Supply Chain Dilemma- Post US Tariffs Ali Salman 7th August 2018

Outline US-China trade volumes Trade War through tariffs Factors leading to US actions Consequences Implications for Malaysia Way Forward Office of the United States Trade Representative. The People's Republic of China. Available at: https://ustr.gov/countries-regions/china-mongolia-taiwan/peoples-republic-china

US-China Trade Volumes In 2016, U.S. goods and services trade with China reached an estimated $648.5 billion- $578.2 billion trade of goods. U.S. goods imports from China totaled $462.6 bn 2016, accounting for 21.1% of overall U.S. imports, making China the largest supplier of goods to US. Top import categories were: electrical machinery ($129 bn), machinery ($97 bn), furniture and bedding ($29 bn), toys and sports equipment ($24 bn) and footwear ($15 bn). Office of the United States Trade Representative. The People's Republic of China. Available at: https://ustr.gov/countries-regions/china-mongolia-taiwan/peoples-republic-china

US-China Imports U.S. imports of agricultural products from China reached $4.3 billion, the U.S.’ 3rd largest supplier of agricultural imports. Leading categories include: processed fruit and vegetables ($1.1 billion), fruit and vegetable juices ($328 million), snack foods ($213 million), fresh vegetables ($205 million) and tea ($152 million).

US Exports to China China was the United States' 3rd largest goods export market in 2016. U.S. goods export to China were $115.6 bn, accounting for 8.0% of overall U.S. exports Top export categories were: miscellaneous grain, seeds, fruit (i.e., soybeans) ($15 billion), aircraft ($15 billion), electrical machinery ($12 billion), machinery ($11 billion) and vehicles ($11 billion).

US Exports to China U.S. exports of agricultural products to China totaled $21 billion, the U.S.’ 2nd largest agricultural export market. Leading export categories include: soybeans ($1 billion), coarse grains (ex. corn) ($1.0 billion), hides and skins ($949 million), pork and pork products ($713 million) and cotton ($553 million)

US Tariffs on China (1/2) US tariffs on Chinese imports generally hit industrial goods rather than consumer items, typically aimed at industries being developed as part of the “Made in China 2025" plan. In January 2018, U.S. placed a tariff on imported solar panels, most of which are imported from China. This tax begins at 30% before falling to half in the next 4 years. Tan, R., 2018. The U.S.-China trade war has begun. Here’s how things got to this point. The Washington Post. Available at: https://www.washingtonpost.com/news/worldviews/wp/2018/07/05/a-timeline-of-how-the-u-s-china-trade-war-led-us-to-this-code-red-situation/?utm_term=.fdb1f0314286 Wei, L., 2018. Trump’s Trade War on China Is About More Than Trade. The Diplomat. Available at: https://thediplomat.com/2018/07/trumps-trade-war-on-china-is-about-more-than-trade/

US Tariffs on China (2/2) In March 2018, U.S. placed tariffs of 25% on steel and 10% on aluminum. In April, a list of 1300 items which would be hit by a 25% tariff was released. Valued at around $50 billion, the list included goods such as semiconductors, medical devices and flat-screen televisions.

China Tariffs on US While US tariffs have been aimed at China’s industrial markets, China’s tariffs disproportionately targets the U.S. agriculture sector. In April 2018, China imposed a 25% tariff on 128 US products, including wine and pork (US’ largest export categories to China) BBC, 2018. China hits back after US imposes tariffs worth $34bn. BBC. Available at: https://www.bbc.com/news/business-44707253

Trade Affected by Tariffs Alexander, K., Blair, Dennis., 2017. China’s Intellectual Property Theft Must Stop. The New York Times. Available at: https://www.nytimes.com/2017/08/15/opinion/china-us-intellectual-property-trump.html Wei, L., 2018. Trump’s Trade War on China Is About More Than Trade. The Diplomat. Available at: https://thediplomat.com/2018/07/trumps-trade-war-on-china-is-about-more-than-trade/

Reasons behind US-China Trade War Chinese laws allow for intellectual property to be easily stolen - IP theft add up to a loss of $600 billion a year for the US according to an estimate. US-China trade deficit, $375 billion in 2017 China threat debate - worries of global dependence on a state lacking social and environmental restraints to undercut the market Reaction to China’s model of developmental state - distortion of the market creates a permanent and unfair disadvantage for foreign competitors, threatening the liberal market system Alexander, K., Blair, Dennis., 2017. China’s Intellectual Property Theft Must Stop. The New York Times. Available at: https://www.nytimes.com/2017/08/15/opinion/china-us-intellectual-property-trump.html Wei, L., 2018. Trump’s Trade War on China Is About More Than Trade. The Diplomat. Available at: https://thediplomat.com/2018/07/trumps-trade-war-on-china-is-about-more-than-trade/

Consequences of a Trade War Risk of full-blown global trade war - retaliatory action by other trading countries will have negative impacts towards global growth Disrupting global supply chains - global businesses become less competitive in both pricing and quality assurance Higher prices of consumer goods - overall cost of production are passed to businesses and consumers Job losses- an estimated 4 million job losses in China and 250,000 in US over next 2-3 years. Finally, these trade wars may not reduce trade deficit (for US) but create a lot of waste and economic dislocation. Jiming, H., Posen, A., 2018. Economic Truths Towards Resolving China-US Trade Conflict. In: Jiming, H., Posen, A., 2018.18-1 US-China Economic Relations: From Conflict to Solutions. Peterson Institute for International Economics. Available at: http://veron.typepad.com/files/piie_briefing_2018_06_china_mcnv.pdf#page=22 Cai, J., Zhang, S., 2018. Why Donald Trump’s threatened trade war with China could also hurt South Korea, Japan and Taiwan. South China Morning Post. Available at: https://www.scmp.com/news/china/diplomacy-defence/article/2152734/why-donald-trumps-threatened-trade-war-china-could-also

Impact on Malaysia Malaysia’s status as one of the most trade-intensive economies leaves it most likely to be hurt by the trade war, second only to Singapore in SE Asia Malaysia sells many intermediate goods and raw materials to China to make products exported to the US. Such goods are expected to see a price hike in the face of the trade war. However, Malaysian MITI Minister Darell Leiking believes the trade war will push China to look towards Malaysia for trade CNBC, 2018. The US-China trade war's impact on Southeast Asia. CNBC. Available at: https://www.cnbc.com/video/2018/07/18/the-us-china-trade-wars-impact-on-southeast-asia.html Shane, D., 2018. US-China trade war will spill into other Asian economies. CNN. Available at: https://money.cnn.com/2018/06/28/news/economy/trade-war-impact-asia-economy/index.html

Malaysian Industries Affected by the Trade War Palm oil. Prices and exports could be lifted if palm oil becomes a substitute for soya beans, which have been a target of tariffs. Chemicals. Malaysia is seen as a competitive alternative to China when it comes to supplying the US with chemical products. Solar panels. With 25% of US solar panel imports hailing from Malaysia, levies on solar panels are sure to land a blow. Electronics. Electrical and electronic products are top exports for Malaysia, and China is a leading trade partner. The Business Times, 2018. Singapore, Malaysia could be most exposed to US-China trade war: OCBC. The Business Times. Available at: https://www.businesstimes.com.sg/asean-business/singapore-malaysia-could-be-most-exposed-to-us-china-trade-war-ocbc-0

Solutions to Counter Future Trade Wars Identify an area of common interest as an opportunity for collaboration to mend ties (e.g. financial systems) WTO and other multilateral mechanisms must enforce and improve decisions with legal status to undermine members’ unilateral actions. Review WTO agreements and take into account issues such as IP rights and social concerns regarding trade. Maurer, T., 2018. The Case for Pragmatism and an Opportunity for Sino-US Leadership. Hoover Institution. Available at: https://www.hoover.org/sites/default/files/research/docs/382122601-the-case-for-pragmatism-and-an-opportunity-for-sino-us-leadership-protecting-financial-stability-against-cyber-threats.pdf Dollar, D., 2018. The future of the U.S.-China trade war. Brookings. Available at: https://www.brookings.edu/blog/order-from-chaos/2018/07/09/the-future-of-the-u-s-china-trade-war/

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