JD Insider | How The China – U.S. Trade War Is Impacting Businesses Around The World

This week on JD Insider, Bo-Ah discusses how the looming China – U.S. Trade War is impacting both small and large businesses around the world.


Read the full article below:

 INTRODUCTION:

What is a tariff? A tariff is tax imposed on goods and services imported from another country to make them less attractive to domestic consumers.[1]The introduction of such tariffs is what resulted in the current China-U.S. Trade War. In March 2018, United States President Donald Trump requested the United States Trade Representative (USTR) to research the effects of applying tariffs on Chinese goods worth $50-60 billion US dollars.[2]When he made that request, President Trump relied on Section 301 of the Trade Act of 1974, which authorizes the President to take all appropriate action, including retaliation, to remove any act of a foreign government that violates an international trade agreement, or results in unfair and unreasonable trade practices that burdens or restricts United States commerce.[3]President Trump announced that the proposed tariffs were a response to China’s repeated engagement in unfair trade practices.[4]It was reported that tariffs were planned to be placed on about 1,300 Chinese products.[5]

As a response to such tariffs, China, in April 2018, imposed tariffs on 128 American products, including aluminum, cars, pork, and soybeans.[6]This triggered President Trump to make another announcement saying that he was considering another $100 billion dollar tariff on Chinese imports.[7]After this announcement, China filed a request forconsultation[1] on new U.S. tariffs with the World Trade Organization (WTO).[8]China claimed that the additional tariffs are inconsistent with the provisions of the WTO’s General Agreement on Tariffs and Trade (GATT 1994) in that they apply solely to products of Chinese origin and exceed the United States’ bound duty rates. Such consultations usually precede a full legal challenge.[9]

Despite the adverse progress in China and the United States trade relations, the United States denied the existence of a trade war several times, defining it instead as a “trade dispute.”[10]However, in June 2018, China accused the United States of launching a “trade war,” and currently, the two countries are still in the process of imposing higher and higher tariffs on imported goods and services.

IMPACT ON SMALL BUSINESSES:

In the United States, small businesses make up a significant number in the workforce: they make up 99.7% employer companies and 48% of the private workforce.[11]This means that the well-being of small businesses cannot be overlooked because increased tariffs will eventually impact wages, employment, and growth.[12]

Although some small businesses that had to compete with foreign products may benefit from increased tariffs, or not be affected at all, some small businesses will face difficulties. One problem small businesses may experience is that supply chains will ask them for higher costs that cannot be quickly passed on to customers.[13]For example, a small business that gets its essential products in tins or cans will probably be affected by the increased steel or aluminum tariffs. The companies that produce and manufacture such tins and cans with imported steel and aluminum now have to pay more for the material and so will adjust the prices accordingly. The newly adjusted prices of tins and cans will probably reflect the increased tariff costs. If these costs get too high, the small business owner probably will not be able to afford the essential products it needs for its business. The small business now needs more cash flow.

Possible Solutions:

            One option for the small business is to assess which payments it can reduce in order to keep up with the price increase in the essential products. It may be able to reduce some costs from advertisement or other parts of its business.

Another option would be to take a look at the business’ inventory to assess whether there are products the business could sell to increase cash flow. Those inventories may be useless in the warehouses, but may play an important role in increasing the business’ cash flow.

Trying to negotiate the price with the providers/suppliers is another option. If the small business cannot afford the sudden increase in price, it may be a good idea to try to negotiate the price for a certain period of time until the small business figures out a plan for the increased costs. This option of course comes from the assumption that the small business has a good relationship with the provider. Thus, maintaining good business relationships is an objective businesses, especially small businesses, should aim for.

Finally, observing the market and looking out for possible tariff changes or any changes that may affect business costs is another way of protecting the business from sudden changes. If a small business is looking out to expand or to renovate, it may be better to do so before lumber, steel, or electronics prices increase.

IMPACT ON BIG BUSINESSES:

The China-U.S. Trade War also impacts big businesses. It was reported that 600 groups, including Walmart, Target, and J Crew rose concerns about the tariffs leading to 2 million job losses.[14]The Chamber of Commerce even referred back to the Smoot-Hawley Tariff Act of 1930 to warn that unilateral tariff strategies have historically not been successful, and have always led to unintended consequences.[15]

Further, the trade war between the two countries could have a grave impact on corporate deals. According to the law firm Baker McKenzie, the escalation of the trade war and its tension may cut world GDP growth by around 0.8 percentage points and “severely undermine” the ability of companies to operate across borders.[16]While a 3.1 % global economy growth was expected in 2018, with a Mergers and Acquisition (M&A) value of US $3.1 trillion, M&A value is predicted to decrease to $2.9 trillion in 2019, and fall to $2.3 trillion in 2020.[17]This means less foreign investment, and thus, less growth for some bigger companies. Some have even predicted that the growth in M&A value last year was due to the desire of companies closing a deal before the anticipated economic barriers resulting from the trade war.

According to a research by the Merrill corporation, 70% of Asian companies that were part of the research cited to the China-US trade war as the greatest emerging business risk, followed by 54% in the Americas and 34% in Europe.[18]Several cross-border M&As involving Chinese companies acquiring U.S. entities have been blocked or terminated, and the slow approval of U.S. chipmaker Qualcomm’s takeover of NXP Semiconductors N.V. by Chinese regulators was probably a result of the trade war.[19]The United States may be especially vulnerable to such delays and terminations in M&As because it is the world’s largest market of foreign investment.

One big issue that accompanies the problem of increased tariffs is the concern about national security, related to China’s practice of intellectual property transfer. It was suggested that China forced delivery of proprietary technology[2] by the United States and other foreign business partners. Proprietary technology is a system, application, or tool that is owned by an individual or a firm. The term applies to companies that develop their own software or hardware with purpose to sell to customers or to use for internal functions.[20]Some examples would be an information security firm developing an intrusion detection system that it sells to other companies, or a bank developing a system that collects data from a variety of internal data sources to calculate risk metrics.[21]Concerns regarding such proprietary technology were also part of the slowed down or blocked M&A transactions.

Possible Solutions:

            What these big businesses could do to prepare themselves against M&A barriers, is to look out for new regulations or events that could make it even harder for M&As or cross-border investments. As the world’s largest foreign investment market finding the right timing for cross-border transactions may prove to be important when such transactions were carefully planned years before the trade war. Sealing the deal when they have the chance or negotiating for a sure deal after the trade war may become a strategy. Locking down a business partner with a long term contract may also become a device for protection. Once the M&A market starts to slow down and becomes affected as predicted above, big companies may have to suffer from slower growth or expansion.

CONCLUSION:

The China-U.S. Trade War has an effect worldwide and businesses in the United States will be among the most affected. The trade war not only affects the economy, but will also result in legal issues related to M&A and Business/Corporations.

The trade war will probably hit small businesses and U.S. startups that are expecting Chinese capital investment the most. The early signs of the trade war already chilled some US-China investment activity, where Chinese foreign direct investment totaled only $1.8billion in 2018, 90% less than the previous year’s investment.[22]Investments are also rapidly pulled out from the United States, which may ultimately damage the world’s largest foreign investment market.

Therefore, in order for businesses to protect themselves from these sudden changes, they should consider some of the above mentioned options. The small businesses and startups will suffer the most because of their dependence on providers and foreign investment, which leaves little room for flexible cashflow. Bigger companies should move swift in closing deals with Chinese or other cross-border companies, if they have been planning to do so for years, in case the trade war goes on for a prolonged period. Businesses should start protecting themselves now, if it is not too late.

[1]Will Kenton, What is a Tariff?, Investopedia(May 9, 2019), https://www.investopedia.com/terms/t/tariff.asp.

[2]Han Wei et al., Trump’s Rumored Tariff Plan Sparks Fears of Sino-U.S. Trade War, Caixin(Mar. 22, 2018, 5:28AM), https://www.caixinglobal.com/2018-03-22/trumps-rumored-tariff-plan-sparks-fears-of-sino-us-trade-war-101224494.html; Han Wei, China Strikes Back With Second Tranche of Tariffs, Caixin(Aug. 8, 2018, 10:55PM), https://www.caixinglobal.com/2018-08-08/china-strikes-back-with-second-tranche-of-tariffs-101313018.html; The White House, Statement from President Donald J. Trump on Additional Proposed Section 301 Remedies,White House(Apr. 5, 2018), https://www.whitehouse.gov/briefings-statements/statement-president-donald-j-trump-additional-proposed-section-301-remedies/.

[3]Trade Act of 1974 §301, 19 U.S.C. 2101 (2018).

[4]The White House, supranote 2.

[5]Ana Swanson, White House Unveils Tariffs on 1,300 Chinese Products, NY Times(Apr. 3, 2018), https://www.nytimes.com/2018/04/03/us/politics/white-house-chinese-imports-tariffs.html.

[6]Thomas Biesheuvel, As China Fires Back in Trade War, Here Are the Winners and Losers, Bloomberg(Apr. 4, 2018, 8:34 AM), https://www.bloomberg.com/news/articles/2018-04-04/as-china-fires-back-in-trade-war-here-are-the-winners-and-losers.

[7]Fran Wang, Beijing to ‘Fight Back at All Costs’ Against New Trump Tariffs, Caixin(Apr. 6, 2018, 7:46PM), https://www.caixinglobal.com/2018-04-06/trump-weighs-additional-100-billion-tariffs-on-chinese-imports-101231136.html.

[8]Caixin, WTO Says It Has Received China Complaint Over Proposed U.S. Tariffs, Caixin, (Apr. 5, 2018, 10:15PM), https://k.caixinglobal.com//web/detail_23497.

[9]Id.

[10]David Smith, Trump Plays Down US-China Trade War Concerns: ‘When You’re $500bn Down You Can’t Lose,’The Guardian(Apr. 4, 2018, 4:04PM), https://www.theguardian.com/business/2018/apr/04/trump-china-trade-war-concerns-import-taxes-stock-market; Niv Elis, Navarro Contradicts Mnuchin’s Assertion That Trade War With China Is On Hold, The Hill(May 30, 2018, 10:46AM), https://thehill.com/policy/finance/389872-navarro-contradicts-mnuchins-assertion-that-trade-war-with-china-is-on-hold.

[11]Adam C. Uzialko, Surprising Ways Tariffs Impact Small Businesses (And What To Do About Them), Business News Daily(Jun. 7, 2019, 12:13PM), https://www.businessnewsdaily.com/10931-small-business-tariff-impact.html.

[12]Id.

[13]Id.

[14]Andrew Edgecliffe-Johnson and James Politi, U.S. Business Urges Trump To End China Trade War, Financial Times,https://www.ft.com/content/fadb49c6-9034-11e9-aea1-2b1d33ac3271.

[15]Id.

[16]Janne Suokas, US-China Trade War May Weigh On Cross-Border Acquisitions, GB Times(Dec. 17, 2018, 1:23PM), https://gbtimes.com/us-china-trade-war-may-weigh-on-cross-border-acquisitions.

[17]Baker McKenzie, Global Transactions Forecast 2019: Dealing With the Uncertainty, Baker McKenzie(Dec. 17, 2018), https://www.bakermckenzie.com/en/insight/publications/2018/12/global-transactions-forecast-2019.

[18]Sarah Downey, US-China Trade War Greater Threat To M&A Than Brexit, ICLG(Jan 30, 2019), https://www.bakermckenzie.com/en/insight/publications/2018/12/global-transactions-forecast-2019.

[19]Jennelyn Tanchua and David Tsui, Global Trade At A Crossroads: What US-China Trade Tensions Mean For Cross-Border M&A, S&P Global(Jun. 22, 2018), https://www.spglobal.com/en/research-insights/articles/Global-Trade-at-a-Crossroads-What-US-China-Trade-Tensions-Mean-for-Cross-Border-MA.

[20]John Spacey, 5 Examples of Proprietary Technology, Simplicable(May 19, 2017), https://simplicable.com/new/proprietary-technology.

[21]Id.

[22]Adam Putz et al., How Trump’s Trade War With China Will Affect U.S. Investment Markets,Seattle Business, https://www.seattlebusinessmag.com/finance/how-trumps-trade-war-china-will-affect-us-investment-markets.

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