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Who’s Winning the US-China Trade War: Other Countries

The theoretical correlation between a decline in U.S. imports from China and an increase in Made in America production hasn’t been borne out in apparel sourcing nor in a new report from the United Nations Conference on Trade and Development (UNCTAD).

The report released last week said the tariff-fueled trade war between the U.S. and China impacted more than 50 percent of the two nations’ bilateral trade. The result, which has been evident in shifts in market share of U.S. apparel imports, has been a handful of countries, mostly Asian neighbors, capturing a bulk of the diverted exports.

The UNCTAD said this effect could become more pronounced if the U.S. follows through on the threat to increase tariffs to 25 percent on a range of goods on March 1 from the more narrow 10 percent duties already imposed, which has led to retaliatory tariffs from China on U.S. goods entering the country.

UNCTAD estimates, which include the potential March hike, show that most of the U.S.-China trade affected by the increased tariffs will divert to other countries and not just shift the bilateral balance of trade. The report said that of the $250 billion of Chinese exports subject to U.S. tariffs, 82 percent will be taken by firms in third countries, about 12 percent will be retained by Chinese firms and just about 6 percent will be kept by U.S. companies.

Of the approximate $110 billion of U.S. exports subject to China’s tariffs, about 85 percent will go to manufacturers in other countries, while U.S. makers will retain less than 10 percent and Chinese firms will only keep about 5 percent, according to the report. The results are consistent across different sectors, which UNCTAD said indicates that while unilaterally imposed tariffs might be effective in deterring trade from rival countries, they are ineffective in protecting domestic sectors in China and the U.S.

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While the trade war raged in 2018, U.S. apparel imports from China have gone from about 10 percent annual gains in recent years to about a 1 percent increase in the year to date through November. At the same time, Asian nations such as Vietnam, Cambodia, Bangladesh and India have seen their market shares surge, as companies spread out their sourcing to avoid risk and higher prices. Gains have also been seen in the Western Hemisphere and Africa.

As for broader product exports, the European Union (EU) is the most likely to profit from the U.S.-China trade collision, the report noted. The EU is poised to grab about $70 billion of U.S.-China bilateral trade–$50 billion of Chinese exports to the U.S. and $20 billion of U.S. exports to China–with Japan, Mexico and Canada nabbing more than $20 billion each.

Although the shifts might not be significant when compared to the $17 trillion in overall global trade, UNCTAD said for some countries, the export increase could be substantial. For example, Mexico would be able to capture about $27 billion of U.S.-China trade, representing about 6 percent of the country’s total exports. Australia, Brazil, India, the Philippines, Pakistan and Vietnam could also see substantial increases relative to their total exports, the agency noted.

“But in a world of global value chains, the wrangling of the trade giants is likely to have a domino effect beyond the countries and sectors targeted,” Pamela Coke-Hamilton, director of UNCTAD’s division on International Trade and Commodities, wrote. “Tariff increases penalize not only the assembler of a product, but also its suppliers along the chain. The high volume of Chinese exports affected by U.S. tariffs is likely to hit East Asian value chains the hardest, which we believe could contract by about $160 billion.”

The impact on North American supply chains is expected to be milder, since the negative effects of Chinese tariffs “would be almost offset by the reallocation of production from China into the North American region,” Coke-Hamilton wrote.

How much of a shift in sourcing will occur will also depend on whether the tariffs are temporary or permanent. Like other recent reports from the World Trade Organization and economists, UNCTAD said a long trade war could have significant implications on global investment flows, employment and growth in developed and developing countries.