What a US-China trade war looks like on the front lines

NEW YORK • For Malaysian plants that make light-emitting diodes, it is an opportunity. For US makers of outboard boat motors, it is a threat. For the biggest sellers of flat-screen television sets, it is a nuisance.

The emerging trade war between the United States and China has prompted predictions of severe economic and geopolitical disruption.

But for any given industry, the impact of tariffs depends on the microeconomics of its products: How much does demand change when their prices rise? Are substitutes readily available? How much extra productive capacity is there around the world, and how long would it take to get new manufacturing facilities up and running?

"How this will play out is idiosyncratic to any given product and unique to each supply chain," said Mr Daniel Rosen, partner at economic research firm Rhodium Group. "Nobody can honestly claim high confidence that they understand what the overall impact will be. You might as well project the weather on a Tuesday afternoon a year from now."

The US imposed its first wave of tariffs over the spring, and each of the 1,102 goods that may be affected will end up with its own list of winners and losers.

To see how this may unfold, it is helpful to examine the different trade patterns for those goods, along with some of the thousands of comment letters that companies and industry groups have submitted to the US Trade Representative. And executives and other experts have their own sense of exactly how supply chains might be rerouted and prices might swing for particular goods.

The lesson that emerges: Be sceptical of predictions of radical disruption to major industries in the near term. For now, businesses have options to avoid some of the most severe risks. But the longer the trade dispute lasts, the more products will get pulled into it. And the more the US finds itself at odds not just with one other major economy but the entire world, the more it makes sense to worry.

BIGGER OPPORTUNITY

The US market is cutting off all ties to China, and in that sense, we have a bigger opportunity to benefit the US market with Malaysia-made products.

MR DANIEL FONG, senior regional manager of Oversea Lighting and Electric in Kuala Lumpur.

The workarounds that firms are using so far would not succeed in an open-ended, indefinite trade war.

OTHERS CAN FILL GAP IN LEDS

Consider light-emitting diodes, the tiny parts that make LED light bulbs illuminate and are used in many industrial settings. The US imported US$637 million (S$865 million) worth of them from China last year, more than any other country. But that does not mean China is the only supplier. Japan and Malaysia exported an additional US$593 million in LEDs in the US combined.

So for US firms that import the diodes and incorporate them in their products, such as solar-powered street lamps, China is not the only option. The question is whether other countries not subject to the 25 per cent tariff can accommodate a potential surge of demand.

In Malaysia, the LED industry senses opportunity. "The trade war, I would say it will benefit us if it really keeps going in the direction of tariffs," said Mr Daniel Fong, senior regional manager of Oversea Lighting and Electric in Kuala Lumpur.

"The US market is cutting off all ties to China, and in that sense, we have a bigger opportunity to benefit the US market with Malaysia-made products."

THREATS TO BOAT MAKERS

Other Chinese products covered by tariffs are not so easy for their importers to substitute.

Ray Electric Outboards in Florida imports its powerheads - the electric motors that turn the propeller for a small boat - from China. Shifting to a different supplier is no small matter.

The firm has moulds that are already made to fit its current suppliers' products, and it would cost thousands of dollars to change them, said business manager Joy Hurley. Meanwhile, the company's profit margins are too thin to absorb the cost of 25 per cent tariffs. In the short run, she said, the company will need to raise prices to pass the tax on to customers.

FLAT-SCREEN TV FLEXIBILITY

Flat-screen TVs were on an earlier list of products targeted, before being spared after weeks of jockeying. But the supply chain for them illuminates the options that companies have for navigating around Chinese tariffs, and the ways that a trade war on all fronts carries greater risks for American consumers than one narrowly focused on China.

It will become relevant if the dispute with China escalates and TVs again find themselves targeted.

The liquid crystal in LCD TVs is made in sophisticated factories that can cost billions to build. The displays are then combined with other parts to make the backlight assembly, the innards of a TV.

The last step is the simplest and most labour-intensive: packing the backlight assembly into the plastic shell of a TV, along with other parts like speakers and buttons, and putting it all into a box for it to be shipped to stores.

The liquid crystals are made mainly in Japan, South Korea, Taiwan and China. The final assembly is done in many more places; many larger TVs sold in the US are assembled in Mexico.

That shows the ways that savvy firms - which the giants of the TV business like LG, Sony and Samsung are - can avoid having the Chinese tariffs pinch. Shifting even more of their assembly to Mexico could allow them to avoid the tax even if it is expanded to encompass their products.

"Companies will try to find ways to reduce the cost of trade barriers," said Ms Mary Lovely, a non-resident senior fellow at the Peterson Institute for International Economics. "If you take away all their options, it's going to be much more detrimental to American corporations and American workers."

NYTIMES

A version of this article appeared in the print edition of The Straits Times on June 25, 2018, with the headline 'What a US-China trade war looks like on the front lines'. Print Edition | Subscribe