Trade wars: macro risks or micro opportunities?

Economic brinkmanship between the United States and China has passed its tipping point. The long-feared spectre of trade wars is upon us. What strategies does your business have to protect itself, or profit, from the fallout of the giants?

Their constant jostling for power and control explains why reckless trade confrontations have put the brakes on the global economy. Around the world, leaders on trading floors, in boardrooms and factories display symptoms of the stress of having to weigh up too many variables at once. China and America are at the root of most of the anxiety. As a consequence, global economies are in flux.

The two superpowers lock horns in a battle for economic dominance with an array of strategies at play. The costs across the international spectrum are accumulating.

The Currency War

Financial markets face the beginnings of a battle of attrition that will test not only America and China's resolve but the resilience of most other countries. Because the world is a complex web of interconnected systems, processes, and influences, any movement at one end triggers a reaction—sometimes with unexpected compounding consequences—throughout the whole ecosystem. 

After President Trump's Twitter post on August 2 announcing America's imposition of an additional 10 per cent tariff on $300 billion worth of Chinese goods, the tension between the two nations escalated. The U.S has already levied a 25 per cent tariff on $250 billion worth of Chinese imports. The latest tariffs were orchestrated to gain political kudos and to demonstrate the mood of the U.S. However, the plan was not well thought out. 

China retaliated on August 5. The People's Bank of China set the yuan's daily reference rate below seven to the U.S dollar for the first time in more than a decade. The Dow Jones Industrial Average lost 2.9 per cent on the sell-off, its worst day of trading this calendar year. The surprise move from China caught the money markets off guard. They have grown accustomed to the steady appreciation of the yuan against the greenback. The retaliation caused repercussions worldwide. 

China's goal was two-fold: 

1. The tactic aimed to give markets a decisive view of the yuan and its rising power as an instrument of currency reform. As more countries accept payments in yuan for tradeable commodities, the U.S dollar's long stranglehold as the world's benchmark currency will inevitably weaken.

2. China wanted to show the pulling power of its economy and currency. It was a clear line drawn in the sand, demonstrating its determination to become the world's pre-eminent economic force within a decade.

Impact on Global Trade

Both the International Monetary Fund and the World Bank agree that China is the world's largest exporter and is also the worlds largest economy based on purchasing power parity (PPP). This is crucial to understanding the unfair advantage that China now has over smaller economies by devaluing the yuan. For example, countries such as Indonesia, Vietnam, Thailand, and Bangladesh—countries whose lower-cost economies currently erode Chinese competitiveness—could see a reduction in trade revenues as the pendulum swings back to favouring manufacturing in China. The currency dilution would also have an even more significant impact on India as a direct competitor to China in major industries such as chemicals, textiles, metals, and apparel.

Another significant point is that China is the world's largest energy consumer, playing a decisive role in crude oil pricing. If, as seems likely, China forces a move towards payments for oil in yuan rather than U.S dollars, the consequences for America could be severe. For example, every US$1 drop in oil prices results in a $1 billion decline in India's oil import bill, which stood at $139 billion in the fiscal year 2015. The drop in the oil price caused by the Chinese yuan creates a widening gap between competitors, which makes it an unhealthy playbook for global economics.

What Does it Mean for the Rest of The World?

How will the rest of the world fare as a result of the growing unrest, and who will take responsibility when things go wrong? Unfortunately for most of us, pleas for governments to intervene fall on deaf ears. The trade wars force regimes to take sides, and they generally try to ride a middle line in an effort to placate opposing and potentially hostile forces. You could call it a risk-mitigation strategy. 

However, there are two sides to risk mitigation. A step too far on either side can have trade exclusion implications resulting in the potential for dishonoured commercial deals. When economies as immense as China and the U.S clash, lesser nations have few places to hide to avoid collateral damage.

The power struggle only widens the divide between rich and poor. With 0.1 per cent, or fewer than 200,000 families owning the same wealth as the bottom 90 per cent of us, what are the implications for humanity?

The annual global economy is valued at approximately US$80 trillion, of which China produced $25.3 trillion in 2018, according to the International Monetary Fund. China's economy is still growing at almost three times the rate of America's. The U.S has run the world's largest economy for about 140 years, and it accounts for roughly 22 per cent of global GDP. 

Prudent Businesses Must Take Stock Urgently

The gap is closing between these two titans, and tension mounts between forces often polarised on ideological, political, and historical issues. Prudent businesses must take stock urgently. What are you doing at a micro level to brace for the impact? Has your business figured out how to turn uncertainty into an opportunity? 

Most of the world's billionaires extend their wealth even further in the face of economic uncertainty or recession. They take advantage of their liquidity to purchase critical assets at lower prices and so build rather than contract their security. Before money becomes more difficult to obtain, now is the time to reinforce your business and withstand the turbulence on our doorstep.

If you want to understand the risks better and explore the opportunities this global trade conflict presents, talk to Strategy Hubb today. Call Ryan Babbage on Phone: +61 (0)3 8563 9522 or email str@tegyhubb.com www.strategyhubb.com