16 September 2019
SEPT 16 — The US-China trade war is more than a year old now, with no end in sight. While it is never too late to end a trade war, there are some impacts that may be irreversible.away from China and mainly into Southeast Asia. In fact, Malaysia is one of the countries that hopes to gain from this diversion of capital. Investments into and from the US have also been affected following China’s retaliatory tariffs.
There are significant costs associated with this restructuring. The move itself incurs fixed costs, some of which will be sunk. There is also the potential increase in variable costs associated with shifting production simply to avoid tariffs. While the former is one-off, the latter is an ongoing increase in production costs. Taken together, these costs will be substantial.
But how can a 25 per cent tariff justify such a costly move? The fact that it is taking place suggests at least two factors are at play, which may have been missed or misunderstood.The first relates to the difference between nominal and effective tariff rates. We only hear about nominal tariffs, such as the 25 per cent rate frequently quoted in the media, and this would be fine if not for the fact that most Chinese exports are produced as part of global value chains.
But for goods with high Chinese value-added shares, the effective tariff may not justify a relocation. In fact, the higher the Chinese value-added share, the smaller the difference between nominal and effective rates. In these cases, transhipment may be pursued to avoid the tariff. This occurs when Chinese exports undergo minimal processing — sometimes just relabelling — in a third country and are re-exported as if originating from that country.