Trade War Truce: How Should Businesses Prepare?

Trade War Truce: How Should Businesses Prepare?

Ever since China – the largest trading partner of the United States (US) – first achieved a positive balance of trade in 1992, the trade imbalance between the two countries has worsened over time. Currently, the US is experiencing a US$26.9 billion trade deficit with China. The trade deficit, which occurs when the country’s monetary value of imports exceeds the nation’s exports, led to various trade disputes between the two economic powerhouses.

Under President Donald Trump’s leadership, the US waged a trade war with China in 2018, criticising China for manipulating its currency to give its firms a price advantage against US counterparts. The US imposed tariffs on Chinese goods and restricted American firms from dealing with Chinese high-tech businesses such as Huawei Technologies Co. Through his protectionist measures, Trump hopes to reduce the trade deficit with China and boost the US job market, which he promised to achieve as part of his presidential campaign in 2016. Various clashes between the economic giants have since been witnessed as China retaliates with similar tariffs.

The impact of the trade war is mostly reflected in international trade. The tit-for-tat tariffs slapped on Chinese and US goods increased import prices and hurt the performance of firms that rely on imported inputs. Consumers also suffer from price rises as manufacturers respond to the higher costs in production by raising prices.

In a press release before the 2019 G20 summit in Japan, where leaders from 20 major economies convene to discuss pressing global economic issues, director-general of the World Trade Organisation (WTO) Roberto Azevêdo announced that trade growth is expected to slow down to just 2.6 per cent due to rising trade tensions. He also warned that the trade-restrictive measures will “have consequences in increased uncertainty, lower investment and weaker trade growth.”

Since the beginning of the US-China trade war, many countries and trading partners have voiced concerns over the consequences of the trade dispute. Singapore Deputy Prime Minister and Minister for Finance Heng Swee Keat shared in an interview that the trade “is to no one’s benefit” and “the effects on the regional and global economy will be very negative.”

Malaysian Prime Minister Mahathir Mohamad echoed by saying that a trade war does not serve any purpose and disturbs economic progress of countries. He added that the world needs to accept the fact that China has become very rich and each country should focus on what they have as competitive advantage instead of “[trying] to conquer.”

While expressing his thoughts, Dr Mahathir also acknowledged the American’s strength in the manufacturing of airplanes and engines. In the US-China trade war, some pressure points that China finds difficulty targeting include high-tech items such as semiconductors manufacturing equipment, cars, and airplanes – US imports that the Chinese cannot find alternatives to. As a result, America’s restriction on the high-tech industry imposed high pressure on the development of Chinese tech firms.

However, this also served as an opportunity for China to recognise the importance of developing its own core technologies in order to reduce its reliance on the US. With a focus on its rare earth industry, China is encouraging local firms to develop independent intellectual property rights and core technology amid competition against the US high-tech monopoly.

On the other hand, the US suffers in the trade war due to its reliance on a large variety of consumer goods that it imports from China. As one of the top-performing economies, the US slowly shifted its focus to developing financial markets while moving the most polluting manufacturing industries offshore to China and Southeast Asia. Thus, American businesses and consumers were hit hard when tariffs were imposed on these Chinese goods.

In an interview with Fox Business host Maria Bartiromo, Trump said that Vietnam is benefitting from the deteriorating US-China trade relationship as companies consider it as an alternative offshore destination to bypass higher tariffs. However, he mentioned that Vietnam is taking advantage of the US “even worse than China” and shared that the US is in discussions with Vietnam when questioned on the possibility of tariffs on the country. It leaves one to wonder if a new trade war between the US and Vietnam would happen in the foreseeable future.

On June 20, 2019, Trump and Chinese President Xi Jinping confirmed after a phone call to meet at the G20 summit. During the long-awaited meeting, the two leaders agreed to resume trade talks. In his Tweet, Trump announced that the US will push off additional tariffs on Chinese imports and allow US businesses to sell equipment to telecom giant Huawei, while China agreed to purchase a large amount of US farm products.

The restart of trade talks is welcomed by investors and businesses as they hope for better trade relations amid slowing economic growth.

Chief Finance Officer of DesFran Teo Mingwen said: “The US-China trade war has threatened international trade and damaged the multilateral trading system. It provoked economic populism and anti-globalisation, where global growth is hindered because of one country’s appetite for protectionism. Shared growth and open cooperation are key to the development of economies, and everyone is hoping for the trade dispute to be over and for the economy to be restored.”

The trade war has impacted Asian economies as exports to mainland China and Hong Kong declined. Countries that rely heavily on trade – including South Korea and Malaysia – are expecting economic growth to fall by 6 per cent.

While large corporations have the leverage to withstand rising instability, small and medium enterprises engaged in international trade might find it difficult to adjust to changing trade relations and increasing risk. Mingwen suggests that businesses seek professional advice on scenario planning and diversifying supply chains in preparation for trade war fallouts.

With years of experience partnering and helping businesses with corporate secretarial services like offshore company formation, DesFran has a team of consultants ready to help you mitigate the business risks that might come with trade war fallouts. Contact DesFran for expert advisory solutions today.

About the Authors

Teo Mingwen is the Chief Finance Officer of DesFran. With over 10 years of experience in the finance industry, Mingwen has deep expertise in regulatory requirements, operational procedures, global business development, corporate regional governance, and FX-related sales. Mingwen was formerly Executive Director for Blackwell Global Investments (Cyprus) Limited, and developed growth strategies, business development plans and client engagement for the company.

Vicky Wang is Strategic Communications and Research Intern at DesFran. With a strong interest in global finance and economics, she produces articles covering corporate finance and regulations. Vicky is currently pursuing a bachelor’s degree in Business Administration (Strategic & Management Consulting) with a double major in Economics at Emory University in the United States.