Trade war ‘cluster bombs’ could explode across Asia

Even before talks have started, the rhetoric resembles sound-bites from the Cold War era. As the clock ticks down on the Beijing summit, fears are growing that the United States and China could end up in a full-blown trade war.

The aftershocks would be horrendous.

Caught in the crossfire, economic ‘cluster bombs’ would severely damage exports, creating havoc for an array of industries, including the tech sector and advanced manufacturing, as well as a host of consumer products.

In Asia, the fallout would descend on more advanced markets in South Korea, Japan and Taiwan, with the ripple-effect spreading across Malaysia and Thailand.

“If tariffs from the US or China become a reality, it would be the biggest self-inflicted wound since the Great Financial crisis,” Willem Buiter, the chief economist of Citigroup, told CNBC. “It would be the end of the global recovery.”

Amazingly, events have taken on a life of their own as each new twist and turn has pushed the world’s two biggest economies to the brink of monetary mayhem.

On March 8, Washington announced plans to impose tariffs of 25% on foreign steel and 10% on aluminum, targeting cheap Chinese imports.

Just a month later, Beijing fired back and slapped 25% added duty on 128 selected US products, from frozen pork and wine to fruit and nuts.

As trade tensions increased, US President Donald Trump immediately raised the stakes on April 3, proposing 25% tariffs on 1,300 imported items worth US$50 billion.

Imported items

Naturally, Beijing retaliated and hours later revealed its own list of 106 US products, worth, yes, $50 billion.

China also warned it was prepared to respond with a “fierce counter strike” of fresh trade measures if the US decided to follow through on taxes for an additional $100 billion of 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, which is based in Washington.

“We are on a dangerous downward spiral,” he added in a statement.

Citigroup, the multinational investment bank, brought those comments into sharp focus when detailing the cost of a “conflict.”

Analysts have also pointed out that “intermediary trading” between China and the US is likely to bear the brunt of the impact if the trade dispute turns into a trade war.

Even Japan could be at risk as the country shipped almost $700 billion worth of goods last year, with China and the US its main trading partners. Cars, computers and other electrical equipment could be hit.

Along with South Korea and Taiwan, Japan’s semiconductor sector would also face problems, especially after the Iran sanctions scandal, which has embroiled two of China’s tech heavyweights, ZTE and Huawei.

Chinese companies import up to $200 billion worth of microchips each year and most of them are from their Northeast Asian neighbors.

Malaysia and Thailand also have ‘high exposure,’ according to analysts and the Citigroup report, as well as Hong Kong, the gateway for trade flowing between mainland China and the US.

Paul Chan Mo-po, the city’s Financial Secretary, stressed that one in five jobs in Hong Kong could be put at risk, citing US tariffs on solar panels, washing machines, steel and aluminum.

“Free trade is an important foundation of our success,” he wrote in a blog post, reported by the South China Morning Post. “Trading and logistics is a pillar industry of Hong Kong, contributing to some 22% of GDP and employing some 730,000 people.”

For South Korea, a trade war scenario would cut semiconductor shipments to China by $4 billion a year, the Korean International Trade Association, a non-profit organization in Seoul, stated.

“If protectionist measures were to significantly and durably weigh on global trade … trade-reliant economies like Taiwan, Korea or Malaysia would be affected,” Marie Diron, the managing director of the Sovereign Risk Group at Moody’s, told Forbes.

Hopes of piercing through this gloom will rest on next week’s talks in Beijing between teams led by US Treasury Secretary Steven Mnuchin and China’s Vice-Premier Liu He.

Illegal exports

Already the state-owned English newspaper China Daily has set a depressing tone after this week’s news that the US is planning to investigate Huawei over possible sanction-busting in Iran.   

The move followed last week’s decision by the US Commerce Department to ban ZTE from buying US-made components for seven years after violating an earlier sanctions settlement. Again, it involved illegal exports to Iran.

Coupled with a possible inquiry into Huawei, this is like taking a wrecking ball to China’s prestigious high-tech sector. In an editorial, the mouth-piece of Beijing, China Daily, came out fighting:

“The United States talks a good game about ‘unfair’ trade practices. But the actions it has taken belie its words … For years, Chinese companies have invested in the US, creating jobs and deepening relations between the world’s two largest economies.

“Yet that mutually beneficial momentum has met strengthening headwinds due to the increasingly tougher regulatory environment encountered by Chinese enterprises with plans to invest in the US.

“To rationalize its increasingly unfriendly investment policies toward China, Washington is trying to give Beijing a bad name, accusing it of being a thief of intellectual property. But this accusation is both unfair and unfounded … Which points to the real reason the US is coming up with more and more excuses to target Chinese investments and major tech companies.

“They are aimed at throttling China’s plan to transform itself into a global technology power.”

Hopefully, Beijing and Washington will discard this sort of rhetoric at the ‘trade talks’ summit in the days ahead, and spare the rest of the world from excruciating earache.