Countries are counting the cost of being caught up in the escalating Sino-US tariff and trade war as companies try to re-configure their supply chains to appease both sides.
IIan Goldfajn, governor of the Brazilian central bank, told GlobalMarkets that even countries and companies that might benefit in the short term would feel pain in the medium term.
“While some of our commodity exporters may sell more to China, I don’t think we’ll benefit from the trade war in the medium term,” he said. “At the end of the day, everybody gets hurt because trade disputes slow growth.”
Citi’s global chief economist, Catherine Mann, quantified this as an 0.8 percentage point reduction in China’s GDP, which would, in turn, reduce global growth by 0.3 percentage points as it percolated through global supply chains. “On the baseline of about 3.3% growth, that’s a material risk to the global economy,” she told GlobalMarkets.
Piyush Gupta, CEO of DBS Group, said companies would accelerate an existing trend of shifting new investments from China to cheaper, neighbouring countries.
He also forecasts that many companies would simply pass on additional costs to consumers given they cannot build a factory overnight and that tariffs would only add a couple of dollars to the price of an average smartphone.
REVERSE OFFSHORING
But he sees a measurable change in the way companies re-constitute their supply chains over the next few years, he told GlobalMarkets. “The Taiwanese and South Koreans may also reverse their strategy of offshoring to China and partially return to their home markets again.”
Gupta said per capita incomes in China and Taiwan were converging, making the cost/benefit argument of moving production to China far less compelling than it was at the turn of the century.
As a result, he said that while Sino-US bilateral trade would be affected by the tariff war, there was unlikely to be much change in overall Asian-US trade volumes. He said he was less concerned about the impact on the real economy than about market and consumer psychology.
“It’s creating negative feedback loops, which is putting pressure on stock and bond markets,” he said.
For Citi’s Mann the disruption to global supply chains is symptomatic of how global integration has stalled. She argues it was key to reviving productivity: the main economic tool governments have to help their citizens to live better lives.
“Many governments either fail or do not even take up the task,” she concluded. “Shrinking the pie does not make redistribution easier.”