Written by Russel Beron August 2, 2018
The trade skirmish between the US and China which started earlier this year continued to escalate into Q3, developing into more of a trade war between the US and the rest of the world, led by President Donald Trump.
According to the International Monetary Fund (IMF) this trade tension could cost the global economy $430 billion in global growth, or 0.5% of global trade by 2020 which will have a direct effect on global retail sourcing. While most of the world will suffer, the IMF predicts the US will suffer most as it becomes the focus of retaliation.
According to the Q3 Global Sourcing Report, to date, the US has picked tariff fights with China, the European Union, its NAFTA partners, including close ally, Canada, Japan and others. As a result, the IMF has revised and lowered growth forecasts for the Eurozone region and the UK but is still expecting overall global growth of 3.9%, as some global retailers benefit from Total Sourcing Management, which allows retailers to source more cost effectively.
China, as well as, other countries and regions have retaliated with tariffs of their own, so the dispute continues. Trump threatened a second round of tariffs of 10% on $200 billion of Chinese goods, including tobacco, and pet food, which are set to take effect in September. The total amount of goods the US has threatened tariffs on is now up to $500 billion.
What is Trump’s agenda? Many believe he is playing to his constituency who elected him based on his rhetoric of bringing jobs back to the US and to challenge China on intellectual property protection. Winning this trade war may not be that easy though and could easily backfire, with global implications.
As of late July, the US has backed down somewhat, exempting certain countries for the meantime, including South Korea, Australia and the EU. Other countries such as Turkey and Bahrain, which is the world’s eight largest producer of aluminum would still be hit hard by tariffs. Trump does seem to be softening, as indicted by the reopening of trade talks with the EU. Some pundits think he is just posturing for a better deal.
The Backlash
China’s imports from the US are only around $130 billion, so it will be difficult for the Chinese to match the US tariffs. Analysts expect China to hit back with delayed approvals to investment inflow, additional customs inspections and boycotts of American brands. Meantime China’s trade surplus with the US expanded to $29 billion in June from $24.6 billion in May.
China has responded so far by providing new fiscal stimulus measures, including looser monetary policy and tax breaks. There have also been reports of companies adding PLM software and supply chain management software tools, and or relocating their supply chains to other Asian manufacturing locations, maybe spurred in part by the trade wars.
What is scary is that Trump has also threatened tariffs on $350 billion of imported motor vehicles and parts, which would result in the EU and others retaliating with similar tariffs.
So far, the impact of the trade wars has not been widely felt. The US economy is doing well, manufacturing PMI continued to perform, and stock markets are doing okay. The American consumer is probably at the biggest risk. If the trade war escalates to the $500 billion of goods that Trump has threatened, consumers everywhere will see higher prices and investment inflow will suffer. For now, it seems the markets and the people think that sanity will prevail, but time will tell. For more information on how the retail industry will be impacted by the escalating U.S. and China trade war and for other retail sourcing related topics read the full Q3 Retail Sourcing Report, sponsored by CBX Software today!