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US-China trade conflict: How long can it go on?

dubai - Chinese retaliation against US imports will have a huge impact on American farmers

On July 6, "the biggest trade war in economic history" as China called it, was declared by the US when President Donald Trump imposed 25 per cent tariffs on more than 800 Chinese products worth of $34 billion.

Trump's administration believes the tariffs are necessary to make China stop its "unfair" practices. The US accuses China of stealing intellectual property and forcing American companies to give China valuable technologies.

On the other hand, China believes it is "forced to strike back to safeguard core national interests and the interests of its people", its Commerce Ministry said in a statement.

Trump has already announced that tariffs could be imposed on Chinese goods worth more than $500 billion. The fear of an escalating trade war between the world's two biggest economies is making investors worried.

The key question is how far this war could go and how many countries could be affected.

Atik Munshi, senior partner at Crowe, said the high rate of tariffs would obviously make goods more costly. "This is protectionism for the local industry, perhaps in a different package," he said.

Munshi said many countries have benefited from globalisation. Unfortunately, the US is not one of them and such moves can be termed as globalisation in reverse mode. He said with the increase in tariffs, the local industry is expected to benefit as the cost of imports increases the cost of the final products, at least in the short term.

Munshi said the US and China are two major global trade players; any policy change in either of them also affects the rest of the countries in one way or the other.

He said imports of Chinese goods into the US will become more costly and hence American companies will have two options; to produce locally or source goods from countries other than China where such tariffs are lower. "In the short term, it would have negative effects; the long-term effects cannot be anticipated accurately at this point as these will not just be economical but also political," he noted.

Munshi said it is difficult to anticipate the outcome of this trade war over a longer period, adding that China is a global supplier of a large number of goods and finding a replacement in the short term is highly unlikely.

He said the UAE acts as a transit hub for many countries. The UAE will be able to sustain this global trade war as it serves a large number of countries, he added. "If the trade war escalates, the producers will resort to finding other countries that can fill in. For the UAE, this could mean a good opportunity," he said.

Hamzah Shalchi, regional director of Guardian Wealth Management Middle East, believes the dispute between the US and China will not lead to a global recession. He said it would make a significant amount of imports much more expensive. However, the goods that are subject to tariffs aren't are in huge demand. Consequently, it doesn't have a major significance and is ultimately a political move from Trump, who is trying to show that he is "sticking up for America" and fighting their cause, he added. However, it will create uncertainty and concern around consumer demand and the economy.

Shalchi said such global political uncertainty makes the UAE slightly less attractive for investors during volatile times. Investors ultimately look for safe havens and the GCC is perceived as an emerging market.

About the possible effects on oil prices, he feels the UAE is at its peak oil rate, give or take two to three per cent. He added that even though Iran's market is now restricted, the world is looking for alternative energy sources. "Therefore, these prices are accurate for 2018," said Shalchi.

Y.S. Shashidhar, partner and managing director at Frost & Sullivan, said a 25 per cent tariff on goods imported by the US worth $50-60 billion from China every year will automatically result in higher prices for consumers. The retailers might absorb the price increase by one to two per cent, but the rough price increase across the product range might vary between 10 to 15 per cent. This will result in lower demand among consumers, thus impacting the overall GDP, he added.

He believes that Chinese retaliation against US imports will have a huge impact on American farmers as almost 60 per cent of China's demand for soya beans comes from the US. Apart from that, massive imports of pork, apples and sorghum from the US will also face issues. However, the impact could be a bit lower as finding a substitute supplier for products like soya beans and sorghum might pose a challenge, Shashidhar noted.

He said any further decision to impose higher tariffs on an expanded product list could lead to a global trade war that will automatically trim economic growth, possibly eating up the GDP of both the countries.

He added that in the US, this could also erase any benefits of the recent tax cuts. The rising tariffs on final and intermediate products will result in a rise in domestic prices; while for US technology firms assembling products in China, higher costs could be partially passed on to consumers, thus depreciating their profit margins.

Shashidhar also thinks that China may consider imposing non-tariff barriers, which could pressure US firms to impose stricter regulations and other security measures. Also, some of the Chinese state-owned companies might engage sparingly with US companies on B2B deals. All these will have a huge impact on global trade.

Regarding the GCC, he said trade wars could lead to a situation wherein countries might be forced to take a stance on sides which could broaden the overall scale of the war and the spillover effects will be felt in the Middle East. This will result in lower economic growth and an impact on stock markets, he explained.

Shashidhar added that a trade war will possibly have an indirect impact on the region as China accounts for close to 30 to 40 per cent of oil imports for its energy requirements. And if industrial activity goes down, it will have an impact on oil consumption, resulting in lower oil revenues for the regional economies.

- hesham@khaleejtimes.com