Trade-driven conflict between the United States and China has escalated significantly over the last year. The Trump administration seeks a fundamental revision to trade relations and Chinese industrial policy. This has created an environment of mounting uncertainty for multinationals. Prospects for tariff measures and commiserate tariff and non-tariff retaliatory measures endanger global supply chains and market access in China and beyond.
FrontierView recently launched The Lens, a weekly newsletter published by our Global Economics and Scenarios team to highlight developments and trends that will have the highest impact on business executives. Below is an excerpt from this week’s edition, “US-China trade war heats up again.”
- We see considerable optimism that the US and China would negotiate a trade agreement after Presidents Donald Trump and Xi Jinping met on December 1.
- Following that meeting, the US delayed the implementation of the next round of planned tariffs. Therefore, these would increase the US import tariff rate on some $200bn of Chinese imports from 10% to 25%.
- On Sunday, Trump suddenly tweeted out that he would soon impose those tariffs. They are now scheduled to take effect at 12:01am EST on Friday. Trump was told by his negotiating team that the Chinese had suddenly back-tracked on earlier commitments.
- Chinese negotiators initially cancelled a planned trip to DC, refusing to negotiate under threat of tariffs. However, they reversed course and arrive on Thursday to move forward with trade talks and avoid imposition of additional tariffs.
As we have consistently warned since May 2018, do not expect a quick resolution to the US-China trade war. Any truce is likely to prove temporary and fall far short of a return to the pre-2017 US-China status quo. There is bipartisan consensus in the US that, on China, Trump picked the right fight. This is only the beginning of a long-term strategic decoupling between the US and China that will continue to impact the global business environment well after Trump leaves office.
The US-China trade war revealed that firms rely too much on integrated US-China supply chains. Going forward, building geographic diversity into supply chains is a management priority, and the best way to avoid disruptions is to localize production as close to demand centers as possible. This reduces geopolitical, regulatory, and currency risks, making more complex supply chains possible due to advances in logistics technology.
FrontierView clients: See our Shanghai Executive Breakfast deck for our most up-to-date views on the US-China trade war