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US-China trade war is wrecking the world economy, UN warns

posted onNovember 6, 2019

The ongoing US-China trade war has been a “lose-lose” situation for both countries and the wider world and it is likely to deteriorate unless a deal is reached, UN economists warned in a new paper published on Tuesday (Nov. 4). Since mid-2018, the US and China have been locked in a trade confrontation that has resulted in several rounds of retaliatory tariffs. While the paper does not examine the impact of the most recent phase of the trade war, the recent escalation is likely to have added to the existing losses.

Titled Trade and trade diversion effects of United States tariffs on China, the study, shows that the trade spat has resulted in a sharp decline in bilateral trade, higher prices for consumers and trade diversion effects.

“US consumers are paying for the tariffs …in terms of higher prices,” said Alessandro Nicita, an economist at the UN trade agency, UNCTAD. “Not only final consumers like us, but importers of intermediate products – firms which import parts and components from China.” 

According to the analysis, the US-initiated measures – put in place in the middle of last year - have also hit the Asian giant, inflicting a US$35 billion blow to its exports in the U.S.
However, despite the tariffs, the competitiveness of Chinese firms has enabled the country to maintain 75% of its exports to the U.S.

While the US and China feel the pinch, other countries are benefiting. 

Taiwan (province of China) increased its exports to the U.S. by $4.2 billion, mostly in office machinery and communication equipment sectors. Mexico gained $3.5 billion in additional exports to the U.S. by selling more agri-food, transport equipment and electrical machinery.

trade war

(Graph Source: UNCTAD)

European Union's exports to the U.S. increased by $2.7 billion, driven by trade in the machineries sectors. Vietnam gained about $2.6 billion due to increased exports, largely in thecommunication equipment and furniture sectors. Other trade winners from the measures include Korea, Canada and India with “substantial” gains ranging from $0.9 billion to $1.5 billion. 

The remainder of the benefits were largely to the advantage of other South East Asian countries.
While trade diversion effects have brought substantial benefits for some countries, the trade war continues to affect the stability of the world economy and jeopardising future growth prospects. 

“The results of the study serve as a global warning; a lose-lose trade war is not only harming the main contenders, it also compromises the stability of the global economy and future growth,” said UNCTAD’s director of international trade and commodities, Pamela Coke Hamilton. “We hope a potential trade agreement between the US and China can deescalate trade tensions.” 

However, former U.S. Treasury Secretary Larry Summers said that US-China "phase one" trade deal won’t lead to “economic nirvana.”

“I think we’ll be kidding ourselves if we thought we were one signing ceremony away from some kind of economic nirvana. There are deeper and larger issues that are holding back rapid global expansion” he told CNBC on Wednesday (Nov. 5)

Deal or no deal, the world economy is projected to grow just 3% this year, slower than last year’s 3.6% and 3.8% in 2017, according to an IMF reported published last month.