The trade war has escalated and its shocks will spread to the world economy.
The trade war began as a populist campaign during the US 2016 elections. Fast forward to 2019, the once named unlikely rhetoric materialised. The sheer scope and depth of the tariff hikes is already having a major impact on bilateral trade between the two largest economies of the world. The US-China trade war has led to $455 billion in lost output. Additionally, the confrontation between these two economies has led to a global contagion, as result of the increasing level of economic and industrial integration between economies across the world.
A few countries can expect to benefit from the fallout, in the short run.
Emerging economies, such as Vietnam, Brazil and Argentina, just to name a few, have witnessed a surge in exports to the US and China thanks to the newly applied tariffs. For example, tariffs are diverting trade away from China towards Vietnam, making the country a more competitive partner. During the first quarter of 2019, Chinese exports fell by 14% (year on year), while Vietnam’s soared by 40%, as highlighted by International Economics’ Trade Insights tool. During that same period, Mexican exports increased by more than 6% in comparison to 2018.
The medium-term outlook is very gloomy.
However, this surge is not sustainable. As the diplomatic meltdown between China and the US continues, consumer confidence in the US economy is likely to go down, leading to a weaker US dollar, and, in turn, slowing down emerging countries’ phenomenal export growth. While the trade war between China and the US is, in itself, quite unpredictable – with cooling off periods one month followed by revamping of the rhetoric, the uncertainty is crippling for investment decisions, inflicting a major impact on many companies dependent on the existing supply chains between these two economies. The US-China conflict is not the only one emerging. Korea and Japan are also facing trade tensions due to export restrictions, and the number of unlawful restrictions to trade in the East African region is sky-rocketing, just to name a few. Could this be a sign of a shift towards regional supply chains instead?
How to better prepare and forecast these risks.
In light of the uncertainty trade wars bring to the global economy, the use of forward-looking quantitative trade models, connected to enterprise level data can simulate various shocks into international trade flows to estimate the direct and indirect costs arising from trade wars. These models are becoming increasingly sophisticated to include not just standard tariff but also non-tariff measures, as well as capturing the sector interlinkages for indirect effects. In 2016, after the US elections, we used such tools to estimate the potential ramifications for certain industries if President Trump was elected. Our findings forecasted the winners and losers of such a measure. Similarly, we have used such simulations to better prepare and forecast risks when working with public and private sector clients to assist in their strategy development.
Executing the right response strategy.
What is the ideal strategy for a company in the face of trade wars? Companies need to assess their appetite for risk (tolerance levels), the likely fallout from trade wars through economic modelling and come up with an effective risk management strategy. The strategy will go from introducing more reactive and robust supply chain risk management policies, better capturing the risks along the value chain and export markets using modern analytic techniques, forecasting the resulting impacts using CGE and other modelling tools, maintaining an effective public affairs communication policy, and deploying contingency investment and production plans.
Paul Baker is the Founder and CEO of International Economics Consulting Ltd., based in Mauritius.