Thursday, December 06,
2018 / 11:45 AM / Fitch Ratings
The impact of the US-China trade war on other major economies through supply-chain linkages will be highest in Korea and Japan and reflects their sales of intermediate products to China that are ultimately bound for the US market. However these exposures are still quite small relative to total exports, says Fitch Ratings.
The fallout of the US-China trade war will operate through different channels, such as dampening business sentiment and slower growth in China and the US eventually feeding through to partner countries via slower exports. Some countries may also reap benefits from the trade dispute by improved competiveness and on-shoring production at the expense of China.
A more direct impact is through the spill-over to Global Value Chains (GVCs). China's exports to the US have significant foreign-produced content in the form of intermediate goods imported by China for use in the production of goods that are then sold into the US market. This is reflected in the fact that the 'value-added' content of China's exports to the US is significantly less than China's total gross exports to the US.
The Trade in Value Added (TiVA) database compiled by the OECD enables us to quantify the GVC exposure of third-party countries to any decline in China's exports to the US. Fitch's latest chart-of-the-month shows intermediate exports to China (also measured in value-added terms) which are then used as inputs to products exported from China to the US. We show these numbers for countries covered in our "Global Economic Outlook" (excluding China and US) as a percentage of their total exports (in value added terms).
Almost 3% of Korea's total gross exports (in value-added terms) to the world are intermediate products sold to China which are then used to produce goods in China that are ultimately sold in the US market. For Japan, this number is 2.3% - the second highest ratio in our sample of 18 developed and emerging markets. Large commodity exporters to China, such as Australia and Indonesia, are also quite exposed to Chinese GVCs because of the commodity import content of Chinese products being exported to the US.
European countries, Canada, Russia, Turkey and Mexico are the least exposed to the China-US trade dispute through this channel. Only 0.6% of German exports (in value-added terms) go to China and end up in the US, even though Germany has strong trade linkages with both China and the US.
All in all, these numbers suggest that the direct impact of the US-China trade war is relatively contained through the GVC channel. In contrast, and by means of illustration, compared to Korea's relatively small GVC exposure to China-US trade, its exports destined purely for the Chinese market account for 16% of total Korean exports. This suggests that any broader slowdown in the Chinese economy as a result of trade tensions would be much more significant.
Related News7. China Imposes Retaliatory Tariffs on $50bn of US Imports