Trade war threats

When elephants fight, it’s the grass that suffers,” goes an ancient Kenyan proverb. A variation says “when elephants fight, the ants get crushed.” Either way, it means that the bigger casualties in big fights tend to be the small bystanders.

There’s no doubt that the ongoing trade war between the United States and China instigated by US President Donald Trump in mid-2018 is taking a toll on consumers, workers and capitalists in the economies of both protagonists in this battle of giants. But more than that, it is also dragging down the world economy and pushing it to the brink of another global recession, last seen in the aftermath of the world financial crisis 10 years ago. And there are clear signs of the collateral damage being caused on small economies like ours.

In China, economic growth has already slowed down to 6 percent as of the third quarter this year, the lowest it has seen in 27 years (even as it remains among the fastest in the world). In September, China’s exports dropped by 3.2 percent in US dollar terms, while its imports fell 8.5 percent. In the United States, exports to China have declined by 15 percent, with US farm exports being hit the most by the import tariff increases imposed by Beijing on US goods, in retaliation for prior tariff hikes by the United States on Chinese goods. The move has prompted the US government to pay out $28 billion in cash assistance over the last two years to American farmers hard hit by the steep reduction of their exports to China.

The latest reports for US manufacturing output also show a decline since August. A recent Financial Times report suggests that American manufacturers are being hit more than their Chinese counterparts. While the debate rages within the United States on whether Trump’s trade war can ultimately benefit the American people, what is clear is that other major economies around the world are suffering significant declines in trade. For economies like Germany and Japan where exports are a dominant driver of output, incomes and jobs, the trade slowdown threatens economic stability, and the effects permeate to other economies they are linked with through the global value chains.

Here in the Philippines, the trade war’s adverse impact is most visible in recent trends in our foreign trade and their impact on the performance of the manufacturing sector, the dominant source (85 percent) of the country’s exports. Latest data show that our total exports as of the first nine months of the year dropped by 3.4 percent from last year, a complete turnaround from its 11-percent increase in the same period a year ago. This drop was prominently due to the 3.1-percent decline in our exports of electronics components, which accounted for 55 percent of total exports. This dominant component of our exports has been most vulnerable to the global trade slowdown caused by the US-China trade war.

China has been our single biggest trading partner and export destination, for which 56 percent of our exports are electronics products. These electronics exports of ours find their way into the finished consumer electronic products China in turn exports to the United States, now hit by the US tariff hikes. Similarly, electronic products have been our top export to Japan, United States, Korea, Hong Kong, the European Union and Asean—all part of the global value chains for electronic products that have slowed down in the wake of the trade war.

In the domestic economy, electronic products make up one-fifth of total manufacturing output, and its decline has caused overall manufacturing growth to slow down to 3.7 percent, after having grown briskly at 7-8 percent annually in the last eight years. For this reason, the overall quality of jobs has also worsened in the past year, with the share of wage and salary jobs again falling to 63 percent from 65 percent last year, while informal work and unpaid family labor have again been on the rise.

It is heartening to note, though, that manufacturing industries comprising 60 percent of the total output of the sector are still growing faster than the overall economy’s 6.2-percent growth.

From our end, we can only pray that the elephants find a way to stop the fighting.

cielito.habito@gmail.com