Illustration: iStock
Illustration: iStock

Just like any other war, there will be collateral damage. The looming trade conflict between China and the United States will be no exception. Already concerns are growing that major US and Chinese corporations will be hit by the planned tit-for-tat tariffs, which were announced earlier this week, as well as European and Asian companies.

On Tuesday, Washington revealed plans to target 1,300 Chinese imports, while Beijing retaliated hours later with its own list of 106 US products. Extra duty would see each side slapping at least US$50 billion on selected goods.

Then on Friday, China warned it was prepared to respond with a “fierce counter strike” of fresh trade measures if the US decided to follow through on President Donald Trump’s threat to raise an additional $100 billion in tariffs on Chinese imports.

“This is what a trade war looks like, and what we have warned against from the start,” said Matthew Shay, the president of the National Retail Federation, the world’s largest retail trade association, based in Washington.

“We are on a dangerous downward spiral and American families will be on the losing end,” he added in a statement reported by Reuters.

The mouthpiece of China’s ruling Communist Party, the People’s Day, also stressed that Trump’s planned ‘Trade War Beyond The Shore’ could affect major US blue-chip brands, including Apple, Boeing, Intel, Qualcomm and Texas Instruments. “They would be among the biggest losers,” it reported.

At the same time, China Eastern Airlines, TCL Multimedia, the country’s largest TV manufacturer, COSCO, one of the biggest shipping lines in the world, and Air China face dwindling sales and cargo volumes if the dispute escalates.

Significant slowdown

“[A full-blown trade war] would have a more pronounced effect,” Oxford Economics, a global leader in forecasting and quantitative analysis, stated in a note to clients.

“The US and China would suffer a significant slowdown in real GDP [gross domestic product] growth – a cumulative loss of around one percentage point.”

As for the wider global perspective, companies in Europe and Asia could be dragged into the dispute.

The German auto giants BMW and Daimler’s Mercedes build SUVs in the US, and then export them to the world’s second-largest economy. Both groups could face an additional 25% on export duties.

“This is essentially a tax on southern German automakers, specifically BMW and Mercedes SUVs,” Arndt Ellinghorst, an analyst with Evercore ISI, a global consultancy and financial firm, told Bloomberg News.

But that would be just the tip of the iceberg if the rhetoric turned into reality.

Earlier this week, the Brookings Institution, a Washington-based think tank, outlined the risks when it pointed out that third-party countries and companies could be sucked into a fully-fledged trade war.

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Using “tariffs,” it argued, was the wrong approach and would inflict “unnecessary pain.”

“Two-thirds of world trade now occurs through global value chains that cross at least one border during the production process,” David Dollar, a senior fellow of foreign policy, global economy and development at the John L. Thornton China Center, and Zhi Wang, the lead international economist for the research division at the US International Trade Commission, said in a Brookings Institution report.

“As a result, the typical ‘Chinese product’ that the United States imports has a lot of value-added from countries other than China. It often has value-added from US firms with operations in China, as well as from parts suppliers in Japan, South Korea, and Taiwan,” they continued.

“Hence, in any trade war between the United States and China, there will be collateral damage on third countries.Tariffs will cause a lot of unnecessary pain for consumers and third countries, not to mention American firms caught in the crossfire,” Dollar and Wang added.

At least, on Friday, there were signs that the Trump administration was looking to ratchet down the verbal exchanges.

While the US Treasury Secretary Steven Mnuchin admitted there was still “a level of risk” that the tariff dispute could erupt into a full-scale trade war, he was “cautiously optimistic” that Beijing and Washington could resolve their differences through negotiations.

“This has been very well organized. Our strategy is very clear,” Mnuchin told CNBC. “[But] I’m cautiously optimistic we’ll be able to work it out.

Defend interests

“On the one hand, we are willing to continue negotiations,” he added. “On the other hand, the president is absolutely prepared to defend our interests.”

For now, key partners inside the European Union are calling for restraint. The European Commission, the EU’s executive arm, confirmed that it was in high-level talks to alleviate the deteriorating situation.

“The EU believes that measures should always be taken within the WTO [World Trade Organization] framework, which provides numerous tools to effectively deal with trade differences,” Daniel Rosario, a Commission spokesman, was quoted as saying. “We call on the relevant parties to ensure WTO compliance of their trade actions.”

In Beijing, the language was more bellicose. Global Times, the state-owned tabloid, did not mince its words when describing the news that the White House was considering a further $100 billion in tariffs in addition to the $50 billion already proposed.

“China won’t back off. The Chinese society will unite around the Party and the government to weather through the hardships, which is unparalleled for the US. More importantly, China is on the righteous side safeguarding multilateral trade rules,” Global Times said in an editorial.

“Most Americans have their life linked with China-US trade. As the tensions escalate, we want to expand the trade war to all Americans, so that they have to choose whether to support Trump’s unscrupulous move or to hold the president accountable,” it added.

Picking a path through a minefield littered with pugnacious phrases might yet prove to be the biggest challenge before cooler heads prevail. If not, the shock waves will reverberate across the global economy.

Read: Slugging it out in the ‘Trade War Beyond The Shore’

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