. Others may be less clearly connected to global trade flows. For every box that is now stuck somewhere or not being filled in the first place, services can be 30-50% of the total value of the goods inside. These services can range from logistics and delivery; cleaning and maintenance of equipment; legal and HR services; graphic design and marketing; and the like. Many of the services of even giant multinationals are supplied by smaller firms. Services are affected not only by slumping demand for goods and their embedded services, but also by direct challenges like the inability of people to meet or travel.