Trade Wars & Global Supply Chains: an analysis on "added value"

It is important to stress the fact that 60%+  of the world trade entails Global Supply Chains  that cross at least one border during the production process.

It follows that a certain product manufactured in China and subject to an import duty from the US would have quite a lot of value-added from countries outside China, like Korea, Japan, Taiwan etc.

This implies that  many other countries  will be impacted and damaged in case a Trade War between US and China will occur.

One of the main reason why the US are threatening to impose Duties is that they are concerned about issues like Intellectual Property theft, so at a first glance it would make sense to target the high tech sector. The problem is that this is a sector where the Chinese value added is fairly low.

On top of that, the Chinese Tech Sector Domestic Value Added includes also multinationals that assemble in China; many US firms are doing so, they will then be impacted by the duties as well.

In the chart below provided by the Brookings Institution you can see the differentiation between Domestic Chinese Value Added (Blue Section) and Foreign Value Added (Green Section) for a multiple of sectors.

The sectors that (from a US Perspective) would make sense to target are the ones with high Chinese Added Value like

• Textiles
• Food 
• Chemicals
• Rubber
• Machinery
• Metal Products

If this will be the case, the collateral damage for the USA may be minimized. 

Another important info is relating to the SOEs, i.e the Chinese State Owned Enterprises. These firms sell 90% of their products in China and only around 10% of their revenues is exported. They will then not be impacted by the Tariffs.

I hope that this potential Trade War will not take place because the outcome will be very diffucult to predict.