Trade war costs global value chains 3-5 years of growth, UN says

Trade shocks fueled by unilateral tariffs between the U.S. and China have undone three to five years worth of growth among global value chains in affected countries, according to a UN policy brief.

The report from the United Nations Development Programme looking at the post-pandemic future of global value chains found that trade within those supply lines shrank in absolute terms along with other types of trade. Still, they’ll remain at the core of economic recovery in the Asia-Pacific region even as global manufacturers consider moving production closer to home.

Tariffs are still being applied on billions of dollars of goods under a U.S.-China trade war that began under President Donald Trump.

“The trade policy shock is therefore very large,” the UNDP report states. “However, while there is some unraveling of global value chain linkages, there is by no means a wholesale disintegration of the model.”

While the effect of the shocks is “far from negligible,” it says, the absence of policies designed to disrupt production sharing — for example, those targeting use of foreign inputs rather than trade generally — makes it “extremely costly to radically alter the prevalence of global value chain trade.”

The U.S. and China agreed on a partial trade deal in 2020, though China never met its purchase commitments. The U.S. trade representative has since stated that a “significant imbalance” remains in the trade relationship between the world’s two largest economies.

Aside from the trade war, restrictive trade policies during the Covid-19 pandemic have also amplified shocks as producing countries restricted exports, the report states. The supply troubles come as the cost of shipping goods across the globe is skyrocketing, threatening to boost consumer prices and compounding concerns in global markets already bracing for accelerating inflation.

“What we’ve seen both because of the pandemic and because of the trade war is that countries, including China and the U.S., have actually diversified risk,” said Kanni Wignaraja, UN assistant secretary-general and the UNDP’s Asia-Pacific director.

“Previously there was a lot of talk saying ‘Let’s go for least cost,’ and the cheapest option started stretching that global value chain,” she said. “Now we’ve seen this double shock, showing the advantage of our global value chain system because you’re starting to see the diversified risk, and more reliance on multiple suppliers in multiple countries.”

Trade Pacts

The report finds “significant potential” for countries to boost trade through two mega agreements, the Regional Comprehensive Economic Partnership and the Comprehensive and Progressive Trans-Pacific Partnership, both of which involve a number of economies in Asia.

Nations participating in the CPTPP may enjoy the equivalent of 12 years of additional global value chain integration based on the rate observed between 2000 and 2018, while RCEP countries may see a boost equal to around five years, according to the report.

It also suggests Asian economies, which rely on the export of transport equip­ment, electronics, textiles and apparel among other goods, should focus on developing general redistribution policies and social-safety nets. Both are “more efficient and effective in the medium- to long-term in promoting human development objectives than is restricting trade and investment flows,” the report says.