Saturday, February 25, 2017

Econ crystal ball looks... cloudy

What's around the bend for the US economy? Absolutely nothing good.

Over at CNBC Benjamin Carlson argues that the loser in a China-US trade war will be Taiwan. Carlson quotes Blue academic Steve Tsang, as well as Gerrit van der Wees and J Michael Cole from the pro-Taiwan side, observing...
A trade war between the world's top two economies would "hurt Taiwan since so much of the Taiwan's tech-oriented consumer industries are tied to those in China, as part of the global value chain," said Steve Tsang, director of the SOAS China Institute, University of London.

Taiwan can little afford such a blow, as its economy is in the midst of a difficult transition. Growth rates have been sluggish, hovering around 1 percent per year, while exports have fallen, dropping 13 percent from their $320 billion peak in 2014.
It's really not that simple.

First, much depends on the shape of the trade war. If the Trump Administration sanctions are symbolic, then the effect will probably be low. But if they have teeth, and are directed only at China and not at Hong Kong, it is obvious what will happen: China's exports will simply be re-routed through Hong Kong and to a lesser extent, Taiwan. Will the Trump Administration distinguish between China and Hong Kong? I expect so...

If they are directed at China, Hong Kong, and Macau, Taiwan might well come out less damaged than many might think. China's firms will still want to export, and export to the US. The natural route will then be through Taiwan, which will show up as falling trade surplus with China followed by rising trade surplus with the US. This will give Taiwan firms added clout in selling stuff to Chinese firms. Even more complicated arrangements might arise, as China and Taiwan attempt to re-route goods through countries in Central America that have free trade agreements with the US. The mind boggles at how any of this will be enforced: "Excuse me sir, are you a Muslim? Are you carrying any electronic parts from China?"

As van der Wees pointed out in a Facebook discussion, it will force the US to further distinguish between Taiwan and China. van der Wees also noted that Taiwan might well get a bilateral trade treaty since the Trump Administration has killed the TPP. That would be an additional impetus for goods to travel through Taiwan from China. One can easily see Ma's free enterprise zones revived in some form to handle this trade. But let's not forget, smuggling from China, already rampant, will only increase under such a regime....

What about the big electronics makers? Many of them have already started shifting production to Vietnam and elsewhere as labor costs in China rise (Forbes, for example). Taiwan does about $18 billion in exports of electronics to China, which constitutes roughly 40% of its exports to China. The "red supply chain" is already starting to eat into Taiwan's position in the supply chain. How long Taiwan will maintain its place in China's supply chain is already a pressing question...

How things will work out depends on how quickly firms shift to other countries, how China retaliates, and so on. Many scenarios suggest themselves. Taiwan might get a short-term boost via re-exports, and then a long-term hit if Beijing decides to accelerate its attempts to replace Taiwan firms in the supply chain in response to a trade war, or Beijing becomes more autarkic.

The end result of trade limits is policies that attempt to create autarkic trade regimes for individual nations, and after that, generalized war. Or so the 1930s taught us. *sigh*

Another issue is that the Trump Administration's increasingly harsh border practices will make tourists think twice about the US, especially people from countries like India whom America's militant unwashed might consider Muslims and thus, fair game for a bullet from one of the hundreds of millions of guns keeping America safe. Luckily for Taiwan, the government has been promoting Taiwan as a tourist destination for Muslim tourists since late in the Ma Administration. Since tourists in general will probably shy away from the US in coming years, Taiwan's tourist boom will likely get a bump as tourists with money search for alternative destinations.

In any case, the really serious problem the Trump Administration is going to create for Taiwan isn't the trade issue, it's the Administration's Wall Street policies. The repeal of Dodd-Frank is a signal that the Administration is going to let Wall Street loot the US economy again. That will trigger another recession and economic crisis, with attendant effects on US purchasing power, the dollar, US power, and long-term economic growth. If it arrives in the midst of a global trade war...
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5 comments:

Formosa Coweater said...

"America's militant unwashed"... well said, unfortunately.

TaiwanJunkie said...

given the bubble economics over the last few decades, the US is primed for another recession over the next few years. Immigration has been a net driver of the economy. with immigration tapering off, mass deportation as the stated goal, expect this to be the trigger for a recession sooner rather than later.

Taiwan obviously would not do too well in light of an US recession, but then China will likely do worse.

Tommy said...

Reexportation through any market would still increase export cost, and any reexportation arrangements would have to be developed from next to nothing. This means that China would still bear a cost, and Taiwan would as well until such agreements were in place.

Also, it is unlikely that Chinese trade could be so easily routed through Hong Kong. Certainly this is more than possible in theory, but it is an option that is really only available to the Pearl River Delta. Imagine the cost of shipping all cargo from the Yangtze River Delta area to Hong Kong, which does not have the capacity to handle the flow. Even then, HK does not have the capacity to be the PRD's key export port for US-bound cargo. Some extra traffic would be welcome, but the volume from the PRD alone would overwhelm HK. Much would have to go through Taiwan, but then again there would be that lag. By the way, HK is mainly a transsshipment port these days. Transshipped goods are not reexported goods. So moving back toward a reexport model would force port operators to completely change their business model.

This does not mean that Taiwan's position would be any clearer, but it does mean that making such changes would not be as easy as you imply. China would bear significant costs, as would Taiwan, for a while.

Michael Turton said...

This does not mean that Taiwan's position would be any clearer, but it does mean that making such changes would not be as easy as you imply. China would bear significant costs, as would Taiwan, for a while.

Sure. I was just tossing ideas out there.

Michael Turton said...

The Chinese would do what everyone else has done too... move to vietnam...