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The Economic Costs of Trade War

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  • Level: High school
  • Pages: 17 / Words 4143
  • Paper Type: Essay
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Question :

Topic - Essay

Word limit – 4000 words

Learning Outcomes:

This Assessment Task Will Address The Following Learning Outcomes

 

Knowledge and Understanding

You are required to have knowledge of the following:

  • Generate a conceptual and critical understanding of the complex and inter-related nature of the international business environment
  • Assess a critical awareness of theories that determine international trade and investment patterns and be well aware of the sources of data which is used to understand trade and investment patterns.

Ability

You are required to have knowledge of the following:

  • Examine and identify an individual perspective on key discourses which are relating to the international business environment
  • Briefly use international business theory and techniques for complex business scenarios which are drawing on relevant data sources and literature

Assessment Brief

Essay Topic Brief

Background:

Multinational corporations are regularly reviewing the context of international business activities in order to understand and prepare for the risks and opportunities involved. In light of the recent US-China trade war

  • You have been asked by a Chinese multinational manufacturing company to create an analysis in preparation for their new subsidiary in the USA in 2020. The new subsidiary will engage in both international trade and activities of investment.
  • You have been asked by a USA multinational manufacturing company to make an analysis in preparation for their subsidiary in the Peoples Republic of China in 2020. The new subsidiary will allow engagement in both international trade and investment activities.

Essay Topic:

Select to focus on either 1) or 2), recognise and examine the three most important contextual factors for the above companys new subsidiary in the host country.

 

Essay Structure (Word limit: 4000)

  • Introduction (500 words)
  • Context: the US-China trade war critically introduces the trade war and determines your understanding through evidence. (500 words)
  • You are required to explain with support of both relevant theory and evidence. Your analysis will address the following two issues: a) what is the reason that these three factors are highly relevant to the company in the light of the trade war; b) on what basis do these factors affect the companys new subsidiary, and why. (You are not required to give suggestions to the company as to what it is required to do) (2500 words)
  • Conclusion: summarise the above part and give reference from your findings – what should we learn from it? (500 words)

- Reference

- Appendix

Answer :
Organization Selected : Cisco systems

Introduction

Trade is referred to the basic economic concept which involves buying as well as selling services and goods in which compensation is paid by the buyer to seller. It takes place in an economy among consumers as well as producers. Along with this, international trade assists countries in expanding their markets in the context of services that might not be available within it (Ciuriak, 2019). It leads to enhanced market competition which brings down the prices of home products for their customers. A trade war occurs when one firm retaliates against others by enhancing restrictions or import tariffs. The word tariff denotes a duty or tax which have been imposed on goods that are being imported to the nation. In the context of the global economy, the trade war is destructive for both businesses as well as consumers and also their economies. Basically, it takes place when one country enhances tariffs on imports made by another country as a response to the enhanced tariffs from the first country. The rationale behind this is secure national interest as well as render an advantage for domestic businesses.

The trade war in between China and the United States leads to enhanced economic disputes between the economies of the two nations. The reasons behind this was the unfair competition practices which were being carried out by China. Firms or corporations were taking advantage of open market in America but China kept their market closed for American products and corporations (Friedman and McCormick, 2015). This created an unfair competition due to which there was factory closures, job loses and minimised output within the American industries. This made America to impose taxes on trades against Chinese companies as well as their products as there was no other option. This report is based on Cisco systems which is a public company and deals within networking hardware & software industry. This was founded on 10th December, 1984by Leonard Bosack and Sandy Lerner. They are headquartered in California, United States and deliver their services worldwide. Cisco Systems are responsible for development, manufacturing as well as selling of networking hardware, high technologies and telecommunication equipments. They are specialised within specified tech markets like domain security, energy management and internet of things (Ojo, 2016). After the trade war in between US-China, the Cisco systems have slashed their manufacturing within China due to higher import tariffs which are levied within US. In this aspect, Chinese government has controlled firms for opting for American-owned companies and go for services which are being offered by local vendors.

This created an influence on the way in which Cisco Systems render their services within China and this can be understood by the figure that have been decreased by 8.6%. Though there is smaller part of business but still when it falls down then it creates a challenge. This report comprises of details related with US-China trade war, theories with respect to international business along with three factors with respect to this and the ways in which these creates an impact on new subsidiary will be illustrated here.

US-China Trade War

The bilateral trade agreement occurred in between China and US in 1979 & diplomatic relations were re-established. This lead to rapid enhancement of trade among these two countries which started from $4 billion and reached to over $600 billion in year 2017 in terms of both imports & exports (U.S. Trade with China: Selected Resources, 2019). Till February 2019, China was one of the largest trade partner of US. The exports from China over decades have altered in terms of labour intensive and low value products or services to enhanced capital modifier goods. This acts as major suppliers to US in terms of global supply chains as well as enhanced technology products. China is one of the largest treasury security holder of United States. But due to unresolved influences which revolves around bilateral trade among two countries has created trade deficit (He and et. Al, 2019). The volume of imports which were made by China went up immensely in comparison to exports made from US. This trade deficit became an issue for policymakers as well as economists. It was identified as unfair trade practices and US took different measures so that this trade imbalance can be maintained.

The tariffs policy emphasise their customers for buying goods or services rendered by America by making the imported products costly. The US have forced tariff of around $360 billion on Chinese goods on the other hand China imposed near about $110 on US products (A quick guide to the US-China trade war, 2019). In 2001 China joined World Trade Organisation in which an agreement took place according to which the later is liable for enhancing economic interests of America. But China was not able to acknowledge the rules and they were supposed to address trade grievances with Washington. The key issues were that China was leading source for pirated video laser, compact disks and all the computer software were sold virtually within there (Ross, 2016). There was no enforcement of written laws due to which it costed American firms with around $1 billion every year. Tariffs were minimised by China but still they went within stealing the IP (intellectual property) as well as American firms for transferring technology for accessing Chinese market which acts as violation of rules of WTO (Hosain and Hossain, 2019).

The trade deficit in 2001 was $90.2 billion which was doubled by 2005. They were slow within enforcing intellectual property rights as well as adding transparency within their industrial regulations & rules. This made it hard for United States businesses for accessing their market. The China and US have agreed on principle for rolling back tariffs on each phase, this will be carried out in an identical proportion after phase one deal has been signed. But on 8th November, 2019, Trump said that China will only get little from rollback and they will not get entire rollback as they know Trump will no do this. The statement made by Trump makes it clear that trade accord will not take place this year. Apart from this, as per WTO China can impose compensatory sanctions on imports that are made by US worth $3.6 billion as they failed to stay on anti-dumping rules in context of Chinese products (The US-China Trade War: A Timeline, 2019).

The manufacturing company which is about to have new subsidiary is based out in United States, named Cisco Systems and this will be in China. There are several issues which will create an impact on subsidiary of Cisco Systems within China. For this the, three crucial factors have been illustrated here which must be taken into consideration by subsidiary. Porter's five force analysis can be utilised for analysing the competitive market. This can be utilised by US based firm Cisco Systems as an strategic tool that will aid within identification of competitive landscape with respect to manufacturing networking hardware & software industry. With respect to this, the model has been illustrated here (Liu and Woo, 2018).

Threat of new entrants,  product differentiation is stronger in this industry as they sell differentiated products instead of standardised products. This makes each product different from other. In this aspect, capital needs in industry are also high which will lead it complex for new entrants for setting up their business. Along with this, the capital expenditures are also higher in context of research and development costs. As Cisco system is already rendering their services within US, it won't be difficult for them to have a new subsidiary in China. The threat of new entrants can be reduced as they possess the cost advantage and by bringing in within the market creativity in terms of their products.

Bargaining power of suppliers, the number of suppliers within the networking industry are lot as compared to their buyers. The products which are being rendered by suppliers are less differentiated, standardised as well as have less switching cost (Moosa, 2012). This will enable subsidiary of Cisco Systems in China to switch their suppliers, it implies that bargaining power is less. Within China, subsidiary of Cisco Systems can have raw materials at lower cost from suppliers but in case the products or cost is not as per desired standards then suppliers can be easily switched.

The bargaining power of buyers and the number of suppliers present within networking industry are more as compared to firms producing products. This implies that buyers posses few options through which they can choose which denotes that bargaining power is not in control of individuals. In addition to this, within this industry, product differentiation is higher which will enable them to have minimised options for peculiar services. The major factor which drives buyers is quality and they make frequent purchases (Ross, 2016). This implies that buyers are not price sensitive. Subsidiary of Cisco System with China can emphasise on bringing in differentiation as well as innovation within their services for attracting more number of buyers. They can make use of advantage of their economies for having a cost advantage this will allow them to attract more number of customers towards services rendered by them.

Threat of substitute services or products,  the products that are being offered by Cisco Systems cannot be replaced by any other firm. But there are some substitutes available which are being produced by low profit industries. There are few alternatives and render their services with high quality and accordingly they are very expensive. This implies that threat of substitute is less. Furthermore, subsidiary must emphasise on furnishing higher quality so that buyers do not have option to go for something else (Zeng, 2013). Along with this, they need to differentiate their products so that buyers do not get anything else with respect to this. These were some contextual issues which must be taken into consideration by subsidiary to identify that which factor will create what impact and how that can be handled in an appropriate manner.

The other factor that must be taken into consideration by Subsidiary of Cisco Systems is impact on environment. As per environment chief, global trade war will modify the efforts that are made for combating with climatic change as well as protecting environment & fighting against poverty. Trade war will lead to pessimistic impact on the environment as raw material will be wasted instead of making them use in an appropriate manner. Along with this, the speed with which enhancements are brought with respect to environmental technologies will decline. It will enhance poverty for longer duration of time.

The trade war in between two countries will lead to job losses as well as global slowdown as coal renders larger employment generators for Chinese within US. They both provides employment within coal reserves and when mining activities are being carried out then there will be pessimistic impact on environment (Zeng, 2015). Along with this, both are liable for importing natural gas as well as oil from different countries. In case any kind of stress occurs then government might tap coal reserves for keeping balance in between trades. This will again create a pessimistic influence on environment (How a Trade War Will Affect Environmental Policies, Cooperation, 2019). The imbalanced trade will lead to creation of an shocking environmental adjustment by transferring demands as well as production. US has placed around 30% tariff on solar panels provided by Chinese. This will affect environment as solar energy eliminates the dependency on fossil fuels which are the major contributors for climatic alterations. Similarly, China has imposed tariff on soybeans which possess unique ability for absorbing nitrate pollutants which are created from soil. This will lead them within decline of production and will result within enhancement of levels of nitrate within drinking water of Americans.

This implies that there well be a serious impact on protection efforts with respect to environment. When affirmative aspects are seen then, when trade war occurs then people will opt for going for goods which are locally available. This will minimise carbon footprints which implies a better affect on environment. Around 30% of international trade involves transportation in which carbon dioxide is emitted and leads to near about 7% of global warming emissions (The positive side of trade wars: fewer imports, a smaller carbon footprint and less need for plastic packaging, 2019). There are both affirmative and pessimistic impact on environment with respect to trade war.

Yip framework is liable for identification of four sets of industry globalisation drivers which underlie situations within each sector that is responsible for creation of potential for becoming global and as a consequence renders potential viability of global approaches to strategies. There exist different categories of drivers that needs to be accessed for identification of degree of globalisation in the industry (Ciuriak, 2019). Cisco Systems deals within networking hardware and software industry so the framework has to be utilised by taking into consideration. The four components includes: markets, cost, government and competitive. With respect to US-China trade war, there will be a strong impact on ways subsidiary of Cisco Systems render there services.

Market drivers imply the extent to which common customer needs, lead countries, global distribution, global brands & marketing can be accessed. There are certain aspects that must be taken into consideration by American based Cisco Systems while having there subsidiary in Chinese market. China comprises of various internet users in terms of social and mobile phones exponentially. The IT market is ranked as fourth largest market around the world after US. The demands of Chinese market are fulfilled by imports from US. This imply that China will have affirmative impact on overall operations as subsidiary will be present within their country and this will eliminate need of any kinds of imports from US. This might have impact on both and may lead to end up the trade wars which are going in between them.

Cost drivers denote economy of scope & scale, sourcing, experience curve, productivity, skills, life cycle of products and logistics (Friedman and McCormick, 2015). Basically, it imply the opportunities for global scope or scale and efficiencies are illustrated in terms of differentials in cost among regions or countries as well as advantages within technology which will lead to save economics . The reason that Cisco Systems has opted for subsidiary in China due to its growing IT industry as well as statistics of internet usage. Along with this, businesses within China connects with customers through usage of wide range of e-selling and online promotions through which millions of US dollars can be earned. This imply that economy of China is greatly impacted by this sector in an affirmative manner. It will create an affirmative affect on Cisco Systems in terms of profitability. China has made large investments with respect to IT industry which will render firms with an option for growth.

Competitive drivers comprise characteristics of industry in terms of degree up to which sales of industry are being imported or exported (in terms of volume), diversity of competitors (in the context of national origin), degree to which large firms have globalised their activities and interdependence among competitive strategies among distinct parts of country creates an globalised potential of industry (Glaser and Flaherty, 2018). In context of China, there has been higher levels of trade competitive diversity and mutuality enhances potential of industry globalisation. The number of imports made from China in US are high but due to trade-war certain differences are created which will lead create an impact on their services. But as Cisco Systems has opted for subsidiary in China then this might improvise the relationship in between trade which takes place. Evolution of hardware and software networking also plays an important role as when characteristics of this will alter then then competitors will also deliver the enhanced response and will have the competitive edge. This will lead to accelerate this industry within the market of China.

Government drivers involve the presence or absence of technical standards, trade policies and regulations that are government subsidized (customers or competitors) or operated (He and et. Al, 2019). This will create an impact on all components of global strategies and hence are crucial for shaping global competitive environment within different industries those who are rendering their services. The economics and politics of global competition have became inter-wined which makes multinational companies like Cisco Systems to pay enhanced attention to non-marketing dimensions such as global strategies which aims at shaping their global competitive environment for having an edge over competitors. The broadening of scope in context of global strategies will reflect alterations within balance among power between multinational corporations and national governments (Hosain and Hossain, 2019). This will create a crucial impact on ways in which regulations & policies affects global competitiveness.

The resources that are required by subsidiary of Cisco Systems comprises of capital, human distribution networks and human resources so that their subsidiary can excel within the market of China as well as acknowledge their needs. Capital is one of the most important factor which must be taken into account as without this, it will become difficult to deliver services and ensure stability within the global market. As Cisco Systems have made their presence strong within the market of US and renders services within different parts of country, capital will not be an issue for them. The fact is that China is one of the strongest players in terms of technology around the world and delivers their services worldwide. This implies that their workforce is effective and can furnish enhanced services (Itakura, 2019). It denotes that subsidiary of Cisco Systems will have effectual human resources which will enable them to attain their objectives and render their operations as per desired standards.

Furthermore, there might be an issue with human distribution network, the reason for this is that the government might ban the services which are being delivered by American firm as US has also banned Chinese firms ZTE & Huawei to render their operations within market and have blacklisted them. As a result of this, China announced the foreign entities list and referred them to as unreliable entities as a retaliation for listing of Huawei along with other five Chinese technological companies (To Deal, or Not to Deal: The U.S.-China Trade War Enters the End-Game, 2019).This might hamper the performance of subsidiary of Cisco Systems as they might not be able to use resources of China as well as human resources. It entirely depends on government of China whether they allows the subsidiary to render their services in US or not. There is also a possibility that China may impose tariff if US want to access those products offered by their own company. The policies which are being formulated by China as well as US will decide what subsidiary can do and impact also depends on them. If any harsh strategies are not formulated by government of China for American subsidiary then it might improve the trade war in between two strong economic countries.

The three factors have been specified above by making use of Porter's 5 forces, Yip model, key resources and environmental factors. Yip drivers will assist to identify crucial aspects of market as well as industry in terms of local and global. The strategies must comprise of both the features with respect to capability of drivers (Moosa, 2012). While having subsidiary within China, Cisco Systems need to identify competitors present within like Jiangsu province (emphasise on ICT), Shandong (second software city) and Zhejiang Province (e-commerce, software, IT) will create a significant negative impact on subsidiary of Cisco as the existent market of China has well established firms within. This enables US government within restricting firms from importing as well as usage of technology within domestic supply chain infrastructure. For an instance, Huawei and ZTE are Chinese firms which are placed within blacklist of US entity and latter on were unanimously voted as security risk (To Deal, or Not to Deal: The U.S.-China Trade War Enters the End-Game, 2019). For having a affirmative influence there is need for bringing something new which might be difficult for others. This will lead to enhancement within relationship between China and US as well as economy of both of them (Four lessons Washington needs to learn from trade war with China, 2019). Furthermore, trade barriers will also be minimised and technical standards will also be uniform.

Conclusion

From above it can be concluded that, US China economic relationship has gone via various twists from last 18 months which lead to anger, tension and frustration that interspersed through periodic outbursts associated with bilateral, re-boots and diplomacy. On March 2018, President Trump has signed a memo which has directed imposition of tariffs on wider range of Chinese products. Along with this, it included restrictions from Chinese investments within key technological sectors of the US. Threats were imposed for sweeping tariffs on China for their unfair trade practices. Around US $550 billion tariff has been forced or slapped on Chinese products. In response to this, China has set tariffs of near about US $185 on US goods. Both the perspectives have created a threat on qualitative measures which will create an influence on US businesses which are delivering their operations in China. The trade tensions between two has created full-blown trade war in between them.

Also read:- Globlisation And Nationalism - Comparative Analysis

The US commerce department has issued a notice which will introduce new procedures for identification, assessment and acknowledging the transactions that possess security risks for their service supply chain and risk to telecommunications. According to reporters, Trump said that China will not be given complete rollback. This implies that it makes unclear that there is chance of getting accord signed this year. China has liability for imposing compensatory sanctions on US imports which was US $3.6 billion as they failed abide to anti-dumping rules that are being applied on Chinese products (The US-China Trade War: A Timeline, 2019).

The economic costs of trade war will be high as the largest economies will be leaving few unscathed. As per IMF, proposed and current tariffs will lead to decline within the economic output by around 0.5% by year 2020. The major central banks will not feel the blow as some measures will be taken for smoothing it. The lesson that can be learned from fallout from US-China trade and Huawei debacle is that no matter what fence local are on, it is important to value data integrity as well as proprietary information for taking care of purchasing as well as installing networks from vendors. It is obvious that government must not be allowed to create an impact on network as well as tech purchasing decisions. Swapping the vendors is not easy as Huawei renders 5G services in US removing them will create a huge impact on the country and might prove disastrous (US-China Trade War: Headed for Conclusion or Escalation, 2019)

The lesson that must be learnt by US is that, only fifth of Chinese exports will go to US which is almost equivalent to around 3.5% of their gross domestic products. This imply that it is half of the trade exposure which China Had given to US years ago. China is an unbent nail which exist within United State tactic of maximised pressure. The other lesson that has been learnt is that Chinese economy is stronger and is stable enough for resisting pressure that is being created by ongoing trade war (Noland, 2018). The other lesson is trade hardliners must stop from denying the fact that trade war is hurting the American businesses as well as people.

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