Trade War: What about Traditional Retail?

  • By Mark Hudson

Trade Disputes Between China and the US

Written by Russel Beron May 3, 2018

The big news impacting global retail sourcing this year is the ongoing trade “dispute”” between the United States and China. Tensions escalated when the US announced tariffs on Chinese exports to the US, which was quickly followed by retaliatory Chinese tariffs. This potential “trade war” has been brewing since President Donald Trump took office on the pledge of bringing manufacturing back to the US and reducing the trade imbalance between the US and China.

Some pundits think a trade war is inevitable, while others suggest this a tactical negotiation which will resolve itself in the coming months. Either way we weighed in on some of the issues and how this dispute could impact retail sourcing, the supply chain management software and retail consumers alike.

Timeline of the Trade Dispute

January 2018 – The US announces a 30% tariff on imported solar panels, which mostly are made in China, along with a 20% tariff on residential washing machines

February 2018 – The Commerce Department proposes tariffs on steel (24%) and aluminum (7.7%). China vows to “take necessary measures to defend our rights.”

March 2018 – Trump announces 25% tariffs on steel and 10% tariffs on all aluminum imports that would take effect on March 8th. These tariffs are not necessarily aimed at China. After a global reaction, the US exempts several countries, including Canada, the biggest importer of steel and aluminum into the US.

China responds with tariffs of around $3 billion in American imports, mostly agricultural related, including fruits, nuts and wine (15%) and recycled aluminum and pork (25%).

Trump signs retaliatory tariffs on $60 billion of Chinese imports, mostly in the high tech and energy industries.

Value of Imports from China 2017April 2018: The U.S trade representative releases a list of 1,300 product categories covered by the 25% tariff, including goods in the aerospace, machinery and medical sectors.

China responds with retaliatory tariffs of 25% on more American goods, including whiskey, cars and soybeans, valued at around $50 billion.

Trump fires back, calling for more tariffs worth $100 billion. China warns of more retaliatory tariffs.

April 30, 2018: China’s stance is that it will refuse to discuss President Trump’s strongest trade demands when American delegation arrives in Beijing in early May for trade talks – this includes a demand to cut $100 billion off America’s annual trade deficit of $375 billion.

Who will win a trade War?

While President Trump feels that “trade wars are good, and easy to win,” history shows that they come with an excessive cost and he may be playing with fire. In the 1930’s when many countries put tariffs in place to protect their economies, global trade fell dramatically, leading to unemployment, mass poverty and the Great Depression.

In the big picture, the number of tariffs threatened on both sides so far is limited. In 2017 the US imported around US$3 billion in steel and aluminum from China, which represents less than 1% of total US imports of Chinese goods. Similarly, China’s retaliatory tariffs would also not affect a large amount of trade.

Economically, both the US and China are likely to lose if this posturing escalates into a real trade war. Despite President Trump’s comments that the US has “already lost the trade war,” there is still a lot at stake. Pushing up costs on Chinese parts required for US manufacturing will likely hurt American manufacturing and make consumer goods in the US more expensive. This will also put a strain on U.S. retail sourcing, retail product lifecycle management (retail PLM) and increase the cost of retail private label goods as echoed in the Q2 Retail Sourcing Report.

Analysts predict that if this trade dispute escalates, it could reduce global economic expansion, from a projected growth of 3% in 2019 to 2.5%. Financial markets will also continue to fluctuate and suffer, as have individual companies impacted by the tariffs so far, including Boeing, Ford, GM and Caterpillar.

There would also be an impact on countries which supply components to China that use “Made in China” products, including Japan and South Korea. Countries, such as Germany, which make cars and other products in China which may be exported to the US, worry that their products will be hit by tariffs.

Value of Exports to ChinaWhy China may have the upper hand

Maybe more so than the US, China has strategically targeted the products they will impose tariffs on. China already buys half of all American soybean exports and has an alternative supplier in Brazil. If China suddenly stops buying, American farmers in the mid-West will suffer. These farming states are a dedicated support base for Trump and voted him in based on his pre-election rhetoric of promising to “Make America Great.”

Also, in China’s favor is that their Chinese Central Bank is government controlled, unlike the US Federal Reserve, meaning they can cut interest rates to spur demand and tell their state-owned banks to extend more credit and depreciate their currency if imports become too costly.

A final thing to consider is that China’s strength is in taking the long view. Their process of 5-year central economic planning and social development have made China the number 2 global economy in only a few decades. President Trump could be voted out of office in 2020, while Chinese President Xi is firmly entrenched. Unlike the US, Chinese policy will likely continue in the same direction with or without their current leader.

Unlike the recent US/South Korea trade deal, where some feel that won concessions by flexing some muscle, China is harder to intimidate. “If the United States wants a fight, we are prepared to stay with it until achieving a complete victory. All options will be on the table and we will not back down,” the Chinese Ambassador to Canada, Lu Shaye, commented recently, echoing his governments sentiments.

More on this story will be revealed as trade talks get underway in Beijing in early May, most likely followed by more talks in Washington in the coming months. 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 Q2 Retail Sourcing Report, sponsored by CBX Software today!

Written by Russel Beron May 3, 2018

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