UNITED States President Donald J. Trump made good on his promise to enact tariffs against Chinese products. This, he said, is to protect US jobs. The tariffs were slapped on July 6, 2018, at a rate of 25 percent over $34 billion worth of Chinese products. The Chinese consequently retaliated by imposing tariffs on the same value of US exports. The Chinese goods slapped higher tariffs include steel, aluminum and solar panels, while the Chinese retaliated by hiking tariffs on mostly agricultural imports from the US.
As of today (Friday), the US threatened to hike the tariffs of $200 billion Chinese goods, and China promised to respond accordingly. These actions seem to indicate that the era of low-cost goods and services is coming to an end. Global competition is now being threatened by the tit-for-tat trade sanctions that the two largest economies are imposing against each other.
The first impact of a tariff war is that it will make the imported product more expensive vis-à-vis the local competitors, thereby protecting local companies and jobs with it. However, this is not as simple as it seems anymore. The critical challenge of the revival of this old trade environment is that it cannot be a purely US-China affair. There will be many others caught in the crossfire without them even taking sides. Being neutral does not mean one will not be affected by these exchanges. This is due primarily to the heavy interconnection of global value chains in the production process. Consider the iPhone, one of the world’s most popular gadgets, often believed to be made in China—this product is made by seven countries—the US, Japan, South Korea, Taiwan, Germany and Italy for the parts, and China completes the product. The six parts makers are not uniquely producing them, as their components are made by other countries, as well—the Philippines is included in this global value chain. This is the intermediate goods trade that the world is currently in. In this regime, the final goods producer is not the only one affected by the tariff increase but everyone else in the value chain.
In this current round implemented by the US and China, the products of China already include processed manufactured goods, such as steel, aluminum and solar panels. US products, meanwhile, are mostly primary products, such as soybean and other agricultural products. In the proposed $200-billion round, China products from primary agriculture products to chemicals and inputs of manufacturing will be slapped with a lower 10-percent tariff.
How will the Philippines, a relatively small player in the global value chain, be affected in such shaking of the global trade arrangements? Both the US and China are top trading partners of the Philippines. They are No. 2 and 3 destinations of our exports, or a total combined 26 percent of total exports, while they are our No. 1 and No. 2 import sources—a combined 28 percent of total imports. Our top exports to the United States and China as of 2016 are as follows:
CHINA US
Office and data-processing machines Electrical machinery and apparatus
Electrical machinery and apparatus Office and data-processing machines
Metal scrap Articles of clothing
Source: UNCTAD
Imports, on the other hand, are as follows:
CHINA US
Iron and steel Electrical machinery and apparatus
Electrical machinery and apparatus Feeds for animals
Telecommunication Cereals and cereal preparations
and sound-recording apparatus
Based on the data, it would seem that the Philippines will not be significantly affected in the first round of tariff increases. Even if iron and steel is our No. 1 import from China, it will not necessarily follow that its prices to us will increase. It is even possible that, since the US will lessen its purchase of this product, China can sell them cheaper to other parts of the world, including the Philippines. However, the concern starts when other products are slapped tariffs, particularly those that are related to our main export, which is connected with electronic production. Intermediate goods demand might suffer a decrease, which could significantly hurt our already weak exports. In a tariff environment, competition for trade shifts back to national level instead of corporations competing against each other under a multinational setting.
The Philippines is now strongly linked to global value chain in electronics. Its primary product exports, mostly in agriculture and processed food and drink, are not as large as electronics. This position puts us in a condition of increasing the share of our largely local content production and having it sold in the global market. As the global trade arrangement changes and reverts back to the past, winners are those with larger local content. Similarly, as the Philippines’s main trading partner now is the Association of Southeast Asian Nations, it must increase its engagement in the region and improve its value chain in the region. With zero tariff already in effect in the Asean, it is unlikely that it will revert to a tariff environment, hence there is better opportunities to work together with the Asean to face this new global challenge.