As the China-U.S. trade dispute shows no signs of slowing down and frictions continue to heat, the impact of these developments on China, the United States, and the global economy is gradually becoming more evident. In addition to the impact of tariff increases on trade and consumption, the China-US trade conflict has begun to have an impact at the industrial level—some industrial chains have begun to shift, while some global supply chains have begun to be reconfigured. At this moment, up to two-thirds of the world's traded goods are linked to global value chains; if trade frictions continue to deepen, we are bound to see more profound shifts in the global supply chain.
On the whole, most countries have greatly benefitted from economic globalization throughout the last few decades, as is evident from the increase in the potential growth rate of many countries. Globalization has given us a way to utilize more efficiently and allocate the world's natural resources in order that we may better use them to complement our strengths. Moreover, globalization has reshaped the global economic order in such a way that the different links of the production chain are now inseparable. For example, Boeing soe main components of its aircraft from more than 70 countries around the globe, and the same goes for other companies like Apple to produce its smartphones. Therefore, it is now rather commonplace that the production of a single product would require a global supply chain, and consequently, any disturbance along the chain would have a disruptive effect on the entire production process and the affected countries will have to bear the corresponding losses. As an important "party" and participant to this particular episode of rising global trade tensions and the changes to the global supply chain, China thus needs to be vigilant by closely monitoring these changes and anticipating their impact.
First of all, China must understand that the trade war will drive a portion of the supply chains to relocate to other countries gradually. Long having held the epithet "the world's factory," China has established itself as a global manufacturing country. Its position at the frontline of global manufacturing also means that it will bear the brunt of any adjustments in the industrial and supply chain. In a recent survey conducted by Citigroup in the Asia-Pacific region, at least half of the companies surveys reported that their supply chain had already been affected by the trade war, while the other half anticipated that their supply chain would be affected next year. Citi's survey also found that while most of the respondents were still monitoring the effects of the trade tensions on their business, more than half of them had already made changes to their supply chains, including by relocating their production bases or investing in new production sites to circumvent the additional costs brought about by the tariffs imposed by the U.S. and trading partners like China, the EU, and so on. Citigroup also expressed that currently, two-thirds of China's foreign direct investment is flowing into regions like Southeast Asia, and this number is bound to increase. The forces driving Chinese foreign direct investment up in such regions are none other than the considerable adjustments happening within the global supply chain.
Secondly, the trade war has also gradually moved China towards the mid to high end of the supply chain. In the smiling curve of the global value chain, developed countries dominate high value-added fields such as branding, R&D, and sales, while developing countries are responsible for a large proportion of low value-added fields such as processing and assembling. Presently, China's profit margin is still very low as it still finds itself in the lower end of the global supply chain. These low value-added industries will not be able to surmount impacts of the trade war such as rising production costs and will thereby be rendered unsustainable. This is why we are already seeing a lot of these industries moving towards regions like Southeast Asia, South Asia, and Africa. Nonetheless, there is yet hope for China; it has a large manufacturing base and numerous industries, which will buy it more time for adjustment and allow it to maintain its dominance in several industries. For example, in 2017, China's garment exports still accounted for 35% of the world's total, while Vietnam's only accounted for 5.9% and Cambodia's accounted for 1.6%. Concurrently, the Chinese government had successively implemented several measures such as reducing tariffs on intermediate goods, opening up the service industry, and facilitating trade and investment in an effort to help China move further up the global value chain. If China wants to maintain its dominance in the manufacturing sector, it is crucial that it moves to the middle to high end of the global value chain. With the trade war "facilitating" China's reform and opening up, it is possible that it might also expedite or even force Chinese enterprises to move up the supply chain. In fact, some of China's more well-developed manufacturing companies have already begun to compete for higher-end value chain products.
Thirdly, objectively speaking, the "resetting" of the supply chain by the trade war can also promote the growth of trade within Asia. Rajesh Mehta, Citi's Regional Head of Treasury and Trade Solutions (TTS) for the Asia Pacific region, expressed that Citibank uses Citi's international network to coordinate with customers in order to better reconfigure the trade supply chain. Throughout the Group's Asian regions, such as within the trade corridors between Japan and China, between China and ASEAN, and between South Korea and China, robust growth in trade has been recorded. Furthermore, as a result of the trade tensions between China and the United States, Citi's internal trade-related income growth in the year-to-date has exceeded 20%.
Finally, it must be acknowledged that the trade war will inevitably slow down the global economy. However, even though some production bases in Southeast Asia may reap benefits from the trade war, such as Vietnam benefitting from the relocation of Chinese production bases, these minor benefits cannot offset the larger impact of the trade war on the global economy, and global welfare will be lost as a result of trade wars and investment barriers. Likewise, the "initiator" of the China-U.S. trade war, the United States, will not be spared. In China-U.S. trade, two-thirds of U.S. imports from China actually come from foreign-invested enterprises, including those with investments from the United States, Japan, and South Korea. So, while the United States may feel the impact of the trade war a little later than China will, given that it is more of a consumer than a producer, it will nevertheless not be immune against it. In fact, the recent adjustments of the U.S. financial market are partly due to the consequences of the trade war, and in the coming years, the economy of the U.S. will be slowed down even more because of the trade war, which in turn will bring about a deterioration in global economic growth.
Final Analysis and Conclusion:
The trade war is bringing about significant changes in the global industrial chain, and this is, in turn causing a reconfiguration of global supply chains. Evidently, the trade war is having a deep impact on the global economy. As one of the biggest players in the manufacturing sector, China needs to pay close heed to these developments and evaluate their corresponding effects to the economy.
