US-China Trade War: Implications on E-commerce in Southeast Asia

JANIO

Co-authored by: Alice Wu Si Yu – Linkedin

Benedict Leong – Linkedin

Since coming into power, US President Donald Trump has made several big moves in an attempt to revitalize US employment and trade. After withdrawing from the Trans-Pacific Partnership (TPP), Mr. Trump signed an executive memorandum on 22 March 2018, placing tariffs on a wide range of Chinese products. This was intended to pressure US companies to move their manufacturing base back to the states and thus, create jobs for Americans while reducing the nation’s trade deficit with China.

Since then, the US has announced and imposed billions of dollars of tariffs on Chinese imports, inciting retaliation from China who slapped tariffs on US products such as cotton and produce in return. With each retaliation, tension between the Dragon and the Eagle intensifies as these countries impose larger tariffs on an increasing range of products. The rest of the world watches painfully as international supply chains are disrupted in the process.

With Trump’s recent tweet that “certain Chinese goods” will have tariffs raised from 10% to 25% by May 10, 2019, this causes more uncertainty on whether the two economic powerhouses will ever reach an agreement, and those involved in various stages of global value chains will surely be affected. We examine what this means for e-commerce, especially in the Southeast Asia region, the world’s most rapidly growing economic bloc.

US and Chinese Tariffed Goods and Its Effect on The Global Value Chain

The Chinese government has slapped tariffs on US food-related products, especially soybeans, in response to US announcing tariffs on Chinese products that includes batteries and intermediate goods used to manufacture consumer goods like electronic appliances.

This move is possibly made to depress support for US Republicans in the upcoming midterm elections. Special focus was given to soybeans as soybeans farmers make up a large portion of Republican supporters.

In return, President Trump announced his intent to hit tariffs on up to USD$50 billion on Chinese products. Experts have predicted that this tit-for-tat war is an appetizer for an upcoming cold war between these two biggest economies. Regardless of whether it reaches this point, the International Monetary Fund (IMF) has warned that this trade war will cost the global economy significantly, mentioning that the global trade is shadowed by trade tensions triggered by the US as outlined in its “World Economic Outlook”.

China is seen as the “world’s factory”, playing an important role in the global value chain. A large portion of intermediate products passes through this country, accounting for more than 60% of world trade. This ongoing trade war will undoubtedly undermine global business and financial sentiment, discouraging trade and investments.

Tariffed Chinese products carrying higher prices will be in lower demand in the US, which could in turn lead to a decrease in Chinese companies’ demand for raw materials. This would affect countries that supply these materials to China such as those in Asia Pacific (APAC). These global supply chain disruptions also contribute to slowing the spread of new technology and productivity. Looking downstream, completed goods will also be less affordable as higher prices could be passed on to end consumers.

With its increasingly large contribution to global trade volume, e-commerce will surely be affected by the trade war as well.

Impact and Implications on E-commerce in Southeast Asia

Southeast Asia thrives on free trade and an open market, making it highly susceptible to changes in global trade flows. Home to economies with rapid growth in consumer expenditure, it is also the global supplier of raw materials for many industries such as electronics, fashion and food. Changes in global trade will affect three main aspects of e-commerce – mainly on the price and consequently sales of end consumer products, supply chain disruptions and e-commerce-related investments.

China’s role in interlinking global value chains for multinational corporations (MNCs) means that disruptions in China could have a profound impact on many other connected markets. President Trump’s tariffs on Chinese goods will likely reshape global markets, causing retailers and manufacturers to seek alternative lower cost suppliers. Investors would also have to rethink investment strategies and seek opportunities in new markets.

1. Effect on Price and Sales of E-commerce End Products

As the price of tariffed intermediate products increases, the cost of end products may increase as well as retailers tend to pass this on to consumers. The unfavourable alternative would be for retailers to absorb the increase in costs and thus, reduce their margins. As more than 30% of China’s exports were processed and assembled products in 2017, this downstream effect is sure to be significant.

Verticals that will be affected by the imposed tariffs include consumer electronics and cotton products. Many US branded electronic products rely on China for supply of intermediate products or assembly of end products. This means e-commerce retailers throughout the world that carry US electronic products – processed or assembled in China – will most likely inherit the higher costs. End products made with aluminium components such as canned food or household appliances could also be affected.

Non-US based brands in these verticals, or brands whose value chains do not pass through from China to US, will likely be unaffected by the tariffs. In fact, we could expect to see greater demand for products from these companies as their retail prices are maintained. In the consumer electronics space, the proliferation of low-cost high-quality Chinese products such as smart phones in the Southeast Asian region could be accelerated by the tariffs imposed, potentially leading to a major shift in market share from US brands to Chinese brands.

2. Shifts in Supply Chain

Before the trade war began, the rising cost of labor and raw materials in China spurred many MNCs to consider moving their manufacturing base out of the country. With the added pressure of tariffs, this shift will most likely be accelerated.

US tariffs are also planned on fashion products and components such as handbags and buttons. This may result in fashion brands moving their businesses from China to Southeast Asian countries like Myanmar and Vietnam. These nations are adopting increasingly business-friendly policies. This coupled with lower labor and materials cost may well spur the region towards becoming the next “world factory”, stealing market share from China.

This is favourable for international brands and e-commerce companies in the region. Having production located closer to their consumers would mean lower cost through insourcing as well as lower shipping costs. The faster turnaround time coupled with reduced manufacturing and shipping costs will help e-commerce businesses in Southeast Asia to grow.

3. Alternative Targets for E-commerce Investment

E-commerce giants Alibaba and Jing Dong (JD) might delay their plans to enter the US market due to the increasing tensions between the US and China. The tariffs imposed on Chinese goods would dampen profits while concurrently making their products less price competitive in the US market. Nevertheless, the two Chinese giants seem adamant in expanding into the US, with Alibaba partnering with Office Depot, and JD partnering with Google to launch B2C platform, Joybuy.

Looking at other markets, Southeast Asia with its growing production and consumption potential presents a huge opportunity for Chinese and US firms to extend their market reach. Earlier this year, Alibaba doubled its investment in Lazada to USD$4 billion immediately after Amazon revealed its plan to cooperate with the Vietnam e-commerce association. This indicates the growing competition between the Chinese and US e-commerce powerhouses in the region. Both companies are racing to roll out their products and services throughout the region as evident through the introduction of Alibaba’s cloud computing arm, Alibaba Cloud and Amazon’s prime package delivery service to Southeast Asia.

What It Takes to Grow in an Attractive Southeast Asia E-commerce Market

As the tension between China and US worsens, retailers and e-commerce businesses may turn their attention towards Southeast Asia. With its increasingly business-friendly policies, developing infrastructure and manufacturing capabilities coupled with increasing affluence of consumers in the region, Southeast Asia is now a target for e-commerce investments and could possibly become a hub for key supply chain activities and sales growth.

However, with any opportunity comes challenges. Each Southeast Asian country is unique in its own way with differing political and socio-economic situations. Technological adoption is also not as advanced as developed economies like the US and China, especially in areas supporting e-commerce growth such as payments. Furthermore, geographical dispersion of the countries and its inhabitants in the region presents logistics obstacles for many online retailers.

As the world focuses its attention on the US-China trade war, it is likely that Chinese, US and global companies will find themselves shifting their gaze towards Southeast Asia. In the end, the companies that are able to navigate the region’s complex social landscape while overcoming technological and logistics barriers will ultimately emerge on top.

To find more on the latest news on logistics and e-commerce in Southeast Asia, consider signing up for our Janio newsletter.

If you’d like to find out more about how we can solve your SEA e-commerce cross-border delivery needs, come and have a conversation with us.

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