Sunday, 17 January, 2021

China-U.S. Trade War Wreaking Havoc on Global Value Chains, Supply Chains


Quan-Ding Liu

It is obvious that different countries only contribute to "added value" after investing in capital, labor, or other factors of production. The final product is a collection of countries' "added value". In other words, different countries cooperate to complete the production of a specific product under the joint action of the value chain, supply chain, and industrial chain. The final product will also be sold in the global market. Such highly integrated global value chains, industrial chains and supply chains make countries interdependent and highly integrated. Under the trend of gradual separation of industrial and technological centers, the differences in economic and technological levels lead to great differences in labor spatial division of labor at different geographical scales (among countries, regions or cities, forming a production network based on product value chain division and constructing a global value chain system (Gereffi et al., 2005;Kratke, 2017. The United States, as the world's most advanced technology of the first largest economy, has long been at the high position of the global value chain system, that is to say, the United States in many industries engaged in the added value of the large, lucrative industry, and China as the world's largest developing country and the largest consumer market, long-term position in the global value chain is relatively low, which means China engaged in labor-intensive, low added value and profit are industry. However, both China and the United States are important in the global value chain because of their large economies. A trade war between China and the United States will undoubtedly shake up global value chains, supply chains and industrial chains. To be specific, from the perspective of the global value chain, supply chain and industrial chain, the trade war between China and the United States has specific impacts on the world economy in the following two aspects.

First, accelerate the "restructuring" of global value chains and increase the risk of "chain disruption" of global industrial and supply chains.


The spillover effects of the trade war continue to ferment, which will lead to the restructuring of global industrial chains and increase the risk of "chain-breaking" of global value chains and supply chains.  The trade war between China and the United States not only increases the cost of bilateral trade in the short term, but also affects the production decision layout of multinational companies worldwide, greatly increases the cost of intermediate goods and industrial chain, speeds up the return and transfer of some industrial chain, and thus leads to the restructuring of the global value chain, industrial chain and supply chain (Zhang Mo Nan, 2019). Since the trade war happened, the government called on American companies returned to the United States, Donald Trump has always been the President of the United States known as the "governance through Twitter", on August 23, 2019,  he " commands " American company looking for a new mode of operation in place of business in China, including the American companies from China moved back to the United States(see FIGURE 2), the same day, the Dow Jones index fell 623.34 points or 2.37%. The S&P 500 fell 75.84 points, or 2.59%, while the NASDAQ was among the biggest fallers, falling 3.00% and 239.62, while the dollar and the Chinese yuan also weakened, with the offshore yuan briefly breaking through 7.10 against the dollar. It can be seen that the international capital market is worried about the international value chain, supply chain, and industrial chain rupture. Trump's remarks, though widely criticized, reflect the US government's determination to push forward the "three-chain" restructuring.

In fact, in recent years, especially since the trade war between China and the United States, some labor-intensive industries have shifted more rapidly from China to South Asia and Southeast Asia, and production links with higher capital and technology have also shifted to Japan, the Rok and Europe. In the context of a trade war, the shift of labor-intensive industries to Southeast Asia and other low-cost countries seems likely to accelerate further, with tariffs and the effect of them shifting some of the capacity for assembling goods from China to other countries. America's share of imports has been redistributed, according to a study by Panjiva, a global market intelligence and trade data firm at Standard & Poor's. U.S. imports from China fell 13.5% in the first quarter of 2019. Imports from Vietnam increased by 37.2%. Against the backdrop of trade friction with the US, many Japanese companies have moved from China to relocate Mitsubishi Electric's metal-working machinery plants to the US; Toshiba has also moved some of its production bases from Shanghai to Japan and Thailand.

Companies from the United States, Japan, and other countries have moved out of China in large numbers, which has extended the impact of the trade war to a wider scope and caused "chain disruption risk" of international industrial and supply chains. The United States "2019 Defense Authorization Act" some terms and the United States on China's high-tech companies such as ZTE, Huawei, general sanctions can be seen, a trade war with China is not only the trade friction, and it is the United States in many fields such as economy, industry, science, and technology in China's comprehensive" decoupling ", aimed at containing China's rise of high-tech, it has become the consensus of the democratic and republican. The core is that the United States does not want China to acquire the core technology of the high-tech field through independent research and development or merger and acquisition to form an alternative industrial chain. The US has comprehensively revised its existing export control laws and regulations to strengthen "long-arm jurisdiction". Trump signed the National Defense Authorization Act for the fiscal year 2019, an important part of which is the Export Control Reform Act, which increases restrictions on foreign holding companies, especially Chinese companies, increases export controls on "emerging and basic technologies," and establishes an interagency consultation mechanism to improve law enforcement capacity. Commerce ministry of industry and security last November 19, lists the U.S. government proposed regulation of 14 "representative of the emerging technology" listing, 5G, artificial intelligence, microprocessor technology, and advanced computing technology, robots, 3D printing, quantum information, advanced materials and biological technology, and to "violation of the U.S. national security or foreign policy interests" on the grounds that the 44 Chinese institutions included in the list of "entity", strengthen the blockade on technology exports to China.

In order to hunt down Chinese high-tech companies, US President Donald Trump even signed an executive order requiring the US to enter a state of emergency on the grounds of "technological cybersecurity", and empowered the US Department of Commerce to allow the latter to prohibit Us companies from buying telecommunications equipment and technology made by "foreign enemies". Immediately, the department of commerce industrial security service(BIS)will be included in the "entity list", while Google immediately stops the business relationship with Huawei, including hardware, software and technology services, including service support Android, which means that the overall high-tech contain and technology exports to China blocked, the dynamics of the "cold war" of science and technology of China and the United States nearly established. Therefore, the global value chain, industrial chain and supply chain restructuring driven by the comprehensive confrontation between China and the United States will be a long-term and inevitable process.

Despite the Signing of the "Phase I Trade Agreement" in January 2020, bilateral tariffs between the United States and China remain at unprecedented levels, which will have lasting effects. America, in particular, still has high tariffs on spare parts and other intermediate goods, and China has adopted retaliatory tariffs of its own. If the track along the value chain of tariff protection measures between the two economies, we will find that a trade war on price, additional, and can have an influence and other factors of production, and in addition to the direct impact of sanctions, due to the vertical value chain link, also led to the American exports less competitive (Cecilia Bellora & Lionel Fontagne, 2020). In fact, GVC also plays a very important role in promoting trade flows. In the first decade of the 21st century alone, the rapid growth of GVC has released nearly one-third of the trade flows subject to the most common temporary restrictions(Bown, Chad P. and Erbahar, Aksel and Zanardi, Maurizio, 2020. In the decades before the Trump era, trade barriers fell sharply and global value chains rose at the same time. While evidence of a causal link between trade barriers and GVCS remains scant, it is clear that increased trade activity through GVCS played an important role in countries' choice to reduce trade protection during this period (Bown, C. P., Erbahar, A. and Zanardi, M., 2020).  In other words, due to the close connection of the "three chains", the interests of trading partners are intertwined, which also promotes the development of free trade. However, such trade wars characterized by protectionism occur in a world economy based on global value chains, which will inevitably lead to the rupture of value chains, industrial chains and supply chains. The fragmented supply of production prevents the domestic appreciation of previous exports and the tariffs that are not conducive to their own appreciation affect factor earnings (Koopman, Tsigas, Riker and Powers, 2013). It is worth noting that if the effects of trade policies were quantified on the premise of GVC, a denser GVC ultimately magnified the adverse effects of protectionist trade policies (Rita Cappariello & Sebastian Franco-Bedoya & Vanessa Gunnella & Gianmarco Ottaviano, 2020. In other words, with global value chains so closely intertwined, a trade war between China and the United States would have a more serious impact.


Second, it increases the production cost of some products.

Besides increasing trade, the trade war between China and the United States will also increase the production costs of some products. In studying the China-U.S. Trade War, we must first take into account the basic fact that after 30 to 40 years of cooperation and development, China and the US have already formed a production, value-added and supply network that is interwoven through the "three chains" in research, development, production and supply. I Phone X smartphone, for example, as shown in FIGURE 3, in the middle of the parts and the production process, and the United States, South Korea, Japan, Italy, Taiwan, and other countries or regions are at a different location value distribution, it is important to note that from the added value of smaller batteries to higher value-added display and touch components to manufacture and supply, mainland China are involved. Generally speaking, the high-value suppliers are mainly from the US, Japan and South Korea, while the medium-low value suppliers are mainly from Taiwan, Japan, and mainland China, and mainland China and Chinese Taiwan occupy an important position in the intermediate links (KANG Jiangjiang, ZHANG Fan, NING Yuemin 2019). As shown in FIGURE III-3, Apple's smartphone industry chain is generally divided into components, modules and OEM. According to the apple supplier data released in March 2018, 756 manufacturers in 30 countries have provided services. Among them, the assembly of iPhone products is mostly entrusted to Hon Hai (accounting for 70% of the total), while the rest of the OEM shares are Shared by Taiwan, Singapore and mainland manufacturers. Foxconn Holdings, a subsidiary that handles most of Apple's manufacturing, has 270,000 employees in factories in China.

With such large global value chains and supply chains, the response to import and export tariffs is naturally very sensitive. How will the tariff increase affect the production cost of iPhone?Zhong tong securities research report in the electronics industry, according to the tariff rate increased by 1% to 20% in the 4th gear is calculated, assuming that in the case of Apple products can't pass on price, according to apple in the American market for $96.6 billion in 2017 revenue, every 1% increase tariffs on Chinese exports to the United States, it costs $966 million, the impact on the net profit of 2%. A 10% increase would increase the net profit impact to 20%, or $9.66 billion.

In fact, if you take a close look at the Global value chain of Apple smartphones, it is not difficult to find that at the lower end of the value chain, suppliers are concentrated in mainland China. In recent years, such as India, Brazil, Vietnam to become the new low-end value chain transfer to undertake, at the same time, China was improved in apple mobile phone value chain link, Yangtze river delta, the pearl river delta, Beijing-Tianjin-Hebei, Chengdu-Chongqing expressway, are gradually formed an apple supplier in the central plains branch of agglomeration area, shows the characteristics of parts production of the regional division of labor. The Yangtze River Delta (Shanghai-Suzhou as the core) and the Pearl River Delta (Shenzhen-Dongguan as the core), which undertake several production links of the value chain, are the main regions embedded in the iPhone production network in mainland China. Since the outbreak of the trade war, China and the United States have imposed high tariffs on each other, which will undoubtedly increase the value of intermediate products and thus ultimately increase the cost of production.  The average price of the iPhone could increase by $110 to $140, while the price of Mac laptops could go up between 15 and 18%, according to Ives’s estimates(BIRNBAUM, E., 2019).  In addition, the planned tariffs on mobile phones and laptops in the US, which will take effect on December 15, it will also raise Apple's cost of sales in the US, which would mean a squeeze on profit margins given that higher pricing is unlikely. According to Trefis, Apple's net profit margin will fall from 21.1 % to 20 % in 2020, and earnings per share will fall to $10.80, compared with $12.70 in the base case. This shows that while the trade war has a negative impact on the "Three chains", it also transfers factors such as tariffs and transaction costs to the cost of products through the "Three chains", thus raising the production cost of products.

(Quan-Ding Liu is associated with the Office of International Cooperation and Exchange, Baoji University of Arts and Sciences, China)

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