Impact of US China Trade War on Global Supply Chain

10 Dec 2019 Read 408 Views

Global trade has evolved so much in past centuries. The oldest stories of trade range for more than 3000 years, where Arabs, India, and China traded in a variety of goods. With time the concept of national identity strengthened in Europe, and around 1000AD, mercantilism started.

'Mercantilism' means that export as much as you can but minimize as much import as you can. Then the world moved to colonialism. Later, in the past century, we walked towards freer trade, hence liberalization.

Recently, there has been a trade war between two supreme industrial giants of the world, the US, and China. It looks like we are heading our way back to 1000 years, the era of mercantilism or 'protectionism.'

The Feud

In the modern era, developed countries barely think of war. They instead choose different forms of warfare. US China trade war is pretty much that.

With the advent of China in 1970, most of the manufacturing operations of the US moved to China. Riding on that growth, China has become a global superpower today. Today, the US has to import the same products it once used to export to China. Moreover, China has been able to arm-twist others to get its way, infuriating the US.

Donald Trump became the US President promising to 'Make America Great Again.' He accuses China of violating the 'intellectual property rights' of US companies and calls it a 'currency manipulator' that deliberately depreciates its currency to facilitate exports.

Long story short, US hiked Chinese import tariff because of the trade war. China played the same way and increased tariff on US imports.

This has escalated the US China trade war.

The Consequence of US China Trade War

The tariffs on imports have increased costs for domestic manufacturers and consumers. For example, a US car manufacturer now has to buy expensive local steel than cheaper Chinese steel.

While nations are ready to go back to 1000 AD, companies and their consumers are not. They have decided to reshape themselves to make a more robust and resilient supply chain.

US China Impact on Global Supply Chain

Everything that is part of raw material to the finished product in your hand is a link in the global supply chain. Let us take the example of a Volkswagen car.

A Volkswagen car is designed in Germany. Its parts are made in China, which uses coal from Australia. These parts are then assembled in a factory in India. The seat covers and other interiors are stitched in Bangladesh. These cars are subsequently sold in US stores.

Now everything in the above journey is part of the global supply chain. The raw material suppliers, manufacturers, intellectual property, assembly, distributors, and selling stores; they are all links.

Reshaping Global Supply Chains

It can be now seen that the hike in tariffs mean that price would increase and make product undesirable. Companies are looking for ways to come out of this shock. This is even more important because the US and China are both most industrial nations.

The first way to combat this is moving out of the US and China. Companies are planning to move to South Asian nations to mitigate the cost factor arisen due to the war. This means that from raw material suppliers to manufacturing would take place in these regions mostly.

This thing is evident. While Chinese imports to the US fell by 7% in September alone, imports from Vietnam jumped by 21%. Samsung establishing the world’s largest mobile manufacturing plant in India is being seen as a foresighted decision.

Yet, because this involves a lot of time, cost, and red tapes, some companies have also started restructuring themselves according to the digital era. This would make some activities go online, saving the cost and time of shifting operations to an entirely new country.

The Forecast

Under current circumstances of trade war and tensions arising between countries, the situation will stay for some time. Some may also see this as Trump’s political tool in his run-up to elections in November 2020, so no respite until then.

Moreover, the situation would not end overnight. It will de-escalate gradually. Hence, companies are taking this as an opportunity to rework on their current supply chain models.

However, this brings in a lot of cost for the companies. If powerful companies lobby, they might be able to change more than a few things, but for now, that solution is far-fetched and comes with much less credibility. Companies also prefer regions with stable institutions and clear, transparent long-term policies.

If the trade war continues for long, global trade will redefine itself.

About the Author: Vivek Tiwari | 51 Posts

Vivek Tiwari is a Software Engineer and a Data Scientist who hopelessly fell for Economics. His plans to move to Finance might now save mankind from his IITJEE selection story.

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