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Chamal Abeytunga

UQBA Member

The Cut: From Trade wars to COVID-19: A brief view on Economic Impacts

With the COVID-19 pandemic sweeping the streets of the world, locking down city after city, a great economic crisis is not too far away. Emerging during the China-USA trade war, Covid-19 has entered an already rapidly deteriorating global economic climate. As at December 2019, Global Economic Growth was 2.3% - its lowest since the 2008 Global financial Crisis. Now, the global economic growth, as at April 2020, is 2.0% with a further sink into a deep recession predicted for the duration of the year. Therefore, it’s appropriate to assume that the economic effects of the China-USA trade war has been exacerbated significantly by the COVID-19 virus.

Many industries were on life support due to the trade war before COVID-19. Manufacturing, wholesale trade, recreation and personal, media and telecommunications, property and business services, transport, postal, and warehousing are all major industries that have been notably affected by the COVID-19 pandemic.

Global economy during the trade war

As of April 2020, 70% of total imports from China are subjected to additional tariffs by the US government. China retaliated by introducing their own tariffs, which then diminished the cargo flows from the respective countries, affecting many industries, such as shipping and cargo. US President Donald Trump wanted to reduce the $621 billion US trade deficit as a strategy to boost domestic small businesses, and create more employment within the United States. Most of the US deficit results from American demand for imported consumer products and European automobiles.

In early 2018, President Trump tweeted that, "trade wars are good, and easy to win”. He has introduced three tariffs that could be perceived as initiations to an aforementioned trade war: a global tariff on steel, a tariff on European autos, and tariffs on Chinese imports. After Trump’s announcement, global stock markets tumbled in fear of a trade war. In late 2018, several U.S. companies saw a rise in cost with the use of imported raw materials.

The Federal Reserve estimates that import tariffs are costing the average American household $1,245 a year. This estimation includes higher prices for goods and services, and lost economic growth. By August 2019 the US GDP has decreased by 0.6%. US Farmers suffered from retaliatory tariffs imposed by China and Europe on their exports, and so therefore their income fell by $11.8 billion between January and March 2019.

On March 8, 2018, the US government put in effect a 25% tariff on steel and a 10% tariff on aluminum imports, with the following as an explanation: “Dependence on imported metals threatens America’s ability to make weapons”. America is the world's largest steel importer. The aforementioned tariffs lowered second-quarter profits for the big three automakers: General Motors, Chrysler, and Ford. To satisfy shareholders, these companies passed those costs onto their consumers. Due to the trade war, the prices of consumer goods that use steel and aluminum have increased drastically, thanks to the disruption of supply chains around the world. The high import cost of raw materials is passed on to finished products, such as GMC SUVs.

Many firms in the US which are responsible for supplying products to the world market are now facing significant hardships. Businesses therefore had to introduce layoffs due to the increase in steel pricing making profits unachievable. Major motorcycle manufacturers Harley-Davidson announced their intention to move areas of their production abroad, in order to avoid these retaliatory tariffs.

Many industries such as seafood, dairy products, and auto parts, are being drastically affected, as China is the biggest market for many premium products. With China’s retaliatory tariffs, many western countries are now affected with low demand and high supply of these products. To give an idea of the effect on businesses in relation to the trade war, this is how several companies forecasted how much tariff-related costs would affect them from 2018 to 2019.

  • United Technologies: $200 billion
  • 91 3M: $100 million
  • Honeywell: "hundreds of millions
  • Ford: $1 billion

Foreign tariffs on US exports will make them more expensive, hence U.S. exporters needing to lay off workers and subsequently reduce the quality of many products.

Global economy during COVID-19

During the trade war, multiple necessary health products were subjected to high tariffs, which then reduced the supply of them to countries like the US, China and members of the EU. Much of the health equipment needed to treat and cure COVID-19 was hit hard. American tariffs resulted in a sharp decline in US imports of these critical products from China between 2017 and 2019.

As the American average age grew alongside the low birth rate, demand for health care services for America’s aging population continued to increase, and US demand for imports of these products from the rest of the world grew over 20%. Today, as a result, nearly 500,000 people worldwide who are affected by the virus are unable to access the required medical equipment, especially in the EU and the US. With supply chains standing still, and human movement restricted, the global economy is at a halt. Inventories have begun to run low, and with the increase in demand, the prices of products have inflated grossly day by day.

The COVID-19 outbreak has generated both demand and supply shocks that have reverberated across the global economy. According to forecasts, the largest downward growth revisions are countries deeply interconnected to China, especially South Korea, Australia, and Japan. Major European economies will experience disruption as the virus continues to spread, and countries adopt restrictive responses that curb manufacturing activity at regional hubs, like the actions initially displayed in Northern Italy, which have now been recreated in other members of the Union, like Denmark. Effects within the Tourism and travel industries are predicted to last for at least 8-12 months, as low income and uncertainty with safety is expected to cause low demand for travel.

COVID-19 could cost global air carriers between $63 billion and $113 billion in revenue in 2020, and the global movie industry may lose over $5 billion in lower box office sales. Many hotel chains have already been severely affected by COVID-19. With more than 500,00 employees laid off in the tourism and travel industry, the recovery is expected to take 12-24 months. Mass-Media Companies, such as Disney, are expecting a significant blow to revenues, and sporting events such as the ICC T20 Cricket World Cup, which was purported to be held in Australia, as well as other international events, will also face significant disruption, which will reduce global integration, and negatively impact globalization.

Industries which do not depend on social circumstances, such as agriculture, may be less vulnerable in direct comparison, but will still face challenges, as the demand for end products reduces in the long run. Economic slowdowns generally lead to lower energy demand; Ascribed to this low demand, the oversupply of oil, coal, and other natural resources, may negatively affect the energy market, therefore affecting investors of such companies.

By the end of February 2020, financial markets observed falling share prices, and most international indices are nearing bear market territory, as investors process the lower corporate earnings that will result from the virus. For the first time since 1997, The S&P 500 fell 7% to open the March 9 session. Overall, the index is down about 17% from its record high on February 19. The longer the virus spreads, the more economic and company performance will be impacted.

References
https://www.visualcapitalist.com/covid-19-economic-impact/
https://australiascience.tv/covid-19-will-majorly-reshape-economies-and-how-countries-work- together/ https://www.capitaleconomics.com/the-economic-effects-of-the-coronavirus/
https://www.csis.org/analysis/global-economic-impacts-covid-19
https://www.thebalance.com/trade-wars-definition-how-it-affects-you-4159973
https://www.reuters.com/article/us-imf-worldbank-trade/fallout-from-trumps-trade-wars-felt-by- economies-around-the-world-idUSKBN1WY0PZ
https://www.scmp.com/comment/opinion/article/3075282/between-trade-war-and-coronavirus-us- china-relations-are-becoming https://www.forbes.com/sites/wadeshepard/2020/03/26/covid-19-undermines-chinas-run-as-the- worlds-factory-but-beijing-has-a-plan/#5f26345d459a
https://www.pwc.com.au/publications/australia-matters/economic-consequences-coronavirus- COVID-19-pandemic.pdf https://www.csis.org/analysis/global-economic-impacts-covid-19 https://www.capitaleconomics.com/the-economic-effects-of-the-coronavirus/