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Protectionism: Are there winners in the trade war?

14th August, 2019

The surge in populist political agendas around the world has fuelled a shift away from globalisation and free trade. While there is a consensus among economists that protectionism negatively affects global economic growth and welfare, spill-over effects from the trade war can create opportunities for countries outside China and the US.

America first

From the beginning, US President Donald Trump argued that globalisation had failed American workers and that existing trade agreements undermine the independence of the US economy. Instead, he vowed to negotiate "fair, bilateral trade deals that bring jobs and industry back onto American shores". He also threatened to withdraw the US from the World Trade Organisation, the key body symbolising globalisation.

Trump embarked on a quest to renegotiate trade agreements with those countries where the US recorded a trade deficit. He argued that trade deficits measured the extent to which other trading partners had been taking advantage of his country. Since Trump became the president, the US left the Trans-Pacific Partnership (TPP) and pushed for renegotiations of the North American Free Trade Agreement (NAFTA) and the Transatlantic Trade and Investment Partnership (TTIP). In 2018, the US imposed tariffs on steel and aluminium, leading China, Canada, Mexico, and the EU to respond with retaliatory tariffs.

The tariff war with China has become the key theme of 2019 and it has been disrupting economic growth and driving the markets. In response to criticism of his trade agenda, Trump argued that the long-term benefits from new trade deals would outweigh the pain from tariffs and retaliatory duties imposed by other countries.

 

Global impact projections

Even before the escalation of tensions between the US and China, the International Monetary Fund (IMF) had warned that the global economy was vulnerable to trade wars. Since then, the IMF cut its forecast for the world economy three times, citing trade tensions as one of the key reasons every time. In addition to warnings by the IMF, both the European Central Bank’s (ECB) and the Organisation for Economic Co-operation and Development (OECD) estimated that escalation in trade tensions would lead to a gloomy picture for US, China as well as the global economy.

“In a trade dispute involving two countries (US and China), third countries may temporarily benefit from rising protectionism. Specifically, third countries can gain market share in countries where tariffs have risen,” according to a recent research paper by the ECB. Indeed, the EU is the top trading partner of both China and the US, and as the US-China tensions have made suppliers in the rest of the world more competitive relative to US and Chinese firms, European companies are well-placed to take advantage.

 

Who are the winners, if any?

Trade is a zero-sum game and nothing happens in isolation. Trade tensions among major economies are bound to have spillovers, externalities and ripple effects on many other countries. However, in every crisis lies an opportunity, depending on how it is looked at:

  • Europe

 One of the spillover effects of US-China tensions is that a substantial share of their bilateral trade will be captured by close competitors of Chinese and US companies in other countries. According to research by the United Nations, of the $250bn in Chinese exports subject to US tariffs, about 82% will be captured by firms in other countries. Likewise, of the approximately $110bn in US exports subject to China’s tariffs, about 85% will be captured by firms in other countries. The EU exports are projected to increase the most, seizing about US$70bn of US-China bilateral trade, while Japan, Mexico, and Canada will each take around US$20bn. However, since both China and the US are the top trading partners for the EU, any reduction in demand for EU exports on the back of an economic slowdown in China and the US would reduce the positive spillover effect from the trade war.

  • Southeast Asia

The current trade war has made Southeast Asia an attractive alternative or at least a supplementary manufacturing base to China. The manufacturing shift triggered by the trade war accelerated foreign direct investment into the region. This trend towards the Southeast Asian region will mean the local population working with and learning about advanced technology and more prosperous societies creating in-country consumer demand.

  • Developed countries

McKinsey Global Institute (MGI) researchers argue that ongoing structural changes in value chains, shifting trends in technology and manufacturing, that have been accelerated by the trade war, will benefit developed economies. Such economies are less burdened with unskilled labour and have an infrastructure in place to provide training and education, especially as a shift towards automation reduces the importance of low-skilled labour costs.

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