Comments: COVID-19 has not damaged supply chains as much as assumed

The vulnerability of global supply chains have been exposed less by global shocks than by country or region-specific shocks. The 2011 Thai floods and the 2011 Fukushima earthquake in Japan highlight how a disruption in order to one segment associated with production reverberates through the entire supply chain, resulting in a sharp contraction within final output.

The China-US trade war can be another country-specific shock mainly because discriminatory tariffs are only applied to each other’s trade.

Even though the bilateral tariffs from the China-US stand-off are usually relatively small, ranging from 10 per cent in order to 25 per cent, their particular impact on competitiveness can be much greater. As the tariff is levied on the total value of the product, it can be totally negated by simply removing the share associated with value added within the tariff-targeted country.

To illustrate, the particular domestic value additional of Chinese complete manufacturing exports to the United States in 2018 was estimated to be 30 per cent. Imported inputs account for US$70 of an US$100 made-in-China shirt, while the last production processes in China add US$30.

It comes after that a 25 % tariff on the US$100 shirt is really an US$25 tax on the US$30 value added within China.

Some other countries, such as Vietnam, effectively receive a “buffer” of US$25. When Vietnam can add exactly the same value while maintaining total costs less than US$55 – within the buffer provided by the particular tax – it could be more profitable to create there.

This multiplier effect of the discriminatory tariff can be termed the effective rate of spillover protection because it makes a magnified and unintentional advantage to all competition, not just the United States. It also clarifies why the relocation of global supply chains could happen according to a relatively small contract price if the value-added discuss is small.