Trade tensions between the United States and China are creating uncertainty for businesses, and could threaten their global supply chains and future investment plans.
By John Kemp
LONDON, April 10 (Reuters) – Trade tensions between the United States and China are likely to have an adverse impact on global growth even if the threatened tariffs are never imposed.
Conflict between the world’s two largest economies is creating significant uncertainty for businesses that threatens their global supply chains and future investment plans.
Senior U.S. officials have emphasised the tariffs are only a proposal at this stage and could be averted by a settlement between the two countries.
But the disjunction between hardline rhetoric and aggressive tariff proposals on the one hand and reassurance to investors and businesses on the other has whipsawed the financial markets.
Equity indices and commodity prices have alternated between selloffs and rallies as traders try to estimate the probability tariffs will be imposed.
In reality, the direct economic damage done by tariffs would be fairly small, though the impact on some firms and sectors would be more concentrated.
Bilateral trade of around $700 billion between the two countries represents only a small percentage of the gross domestic production of the United States ($19 trillion) and China ($11 trillion).
But the threat of tariffs will have a much more damaging and chilling impact on investment decisions that depend on global supply chains – even if the import taxes are never actually imposed.
For multinational businesses considering the location of new manufacturing facility, the threat of tariffs is likely to cause at least an additional pause before the project is given the go-ahead.
If decisions are delayed, the result will be a slowdown in investment, at least in the short term, with negative implications for growth.
U.S. officials have indicated it could take six months or more to reach a final decision on tariffs which implies an extended period of damaging uncertainty.
The damage will extend well beyond decisions on the location of new automotive plants and semiconductor factories.
Most major construction projects and manufacturing systems depend on raw materials and components that cross international borders at least once and in some cases multiple times.
Raw materials, components and finished goods generally have to be ordered many months or even years in advance.
Projected costs depend on estimates of the price of items ordered now, but which may not arrive and clear customs until many months in the future, when they could be liable to new tariffs.
Every business relying on items from one of the countries engaged in a potential trade war must calculate the risk the items will be unavailable or significantly more expensive and make contingency plans accordingly.
Even if a truce is declared in the current trade spat, it has raised major questions about the future direction of trade and investment policies.
Since 1947, the broad thrust of international economic policies has been towards greater openness to trade and investment, led by the United States.
Successive rounds of trade negotiations have lowered average tariff barriers and tried to control non-tariff barriers on trade and investment to create a more predictable environment for business.
Officials conducted eight successful rounds of multinational trade negotiations between 1947 and 1994 under the General Agreement on Tariffs and Trade.
In addition, there have been several ambitious attempts to liberalise regional trade, notably the European Union and the North American Free Trade Agreement, as well as a dense network of bilateral free trade agreements.
Protectionism has never been far from the surface but the broad trend has been in the direction of greater liberalisation.
The liberalisation thrust has seemed to run out of momentum in recent years with the failure to conclude a new round of global trade negotiations.
The tariff war now threatens to send the process into reverse.
Proponents of tariffs have made explicitly clear they want to revive U.S. manufacturing by cutting global supply chains and re-nationalising them.
This marks a major change in the direction of the international economic system and could upend corporate strategies that have been based on global supply chain management.
The results could leave hundreds of billions of dollars of foreign investments as stranded assets if multinationals are forced to reconfigure their supply networks.
The potential for asset stranding and write-downs helps explain why stock markets have reacted so badly to the threat of tariffs even when their direct economic impact would be limited.
The threat of a trade war has injected an extra degree of uncertainty that will not necessarily be lifted even if the two sides reach a settlement.
It comes at a time when Britain is withdrawing from the European Union and international sanctions are also proliferating and disrupting the operation of supply chains for energy and minerals.
And there is no guarantee another tariff war will not break out in future over another issue. Corporate leaders must plan for a world in which greater openness to trade and investment is no longer a given.
Trade tensions between the United States and China have revealed the shallowness of political support for the current open trading system let alone further liberalisation.
Whatever the merits of the current dispute, the threat of tariffs has injected a significant additional source of uncertainty into the global economy that is likely to inhibit investment and output growth.
The tariff war is a sign the post-war project of trade liberalisation is in deep trouble and the impact could linger even if the United States and China can negotiate a truce.
(Editing by David Evans)
John Kemp is a Reuters market analyst. The views expressed are his own.