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Supply Chain Risk

US-China trade war “unlikely” to be resolved quickly

Chief economist at Rabobank, Menno Middeldorp, has insisted that a “zoomed out” view is needed in order to assess how geopolitics affects the world economy and its likely effect on trade, banking and finance. He argues that the issues leading to trade wars with China existed long before Trump won power and will continue after his premiership ends.

Speaking at the SCF Forum Europe in Amsterdam, Middeldorp analysed how China had developed its economy and lifted its population out of poverty. He demonstrated how the growth in the Far East has led to a reversal in the economic growth in the post-war period in US and the west, leading to wealth inequality. Arguing that “The rich are basically a lot richer,” he stated that the top 1 percent Chinese earners have captured 27 percent of total growth, leading to widespread dissatisfaction.

Alongside concerns surrounding the environment, there are world distribution issues that surround globalisation. Middeldorp argues that US concerns around Chinese growth are unlikely to disappear if Trump is no longer president. There has been a tariff ‘tit-for-tat’ which existed before Trump’s presidency.

The economist argued that the bigger context means that trade war between the US and China is unlikely to resolved quickly. Many of the issues are based on long standing barriers to trade, ensuring that the issues will not disappear when Trump is no longer president. He said:

“The drivers that created Trump and Brexit will not go away if Trump loses is 2020 or Brexit is cancelled; they are here to stay.”

The trade war is more damaging to China’s economy than it is to the US, slowing down its growth rate and ability to hit targets on migration to towns and job creation, potentially leading to political issues. Supply chains are likely to be damaged, due to interdependence, but here it is the US which is more vulnerable. Middeldorp argues that the US are “inadvertently shooting themselves in the foot” by placing tariffs on China as it ultimately negatively impacts back upon the US.

Tariffs are not just a matter of trade, but are also based on geopolitical concerns. Middeldorp argued that they are being used to access other areas that the US is concerned about, such as the risk of China breaching US intellectual property rights.

US firms are looking to move their supply chains due to the trade war, with South East Asia being the most likely area for US firms to relocate too. This is due to the having similar industries to China, cheap labour, and a business-friendly climate. Thailand, Malaysia, Vietnam and Taiwan are the countries most likely to benefit.

Brexit was also singled out for analysis, with the uncertainty of the future progress being highlighted. The upcoming general election will be a key factor, with a Conservative victory meaning that Brexit will go ahead, but still with a risk of a hard-Brexit, due to the fact that trade negotiations will be ongoing for at least a year, post exit.

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