Trade war consequences

The trade war initiated by Donald Trump is already provoking shock waves in the very organized system of globalization and disturbing the entire supply chain. We see a vicious circle where the US start increasing tariffs which leads China and other to increase their own in retaliation. The US president is betting that the size of the US market will force China, India, or the EU to accept the new terms imposed by the US. If this is nothing new in the US history (let’s remember when the US successfully sent their war ships to Japan to force them to open and buy US products), the US are this time attacking a very potent power which have the means to respond symmetrically. Donald Trump with his background in real estate is used to this type of tactics but if he may win the first battle, he is in no way certain to win the war and this war once started will be hard to stop. We can expect it to last for the next 30 years and deal a heavy blow to the global economic growth. This will also certainly lead to an acceleration of the autonomous development of entire sectors in China, India or Russia.

The global world where the different pieces of a product are made in different countries, assembled in yet a different one and finally sold in other countries might be coming to an end. Since tariffs are rising across the world, the efficiency of this system will be reduced. Corporations will have to increase their prices to compensate for the tariffs. Consumption will be hit hard with inflation increasing drastically. In order to deal with these tariffs, corporations will adopt two different types of strategies. They could try to continue the race to the bottom by moving their production from China to countries not targeted by these higher tariffs and with even lower cost of production to recreate their margin. If this trade war gains some momentum with even higher tariffs and spreads to most countries, we might see a return to a more national strategy with corporations moving back production to the major countries where the products are sold in order to avoid the tariffs.

Until recently, the US were dominating the tech world and for the key components in hardware like microprocessors, they still have a monopoly which is even more obvious when it comes to the software with the GAFAM. However, this monopoly is started to crack with outsiders coming from China especially like Huawei, Xiaomi, or Alibaba. The 5G being critical for the next generation infrastructure, the US is now targeting Huawei because it is several years ahead and the US cannot allow this competition (as well as not being able to spy on communications like they used to with Cisco). However by banning exportations of semi conductors and Google Android software, they will hit hard Huawei in the short term but in the medium term, backed by their government, with other Chinese firms associated, they will speed up the development of their own semi conductors sector as well as a new operating system for mobiles which could become a real competitor given the size of the Chinese market. They would most likely ban Android and even Apple products. China could also ban Microsoft Windows and replace it easily with Linux. China and Russia have the capacity together to plug the holes in their industry in order to be independent from US firms. Finally, given that China holds 80% of the rare earth production which is critical to most US Tech producers, they could simply stop exporting it to strangle Intel in the US or Arm Holding in the UK.

The US having started this trade war have on top of it nothing to offer to win over countries and allies. To a point where even the very weak EU is trying to reconsider its alliance with the US without much success given the profound disagreements between the countries and their inability to create their own army and have a common foreign policy. China on the other side has much to offer with the gigantic project of One Belt One road which is recreating the famous silk road with massive investments in the infrastructure and opening new markets for Chinese companies. A trillion dollar has already been spent and new contracts are being signed like during Xi Jinping’s recent trip to Italy. Furthermore, the BRICS have created the New Development Bank based in Shanghai to bolster this project and compete with the US controlled World Bank. This will increase the dependence on China and create an integrated market in the Euro-African-Asian region. The US empire is using its military might to force their will on other actors but it might not be enough since the US are losing their edge military vs China and Russia (see the new hypersonic missiles developed by these countries). China also holds an important portion of the US debt and could dump it on the market which would heavily impact the dollar and US interest rates would increase significantly (damaging the economic growth in the US and worldwide).

Businesses will have to be even more adaptable because the relative stability that we have seen during the last 30 years is about to change drastically. Production will have to be switched quickly from one country to another depending on the new tariffs being implemented so we might see companies selling their production lines and using third parties in order to be able to move production much faster and reduce their costs. If production moves back to developed countries, we will see a lot more automated plants in order to avoid high labour costs. Currencies will most likely also see a lot of volatility and companies will need to use hedging to protect themselves.