One year customs conflict USA versus China – the effects are not (yet) reflected in import prices, but elsewhere

Donald Trump’s policy of “America first” has led to a compartmentalisation of states and a noticeable impairment of free world trade.

On 15th of June 2018 the US President began to implement his customs threats against China – initially with 10 percent to a volume of 50 billion US dollars. Since then tariffs and counter-tariffs have risen steadily along with sanctions and blacklists. The grand finale is probably just around the corner. But what impact have these tariffs had on the economic data? Price rises? Not at all, according to the inflation data published on Thursday. The prices of exports from China to the USA even declined.

Why didn’t the prices go up?

How is such a thing possible despite further increased customs tariffs, which can also be seen as additional taxes – no price buoyancy? On the one hand China devalued its currency. Exporters lowered prices and there was also some label fraud. What is meant here is China’s now prohibited procedure of directing exports for the USA to Vietnam and labeling them with the “Made in Vietnam” label there and then shipping them to the USA. In the meantime the Vietnamese are taking action against these traders – naturally fearing Trump’s reactions. While US imports from China fell by 14 percent in the first quarter compared to the previous year, imports from Vietnam rose by 40 percent – to almost 16 billion dollars.

A decline in global investments

According to a UN report the trade dispute between the two major powers led to a worldwide decline in foreign investments.

UN organization UNCTAD noted that companies are increasingly reluctant to cross borders to build new factories. In concrete terms foreign direct investments worldwide fell by 13 percent to 1297 billion dollars in 2018.

The investor’s attitude, due to uncertain conditions, which we have often written about. Particularly affected are the industrialized countries. In these countries the 27 percent decline in investments to 557 billion dollars was particularly pronounced. The decline has not been as low as it has been since 2004. So far the United States has benefited. Not so much because of the return of jobs due to tariffs, but because of the reduction in corporate taxes from 35 to 21 percent. This was a lure that many US companies operating abroad followed.

The losers of de-globalisation – including Germany

According to UNCTAD, the losers of this development in Europe are those countries that have benefited in the past from particularly attractive location conditions, like Switzerland or Ireland (Facebook subsidiary).

But Germany is also affected with a decline in direct investments to 26 billion dollars, from 37 billion in the previous year.

In the ranking, Germany fell behind Spain, Canada, France and Mexico. The UN study can also be seen as a wake-up call to German politicians to improve the attractiveness of Germany as a business location.

Conclusion

Donald Trump’s policy of “America first” has led to a compartmentalisation of states and a noticeable impairment of free world trade. And there is also tax competition between nations. The “high-tax country” Germany is not doing so well at the moment. A weakening of the global economy would have to be the inevitable consequence. To what extent will the US President force the development described above?

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