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The European Union, the great beneficiary of the trade war between China and the United States.

4 February 2019
Economic Affairs

Bilateral tariffs between China and the United States are altering global competitiveness to the benefit of companies operating in countries not directly affected by these tariffs, including those of the European Union, Japan, Mexico and Canada.

The tariffs that the United States and China imposed on each other last year, provoking a trade war between the two nations, will have a “mainly distorting effect” on international trade, concludes a new study by the United Nations Conference on Trade and Development presented this Monday in Geneva.

“Due to the size of their economies, the tariffs imposed by the United States and China tthey will inevitably end significant repercussions in international trade ”, highlighted the head of UNCTAD’s international trade division, Pamela Coke-Hamilton.

He also indicated that bilateral trade between the two economic powers will see its volume reduced “and will be replaced by trade from other countries“.

The report considers that companies from third countries will absorb about 82% of the 250,000 million dollars in Chinese exports subject to US tariffs, that 12% will continue in the hands of Chinese companies and that around 6% will reach North American soil.

On the contrary, it also estimates that companies from other countries will capture 85% of the 110,000 million dollars in US exports exposed to Chinese tariffs, US companies will retain less than 10%, while Chinese firms will capture only about 5%.

According to UNCTAD data, results will be produced in various sectors ranging from machinery to wood products, and furniture, communication equipment, chemicals, and precision instruments.

The European Union, the great beneficiary

The reason for this phenomenon is simple, the Conference points out: bilateral tariffs alter global competitiveness to the benefit of companies operating in countries that are not directly affected by them.

The main beneficiaries of this situation will be the most competitive economies such as the European Union, which will probablywill absorb about $ 70 billion bilateral trade between the US and China ($ 50 billion from Chinese exports to the United States and $ 20 billion from US shipments to China).

Japan, Mexico and Canada will be other countries benefited since each of them will attract more than 20,000 million dollars.

Thus, for example, the almost 27,000 million dollars that Mexico could raise represent around of 6% of its total exports.

A good deal, but with risks

However, the study also highlights that this scenario can cause negative trends in the countries that have benefited the most from this trade struggle.

An example of this situation occurs with the Chinese tariffs on US soybeans, which have had distorting effects on the trade of several exporting countries, such as Brazil, which became the main supplier of soybeans to the Asian country.

Thus, Brazilian producers were reluctant to make investments that could be unprofitable if the tariffs are revoked, as the size and duration of the tariffs is unclear.

The impact on poor countries

Other added concerns are the impact that trade disputes may have on the world economy and that more countries join the fray, causing an escalation of protectionist policies worldwide.

UNCTAD highlighted the importance of a well-functioning global multilateral trading system that is “capable of defusing protectionist impulses and maintaining market access for the poorest countries”, as protectionist policies tend to be the most they harm them.

Finally, it also worries a possible domino effect that may affect countries and sectors involved in this contest.

For example, the report highlights the likelihood that the high volume of Chinese exports affected by US tariffs is the one that most affects the value chains of East Asia, as UNCTAD estimates that they could contract at about $ 160 billion.

The current trade tensions reached their peak in early 2018, when China and the United States imposed tariffs on each other worth $ 50 billion.

The confrontation escalated rapidly, and in September the United States imposed a 10% increase in tariffs on Chinese exports worth about $ 200 billion.

China immediately responded by applying tariffs on imports from the United States worth $ 60 billion.

The agreement reached between both parties last December froze until March 1, 2019 the initially planned increase by which tariffs were to increase from 10% to 25% at the beginning of 2019.