Escalation of trade war

The US president Trump kept his promise to his supporters and imposed further tariffs on $200bn of Chinese imports as a counter-counter-act. This new list of tariffs covers multinational companies which rely on Chinese materials and components including automotive parts, food ingredients and construction. If the same term is also applied on other countries, this means that there will be little room for multinational companies to get around of the tariffs, while many multinational companies are trying to get around of the tariffs by restructuring their business structures at the moment. Even without applying similar terms on all the other countries, this move done by the US will damage many multinational companies already.

No multinational companies can avoid doing businesses with China because China has a massive scale of manufacturing and an incredibly large market with huge potentials. From the cost effectiveness's point of view, multinational companies have to buy materials and components from China, as China has the technology as well as the labour resource to produce them at very low costs due to the economies of scope and scale. On the other hand, these multinational companies want to use the cheap materials and components bought from China into production and sell their products all over the world. Then here comes a problem. When these multinational companies are doing businesses in the US, they are facing high tariffs because they are using Chinese materials and/or components. To avoid the tariffs, these multinational companies can purchase materials from other countries; however, such move can potentially increase the costs of production. Furthermore, the US is not the only market that these multinational companies have, they need to consider of whether they want to switch their current Chinese suppliers or not based on the gains and losses. The losses come from potential loss in their Chinese market share, and potential increases in costs of production, and other possible circumstances. Either way will damage these multinational companies' profitability. Such tariff policy may create a potential cost-pull inflation worldwide.

This tariff is critical to multinational companies as well as the economies all over the world. Some countries, such as Vietnam, Thailand, may see this as an opportunity as they are in hope of taking some job of manufacturing from China; for some countries, they will suffer from the tariffs. China will definitely suffer from this tariff policy, but the US will do as well. The US is very likely to experience a cost-pull inflation. Yes, the US economy is in a good shape; however, when the trade war really hits the two world major economies, the economic data will not look great and cause more panic worldwide, and eventually have a possibility of leading the world economy into a crisis (a recession).