Markets yesterday tumbled after US President Donald Trump threatened to increase China tariffs after trade talks ended in an impasse.
But these outbursts and the lingering trade tension is not helping China’s investments abroad while the continued trade dispute between China and the US will eventually hit Chinese multinational corporations.
The White House adopted protectionist measures as part of its global trade strategy thinking China and other countries are taking advantage of America’s once flexible trade policies.
Trump’s tweet saying there will be a jump from 10% to 25% in tariffs on Friday showed both countries have reached an impasse in their talks to end the ongoing trade war.
Experts are wary of Trump’s threat to raise tariffs on $200 billion in Chinese goods and the threat to target a further $325 billion of Chinese goods could destabilise global financial markets.
Malaysian-based research house, Anbound Malaysia, says trade protectionism and the mutual increase of tariffs by the United States and China has led to the overhaul of the current industrial chain around the world.
Contrary to Trump’s initial optimism that talks with China will end positively, Anbound is of the view that the trade spat between both countries will not end in the short-term.
Trump has accused China of trying to renegotiate the deal reached so far, saying ‘No’ to renegotiation attempts by Beijing.
But it will be even more difficult for China to abandon the negotiations because spreading investment across the globe is not as it was before the start of the trade spat.
Anbound says the geopolitical and geo-economic fluctuations continue to impact the global economic landscape and this means the global investment climate in 2019 is both complicated and unpredictable.
China depends on low-cost destinations to boost its investment abroad, but Huawei has paid a heavy price in this approach with the American backlash against the technology firm.
Chinese multinational corporations were feeding on moving from high-cost to low-cost destinations but cultural integration, institutional and security risk, and other hidden costs have resulted in new operating costs for MNCs.
“Given such facts, any MNCs, including the Chinese enterprises, hoping to invest in other countries must achieve the three requirements: calculation of supply and value chains, technological innovation and mutual benefits with the host countries, moving high-cost to low-cost destinations may not be lucrative,” says Anbound.
In terms of supply and value chains, today’s cost calculation should be broad-based, not based on the narrow definition of the past. Chinese companies should not expect low production cost, which is vital for industrial transfer from developed regions to underdeveloped regions.
This is because the ‘low-cost advantage’ is not applicable anymore and it involves destructive exploitation of resources, low costs of labour, imitation of low-value products and the policy on arbitrage, says Anbound.
It cites Huawei as an example of the potential problem faced by Chinese MNCs, which are not conventional but one that may imply social costs and affect international diplomacy.
“Chinese companies complying to Euro-American standards, which differ from Chinese standards, will see their transaction cost increase.
Chinese enterprises investing abroad must account for all these overseas operating costs,” says Anbound.