How does US / China trade war affect EU, Asia and Africa?

Readers Question: To what extent does the trade war between USA and China actually impact on the economies of other nations?

A trade war between the US and China is concerning for other countries because a trade war can precipitate a fall in global trade, and lead to lower investment, lower confidence and a drop in global economic growth. Since the US and China are dominant forces in the world economy (US accounts for 20% of global GDP, China 9%), the effects are likely to be significant.

However, a bilateral trade war can create opportunities for other EU and Asian exporters who can displace lost Chinese and US exports. Also, although a trade war leads to a loss of economic welfare, if it remains piecemeal, it is unlikely to on its own cause an economic slowdown.

Cost of US/China Trade war

Higher tariffs on Chinese and US exports mean that US and Chinese consumers are paying higher prices. Effectively, tariffs reduce their disposable income and lead to less spending on other goods. Other countries exporting to the US and China may find consumers less willing to purchase goods because they have less to spend than previously.

US/China Tariffs indirectly affect EU firms. China has imposed tariffs on US-manufactured cars, but this has an impact on EU car firms, such as Daimler and BMW who make cars in the US and export to the US. In 2017, BMW exported 272,000 vehicles from its plant in South Carolin. Of those, 81,000 – worth US$2.37 billion – went to China. (SCMP)

Lower profit and less investment. A trade war is likely to cause lower exports and therefore reduce the profit of large multinationals based in China and the US. This is likely to cause lower global investment. There is already concern that the trade war is causing China to cut back on investment in Africa. Therefore, other countries could lose out in inward investment from China and the US and this will lead to lower economic growth.

Fall in commodity prices. The prospect of escalating trade war has led to fall in commodity prices, this leads to lower export revenue for primary producing economies – especially a problem for African economies who rely on exporting primary products.

“African Development Bank experts warn that the trade tensions could cause a 2.5 percent reduction in GDP in resource-intensive African countries and a 1.9 percent reduction for oil exporters by 2021” (CSIS)

Confidence effects. News of the trade war, combined with other negative news (Brexit in UK, slowdown in Germany) will be affecting the ‘animal spirits’ of businessmen and consumers. This will lead to slower rates of investment and consumer spending, which will lead to slower economic growth around the world.

Evaluation of trade war

The trade war is currently piecemeal. There are tariffs on selected goods, such as agriculture and washing machines. On its own, the effect on global growth is fairly minimal. The bigger concern for other countries is if the trade war escalates and is extended to a wider range of goods. If growth in the EU area was strong, they are unlikely to be affected by a piecemeal trade dispute between the US and China.

Opportunities of tariffs. If the US places high tariffs on the import of Chinese goods, it gives an opportunity for other countries to displace Chinese exports. For example, North American economies, other Asian countries and the EU could find they are now more competitive and regain a foothold in export markets to the US. A study by United Nations Conference on Trade and Development suggest that EU firms could be able to gain from gaps in the market US$50 billion from lost Chinese exports to the US and US$20 billion from lost US exports to China. Japan, Mexico and Canada also are each likely to capture more than US$20 billion in trade. (SCMP)

However, this assumes the US doesn’t widen the trade war to Europe and beyond. Also, with China placing high tariffs on the imports of US agricultural exports, it means that China will be importing the same food from other countries.

Effect on WTO. Another concern is that this trade war places greater strain on the WTO and it could lead to the WTO being undermined to the point, where it is unable to effectively monitor international trade.

Effect on the EU

As a net exporter, the EU will be more affected by a slowdown in global trade.

In July 2018, the German Chancellor Mrs Merkel said

“It’s worth all our efforts to defuse this conflict, so it doesn’t become a war,”

The German economy is reliant on exports and would be badly affected by a global slowdown.

The EU also shares some grievances with the US on trade issues with China, such as intellectural property rights.

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By on July 1st, 2019

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