The trade war

We often look for reasons to be a part of the bigger picture and the “trade war” between
the United States and China is not an exception. While those that examine Philippine trade have stated for the most part that the Philippines is not involved, certain quarters keep trying.

The Philippines does export $2.5 billion worth of electronic equipment to China that conceivably could be part of China’s finished goods exports to the US and subject to increased tariffs. But to say that the trade problems between the two economic giants are going to have a major impact on the Philippines is a giant leap.

Some analysts have been pushing the trade problems as a reason for the recent dismal stock market performance. However, they never seem to be able to mention exactly how and why local companies would suffer financially. It always seems to come down to negative investor sentiment, and that too is a big logic jump.

It may be true that foreign investors are selling local stocks because they fear a spillover on the Philippines, but again there are no specifics of how that might happen. In fact, former Trade Secretary Adrian Cristobal—now president of SteelAsia Manufacturing Corp.—said the “United States-China trade spat may even bring down prices of steel locally.”

It is difficult to fault the United States for being concerned about its huge trade deficit with China. Last year China imported about $130 billion worth of goods from the US. The US, though, imported some $500 billion worth of Chinese goods. Those facts give the US a strong advantage in the war. China has much more to lose than the US does as the two countries raise tariffs on the other.

The one thing about a trade war is that it is “fought” to impose short-term pain for long-term gain, and that is what the US is striving for. Further, unlike with bullets and bombs, a trade war can be stopped in an instant by simply lifting the new tariffs with a single signature.

However, the US is at risk. The one thing that could turn the situation around in an instant is if the US stock market starts failing as the higher tariffs begin to bite the US economy as the prices of imported goods go higher.

China can respond by depreciating its currency to offset the higher prices from the increased customs duties. This week, the dollar exchange rate for the yuan in China is at a 12-month low. It is important to note that the People’s Bank of China sets the exchange rate, so this is not market forces depreciating the Chinese currency. And the yuan is being taken down at a faster rate than back in 2015 when China devalued its currency.

Both sides are betting that the other will blink first. What we in the Philippines should be doing is figuring out how we can benefit and take advantage of the situation.

 

 

 

 

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