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August 16, 2019

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American consumers and global economy bearing cost of tariffs

Two years ago when the US launched a probe into alleged Chinese intellectual property practices, few would have expected the scale and scope of the trade tensions that are still rumbling on.

Amid the numerous twists and turns, rounds of talks were often met with setbacks. Each time when the two countries seemed to be getting somewhere, the US would make an unexpected move and forestall the progress.

While the two countries are still seeking to work out a solution with recent phone talks between chief trade negotiators, the uncertainties created by the drawn-out frictions threaten to rattle financial markets, hurt business sentiment and disrupt global supply chains.

The fact that higher tariffs on Chinese goods since last year have not been beneficial to the US plan to narrow the trade deficit should suffice to make policymakers rethink their strategy.

Official data showed in the first seven months of 2019, China’s trade surplus with the US came in at 1.15 trillion yuan (US$163.6 billion), expanding 11.1 percent from the same period last year.

Benefiting no one, the tariff hikes are hurting every link of the supply chain.

Toys produced by Guangsheng Metal & Plastic Products Co in south China’s Guangdong Province are on the new list of goods subject to additional tariffs.

Zhai Suoling, chairman of the company, said that his company might share part of the extra costs.

“Either it’s us or US importers who will pay the tariffs, but eventually the costs will pass on to consumers,” he said.

The prevalence of Chinese goods across the world is a result of market forces. Despite the trade tensions, China’s exports expanded 10.3 percent from a year ago to 1.53 trillion yuan in July, driven by demand from the European Union, Southeast Asia and Belt and Road countries.

If US buyers are forced to turn to other places such as Southeast Asia, the costs are set to rise as it takes time to rebuild the supply chain, according to Zhai.

Business sentiment deteriorates

It is common sense that trade frictions between the United States and China, whose combined contributions accounted for more than half of the global economic growth in 2018, will be amplified through stretching supply chains and, eventually, collateral damage will follow in unpredictable ways and the global economy will bear the cost.

Wang Tao, an economist from UBS, noted in a research report that the trade war was one of a few key drivers behind the deterioration of business sentiment last year.

UBS Evidence Lab CFO surveys showed that businesses have cut or held back capital expenditure due to the trade war and uncertainties, though the actual impact is hard to quantify.

But instead of turning back from the wrong path, the US went further by labeling China a “currency manipulator,” expanding the battlefield to the currency market and beyond.

Despite the wild swings in the financial markets and impacts on the supply chains, the global economy so far seems to be holding up. But the underlying uncertainties brought by the US capricious actions will over time filter through and weaken growth, analysts warned.

The International Monetary Fund has lowered its growth forecasts for the global economy three times this year, in July from 3.3 percent to 3.2 percent.

Investment banker Ronald Wan makes it clear — If China-US trade relations continue to deteriorate, global growth may slip into recession and everyone will be a loser.


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