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In a US-China trade war, big losers include ... BMW? Taiwan?

Why We Wrote This

President Trump says his get-tough tactics are about addressing unfair practices in global trade. But as penalties and counter-penalties start flying, the results aren't always intentional or predictable.

Construction workers stage a rally demanding job security in Seoul, South Korea, on July 12, 2018. South Korea's central bank cut its forecast on the country's economy, citing mounting uncertainties from the US-China trade battle.
Ahn Young-joon/AP
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In the escalating global conflict over trade, a useful maxim is “be careful what you wish for.” Measures designed to punish an adversary over unfair practices could come back to bite workers in your own country, or those in some other place that’s not directly targeted. When the United States slaps penalties on imports from China, Taiwan faces collateral damage because of its role as a parts supplier. And if China’s retaliation hits US car shipments, German automaker BMW would be pummeled, along with US workers, since that company exports heavily from a South Carolina plant. President Trump hopes that a reset in global trade will bring jobs back to the US. Some of that may happen, but the process could take years. And economists say a trade war would cost more jobs than it creates. It’s a sign of how reliant the world has become on cross-border global supply chains. Darson Chiu, an economist in Taiwan, worries about a huge impact there. “When the tsunami is coming,” he says, “it’s useless to hold an umbrella.”

If the Trump administration slaps tariffs on foreign autos and China retaliates, the biggest loser in the United States might not be General Motors or Ford. It might be BMW.

Last year, the German company was the largest US auto exporter by value, shipping nearly $8.8 billion worth of BMWs from its South Carolina plant. If the prospect of China hurting one of Europe’s premiere companies in order to punish the US sounds preposterous, then welcome to the world of trade wars and unintended circumstances.

World business has a message for those trade officials from China, Europe, and the United States who are busy trying to calibrate tariffs and countertariffs for maximum political advantage: Be careful what you wish for.

Supply chains are so globally intertwined that tariffs and other trade barriers will produce collateral damage – and some of that damage will hurt your own workers and consumers – or those in nations that aren’t directly targeted. And the danger is that policymakers will underestimate the damage of their moves because of the complexity and mutual dependence of the supply chains.

“The risk is definitely higher than expected,” David Simchi-Levi, a supply chain expert at the Massachusetts Institute of Technology, writes in an email. Even companies can underestimate the risks to their supply chains. “Companies gravitate towards dealing with the obvious risks from large suppliers or known areas and underestimate the risk from others.”

The principle of collateral damage applies to nations as well as corporations. With a looming surge in US tariffs on Chinese exports, experts in Asia say some of the heaviest impacts could fall in places like Thailand and Taiwan, where much of the economy is bound to supply chains that are intertwined with China.

Job gains? Maybe not.

And governments, particularly the White House, may be overestimating the job gains from moving manufacturing back to the US.

“The job effect would be negative if Trump imposed tariffs on China and [the] EU,” Gregory Daco, head of US economics at Oxford Economics USA, writes in an email. “We estimate that if he follows through on his threats the total jobs loss could cumulate to 500,000.”

One of the most striking examples is the auto industry.

Employees at the Volkswagen plant in Chattanooga, Tenn., work on the assembly of a Passat sedans.
Erik Schelzig/AP/File
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When Mr. Simchi-Levi worked with Ford a few years ago to examine its supply chain, he found that the greatest threats of disruption didn’t come from Ford’s biggest suppliers, but from smaller suppliers that made relatively low-cost components.

Take an auto imported from Mexico. Some three-quarters of the foreign parts – representing an estimated 38 percent of the value of the car – comes from the US, according to a study by Harvard doctoral student Alonso de Gortari. So if proposed US tariffs reduce the number of cars imported from Mexico, then US auto-parts manufacturers will make fewer sales and will likely have to lay off US workers.

Eventually, of course, US workers could make those parts for auto assemblers in the US. But it will take a minimum of three years for domestic and foreign manufacturers to set up factories and train workers, points out Kristin Dziczek, vice president of the Center for Automotive Research in Ann Arbor, Mich. In the meantime, foreign-made parts will cost more if US tariffs go into effect.

Wire harnesses – that bundle of wires, terminals, and connectors that run the length of a vehicle – are an example. They’re low-margin, labor-intensive parts no longer made in the US and imported instead from Mexico or elsewhere by workers earning at best a little over $2 an hour. If automakers set up US factories to start making them again, they would have to pay workers seven or eight times that amount, making the part far more expensive.

By some estimates, a 25 percent tariff on cars could boost average new car prices by $5,000 or more.

“It’s a fool’s game,” says Sherman Robinson, a fellow at the Peterson Institute for International Economics. “It’s hard to imagine that [the administration] can do any good messing around with these supply chains.”

While the US can impose damage on China for its allegedly unfair trade practices, tariffs are a blunt instrument that would unsettle Asian economies defined by a web of cross-border connections.

Effects on China's neighbors

Some of the biggest losers will be not Chinese companies but other Asian firms that supply them.

“The US-China trade war will create very significant collateral damage,” says Tu Xinquan, executive dean and trade expert at the University of International Business and Economics (UIBE) in Beijing.

In manufacturing, for example, China often acts as a processor of intermediate goods imported from elsewhere and then exported again. Thus, about 40 percent of the total value of the goods exported from China to the US come from foreign sources, says Lin Guijun, vice president of UIBE. While those foreign supplies come from many nations, the US itself represents a slightly bigger slice of the pie than many Asian countries, he says. [Editor's note: The final sentence of this paragraph has been revised to clarify Professor Lin's meaning.]

The interconnection of Asian economies has grown in recent years as they’ve developed economically, and also as a rise in wages and environmental rules in China have pushed some production toward places like Vietnam and Cambodia. The nascent trade skirmish could force changes in those ties but won't end them.

Among Chinese experts, opinion is divided over whether China or other Asian nations will be hit hardest by US tariffs.

China will bear the brunt of a trade war with the US, says Yu Miaojie, deputy director of the China Center for Economic Research at Peking University in Beijing. But other vulnerable countries include Indonesia, Malaysia, Thailand, and Taiwan.

The trade war will impact every economy, and perhaps especially Taiwan – not just in information and communications technology, but traditional manufacturing, says Darson Chiu, deputy director of the Macroeconomic Forecasting Center at the Taiwan Institute of Economic Research in Taipei. Some 78 percent of Taiwan’s exports are intermediate goods, “so the impact will be huge…. It’s like a tsunami coming, and when the tsunami is coming, it’s useless to hold an umbrella.”

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