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The Impact of Trade Wars on Global Supply Chains and Economic Stability

Updated: 6 days ago


Written by Sarya Güleç

The effects of globalization on the supply chain are becoming more and more obvious, impacting the speed and cost optimization of the international supply chain. This globalization creates trade wars that affect both countries and companies. Trade wars emerge when countries put taxes(tariffs) on imported goods to protect their domestic industries. This often leads to retaliatory measures from trade partners(4).


The free trade flow is often disrupted by this protectionist approach which can also lead to a cycle of actions and counteractions that negatively impact global economic stability.

  

Historical data reveals that trade wars can decrease global trade volume, affect consumer prices, and even impact global economic stability(4). The strategic use of tariffs as a tool was prevalent in past trade disputes, serving both as financial leverage and political signals.   


An example of a recent trade war is the U.S-China trade war. Two countries impose tariffs on specific products imported from each other, affecting the trade patterns between them significantly. Furthermore, these trade conflicts have had spill-over effects on other countries through global value chains and trade diversion. 


Former President Trump imposed tariffs on over $350 billion worth of Chinese goods while China imposed tariffs on over $110 billion worth of U.S. exports(1). Some other countries benefit from this conflict since China lowered the tariffs on the rest of the world, such as Taiwan, Vietnam, and Mexico. Imports from China fell from $539.24 billion in 2018 to $451.65 billion in 2019.


The instability of the global supply chain may have a profound impact on the worldwide economy, business operations, people’s lives, and international trade cooperation(6). Firstly, supply chain issues will affect the global division of labor and trade corporations, thus hurting the global economy. Secondly, the instability of global supply chains may bring serious operational risks for enterprises, such as rising prices of commodities and raw materials, appreciation of the RMB exchange rate, rising labor costs, poor international logistics,  insufficient shipping capacity,  and high international freight rates may lead to rising corporate costs and erosion of profits.   


To take a look at the strategies companies employ to mitigate disruptions, let's go back to the U.S.-China trade conflicts. The tariffs could significantly impact companies whether they stayed in the Chinese market or faced the effects in the U.S. markets. To reduce the risks and guarantee their safety, companies need to expand past China. Sourcing with other countries will reduce the uncertainties and expenses associated with the supply chain. 


Apple is one corporation that has focused its efforts on other countries. Instead of China, Apple has started new manufacturing bases in India. While imports from Mexico have increased around 25% in the last five years as a way to relocate closer to home, Vietnam has a cumulative growth of 103.9% in shipments over the last three years(4).


 Effective strategies and international cooperation are crucial to mitigating the adverse effects of trade conflicts and ensuring the stability and growth of global supply chains. Despite the challenges posed by trade wars and supply chain disruptions, globalization continues to be a driving force in economic growth and innovation. Businesses and countries alike are adapting to these new realities, finding ways to navigate the complexities of international trade. Diversifying supply chains, embracing new markets, and fostering international cooperation are essential strategies to mitigate risks and capitalize on new opportunities.


In summary, while globalization has optimized supply chain operations, it has also exposed them to the volatility of trade wars. The dynamic nature of global trade requires businesses to continuously adapt and innovate. By diversifying supply sources and enhancing cooperation, companies can mitigate the adverse effects of trade conflicts and maintain the resilience and stability of global supply chains.



References:


  1. Anim, C. (2023, April). Assessing Trade Wars and the Impact on US Supply Chains. Research Gate. https://www.researchgate.net/publication/378772827_Assessing_Trade_Wars_and_the_Impact_on_US_Supply_Chains

  2. Bank, E. C. (2022, January 13). Supply chain disruptions and the effects on the global economy. European Central Bank. https://www.ecb.europa.eu/press/economic-bulletin/focus/2022/html/ecb.ebbox202108_01~e8ceebe51f.en.html

  3. Dang, D. A., & Tran, N. A. (2023, August 29). The effects of the United States-China trade war during the COVID-19 pandemic on global supply chains: Evidence from Viet Nam. Economic Research Institute for ASEAN and East Asia. https://www.eria.org/publications/the-effects-of-the-united-stateschina-trade-war-during-the-covid-19-pandemic-on-global-supply-chains-evidence-from-viet-nam

  4. How Trade Wars Influence Economic Stability. (2024, May 28). metalsedge. https://metalsedge.com/how-trade-wars-influence-economic-stability/

  5. International Trade Council. (2022, December 26). Effects of trade wars on global economy and international trade. https://tradecouncil.org/effects-of-trade-wars-on-global-economy-and-international-trade/

  6. Qian, A., & Arkadievna, A. (February). Stability And Risk Management of Global Supply Chains in Foreign Trade Economy. Research Gate. https://www.researchgate.net/publication/377987475_Stability_And_Risk_Management_of_Global_Supply_Chains_in_Foreign_Trade_Economy

  7. Yakhshilikov, S. (2023, June). The impact of global trade wars on international political economy. Research Gate. https://www.researchgate.net/publication/373395286_The_impact_of_global_trade_wars_on_international_political_economy

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