- Global trade war

If a global trade war is inevitable, how should Kiwi businesses play?

By Siah Hwee Ang

An all-out trade war is unlikely, especially one between China and the United States. But the US has been clear that it takes bilateral trade (deficit) seriously.

So some attempts at addressing that can be expected.

Fewer than three weeks ago, new US tariffs were slapped on to steel and aluminium coming from Europe, Canada, and Mexico.

These nations were exempted when the 25 per cent tariff on imported steel and 10 per cent tariff on aluminium were first introduced in March.

This exemption indicated that the primary target at that time was China.

With the new tariffs now imposed on them, the European Union, Canada and Mexico are likely to retaliate with increased tariffs on various products.

Faced with the same plight, many other countries are filing disputes with World Trade Organisation over the US' actions.

The tariffs in this case mean that products made from steel and aluminium are likely to experience price hikes, which are transferred to both businesses and consumers.

Retaliatory actions from other countries mean US exporters will experience higher costs of exports and that some markets will potentially be less viable for further engagement.

Trade tensions also seep into risk aversion in foreign direct investment.

Global flows in foreign direct investment fell from US$1.91 trillion (NZ$2.75t) in 2015 to US$1.43t in 2017.

More animosity between countries around trade this year is likely to cause collateral damage in foreign direct investment.

Some studies have shown that a country that liberalises its trade regimes is able to accelerate its annual economic growth on average by about 1.5 percentage points, with some lag effects.

So the potential prize for liberalisation is there – little wonder that China has been an active proponent of a liberalisation and multilateralism in recent years.

Intra-European trade volume and the rising figures in intra-Asia trade are good testimonials.

The likely CPTPP (Comprehensive and Progressive Trans-Pacific Partnership) and the RCEP (Regional Comprehensive Economic Partnership) that, despite its critics, has not yet toppled over, are further examples of how many countries are still walking away from trade wars.

It looks like some small trade battles are there to stay.

And as global goods flow is now more interwoven, there are many indirect effects that businesses should look out for.

Contesting a lot of assumptions might be the first thing to do, in other words considering a lot of "what-if" scenarios.

For example, if the US tariff on steel and aluminium persists, how far and fast would the ripple effect be? What are the alternatives to cushion the potential impact?

Trade battles on commodities usually have stronger ripple effects than intermediate and finished products. Accordingly, reach, timing and response time are different as well.

Trends indicate that there will be a lot of tit-for-tat trade battles in the commodity space.

Analysing global trends in the spaces adjacent to your business is more important now than before.

Thinking of alternative sourcing and customer markets are two other areas worth consideration.

A supplier of yesterday is not necessarily a supplier of tomorrow. Research has shown that over-reliance on one supplier without considering alternatives can put a business in a precarious position.

Likewise, a market that does not currently cross your mind may turn out to be a viable future option.

It would also be worthwhile to identify ways in which your business can leverage off existing free-trade agreements that NZ has with other partners.

As with any business in international markets or for any domestic company that is subject to foreign competition, it is always important to ensure that the value proposition is there.