Impact of Trade War on Global Supply Chain

In 2017 we imported $500B worth of products exported about $125B. Here is a trend of Trade deficits over the last 15 years                        

Yes, our Trade Deficits have increased with China.

The Chinese diligently supply us with inexpensive products and gadgets and earn USD as foreign currency which they invest back mostly in our Treasury Bonds. Essentially we keep buying their products, happily consuming them and give them an IOU!

Regardless, the Trade deficit is just 2% of the size of the US Economy – looks like a drop in the ocean.

However, this Tariff talk has created a “Word War” (not World War) and inflicted a lot of emotional pain and hurt on the financial markets.

Are we penalizing our own Domestic Manufacturers?

Here is a distribution of imports from China – most are either capital goods or intermediate components.  This is going to severely hurt US manufacturers.

Many supply chains will be scrambling to source from alternative suppliers or domestic suppliers.  And this may create cost increases in the production process.

Distribution of China Imports

• Out of the $ 505 billion imports, almost 90% are at a risk of the high tariffs at $450 billion.
• So essentially even if all $177 billion of consumer imports face tariffs, at least $273 billion of either intermediate or capital goods would need to be exposed to new tariffs in order to reach the president’s goal of $450 billion.
• The real risk is the tariffs on Intermediate and Capital goods.
• If the US manufacturer is re-exporting the final product, we will be uncompetitive in the global market due to higher cost of production.  This is a case in point with recently General Motors laying off 14K American workers and moving their plant to an overseas location.  In reality, export manufacturers will relocate their manufacturing and this will have an undesirable effect of moving jobs overseas.
• If the final product is for the US market, this will induce a cost-push inflation on the final product. The only way to protect this will be to levy more tariffs on the final product coming to the US.

Interestingly, the administration has given selective exemptions.  Apple Computer corporation has obtained exemption to import Chinese made iPhones to be sold in the US.  And more will follow but this hampers how a free economy works.

The very threat of uncertainty may result in businesses holding off on investment decisions.  This itself may lead us in the path of an economic slowdown………..  Let us hope for more certainty.