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Trade war a threat to global supply chain

By Zhang Haiyuan | China Daily | Updated: 2019-06-29 09:31

What affects Argentina most is the trade dispute between the United States and China, which has had a very strong impact on the grain markets and on the price of soybeans in Chicago (Mercantile Exchange). [Photo/VCG]

The United States has adopted unilateral and trade protectionist measures in violation of established international trade rules and launched a trade war against China, and triggered trade disputes with other economies including the European Union, Canada and Mexico. The US' trade protectionist moves are seriously undermining international trade and the world economy, and disrupting the global supply and industrial value chains, destabilizing the global resource distribution system and harming multinational companies' productivity.

The US' protectionist measures have not only intensified trade fictions but also fanned anti-globalization passions in several countries. True, the trade war is hurting Chinese enterprises, but it is also hurting American enterprises and consumers, and the global economy.

The US' moves have also created serious challenges for the sustainable development of international trade and investment. According to the International Monetary Fund's World Economic Outlook, tariffs cannot strike the right balance in bilateral trade. Instead, hiking tariffs on a large scale will weaken the global economy. In fact, the IMF has downgraded its forecast for international trade and global economic growth in 2019, due chiefly to the trade war.

Economic globalization has helped form a comprehensive international division of industry and labor. As a result, the integrated global supply and industrial value chains have promoted industrial and technological transfer between developed and developing countries. In turn, the international division of industry and labor has strengthened globalization. No matter whether they are American or Chinese enterprises, all pursue production efficiency by using the international supply and industrial value chains.

But the US-triggered trade war has increased the cost of global trading, made it difficult for multinational enterprises to make production decisions, and increased the costs of intermediate goods. Take Singapore for example. If China's imports reduce by 10 percent, Singapore's exports will decline by 1 to 2 percentage points. Which shows the trade war is having a cascading effect on economies.

The US' unilateral and protectionist moves have also lowered the returns on multinational enterprises' investments and undermined their confidence. Multinational companies choose an investment destination based on local infrastructure and demographic factors such as transportation networks, information and communication technology, and labor supply, as well as supporting industrial capacity and consumption market potential. And the global supply and industrial chains help the companies to make the right decision.

Yet the US seems determined to rebuild the international industrial chain. In so doing, it is ignoring the fact that the cost of rebuilding the global industrial chain would be very high, and such a move could destabilize the world economy.

Besides, many assume that owing to the intensifying trade disputes, multinational companies could consider changing their business strategy, by re-docking with the global supply chain and transferring their purchase and processing bases from China to destinations such as Southeast Asian countries in order to avoid paying the high tariffs imposed by the US on Chinese imports.

But such a transfer also depends on many other factors such as transportation cost, quality management, labor force and administrative environment. So a large-scale transfer of multinational enterprises from China to other countries is unlikely in the short term, not least because their production, investment and industrial chains are all in China.

It is also difficult for multinational companies to find a destination that is as business-friendly as China, which has a comparatively sound supporting industrial system and is deeply integrated with the global value chain.

As for China, to overcome the impact of the trade war on its economy, it should deepen its reform and further open up its economy. As a matter of fact, China's reform and opening-up have accelerated in recent years. China has deepened the supply-side structural reform, expedited the construction of an innovation-led economy, opened up its market wider by shortening the negative list, promoted a unified market and fair competition, improved government functions and boosted domestic demand.

It has also taken measures to deepen international cooperation through the Belt and Road Initiative and bilateral as well as multilateral free trade zones, in order to create a better environment for domestic as well as global economic development.

The author is a researcher at Foreign Trade Research Institution, Chinese Academy of International Trade and Economic Cooperation. The views don't necessarily represent those of China Daily.

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