Some economists believe that engaging in subsidy competitions could ultimately result in all parties involved being left in a financially worse off position.
President Joe Biden has not officially ended the trade conflict with China initiated by his predecessor. However, as Treasury Secretary Janet Yellen makes her second visit to China within a year, it is apparent that the situation has evolved. Rather than prioritizing bilateral trade deficits and imposing tariffs that harm American consumers purchasing goods from other countries, the Biden administration has adopted a strategy of providing subsidies to businesses in order to encourage domestic production.
"We're in kind of a new world of trade and industrial policy," Harvard economist - Gordon Hanson told MarketWatch.
In recent years, trade wars which are characterized by increasing tariffs as well as escalating barriers between countries, have become one of the prominent features of the global economic landscape. For manufacturers in Asia, these trade tensions give a double challenge; these manufacturers often operate at the center of global supply chains. In this article let us look at the impact of trade wars on Asian manufacturers by analyzing the risks the come across and the opportunities they pursue in order to thrive in a growing uncertain global trade environment. Some of the key challenges include:
Supply Chain Disruptions: Immediate risks that stem from trade wars include the disruption of global supply chains. Manufacturers in the Asian continent who are deeply integrated into these networks are vulnerable specifically to disruptions in the flow of goods as well as materials. Obtaining both raw materials & components become challenging as well as expensive with tariffs as well as trade barriers being coming between key trading stakeholders. For instance, electronic manufacturers in China who are more reliant on semiconductors would face shortages or price hikes owing to tariffs imposed by the US.
Reduced export demand: trade tensions can also lead to decrease in demand for Asian exports since trading partners impose retaliatory tariffs. Sectors that rely highly on exports such as automotive, textiles & electronics would witness declines in revenues & orders. This can also have a huge impact on not only the manufacturers directly who are targeted by tariffs but it would also have an impact on those who are indirectly affected via decreased global demand. For example, automotive manufacturers in Japan who export their products to the US may witness sales decline since tariffs make their vehicles less competitive in the market.
Increased costs:
Tariffs on imported materials as well as components can increase manufacturing costs for manufacturers in the Asian market. Be it aluminum, steel or even electronic products, higher tariffs help in driving up input costs, and squeezing profit margins unless the producers/manufacturers can send these costs to consumers. Furthermore, in a competitive international market, absorbing these additional costs would not be feasible specifically for SMEs with limited pricing power.
Market Volatility
Trade tensions not only contribute to market volatility, but they also impact the financial markets as well as the investor sentiments. Furthermore, uncertainty that is surrounding the trade policies will result in fluctuations in stock prices, commodity markets & exchange rates. This volatility can disrupt the expansion plans and increase the financing cost for manufacturers in Asia who are reliant on foreign investment or access to capital markets. Also, it can deter long-term investments in R&D which would in turn hinder innovation & competitiveness.
Geopolitical Risks
Trade tensions can escalate into border geopolitics conflicts beyond economic risks, which would pose additional challenges for manufacturers in Asia. Also, political instability & security concerns can disrupt operations, investment plans, and supply chains. For instance, increased tensions in the South China Sea or the Korean peninsula would lead to maritime trade route disruptions or other diplomatic tensions that would impact business operations.
Some of the Opportunities include diversification of supply chains, market expansion, and innovations.
Diversification of Supply Chains: Asian manufacturers can grab the opportunity of diversifying their supply chains in response to supply chain disruption that is caused by trade wars. Also, by decreasing the dependence on any single country or market the manufacturers can improve resilience & mitigate the risks. Also, this may include sourcing materials as well as components from several alternatives suppliers within Asia or diversifying manufacturing facilities across locations. Firms that can provide flexible as well as agile supply chain solutions will be perfectly positioned to attract customers who seek greater stability & reliability.
Market Expansion: Although trade tensions may reduce the demand in traditional export markets they can also help in creating opportunities for manufacturers in Asia to explore and find new markets. Also, developing economies in Africa, Southeast Asia & Latin America hold untapped opportunities for growth. Manufacturers can diversify their customer base and decrease the dependence on a single market or region by making investments in market research & adapting products in order to meet the requirements of these landscapes.
Innovation & differentiation: In order to mitigate the impacts of tariffs as well as trade disruptions, Asian manufacturers can mainly focus on product differentiation & innovation. Also, investing in technology, quality improvement & product design will facilitate the manufacturers in differentiating their offerings in the market & command higher prices. Also, manufacturers can attract several customers who are willing to pay a premium, by delivering value-added products with unique features or superior performance, which would lead to offset the impacts of tariffs on their profit margins.
In conclusion, trade wars present both opportunities & risks for Asian manufacturers. While factors such as increased costs, supply chain disruptions and reduced export demand pose huge challenges, proactive strategies can facilitate manufacturers to mitigate risks and uncover new growth opportunities. Agility and adaptability would be the two main traits for success in the dynamic global market place, in an age of increasing trade tensions & geopolitical uncertainty.