The highly integrated nature of the global economy means trade disputes often cause third-party economic harms via contagion. A trade war between two of the world’s largest economies is particularly likely to cause contagion.
The trade war with China causes economic collateral damage to the region. As early as July 2018, the week before the commencement of U.S. tariffs, there was a dive in investor confidence in Asia. Nine of the ten worst-performing stock indexes in the world were from the region, including Tokyo and Vietnam . One point of harm is that China is a significant investor in the region. When Chinese businesses feel the squeeze from U.S. tariffs, they are forced to scale back investments abroad, hurting regional growth. This is only part of the story since the proportion of Chinese investments differ significantly across the reason – for example, while Chinese Greenfield FDI to Southeast Asia is on the rise, the largest share is still held by Japan. The broader reason is that regional economies tend to be tightly interlinked. Damage to the Chinese economy also hurts regional businesses with supply chains that flow through China. In turn, this diminishes market confidence in those regional economies, leading to a loss of investment. The loss of investment is harmful to the region. The foreign investment allows businesses to flourish and expand, creating employment, and increasing government revenue. The region surrounding China is not the only one to see a decline in foreign investment. Foreign investment has slowed globally as a result of fear of the trend towards protectionist policies. The Institute for Supply Management’s purchasing managers index shows that we are also seeing weak manufacturing performance globally such as in the U.S., Britain, Germany, Japan, and South Korea.  The European economy, particularly Germany, and the Canadian economy have also been hurt by the uncertainty that the trade war has caused. Exports account for almost half of Germany’s economy which is now suffering; there has been a fall in exports, a drop in production, and a decrease in investment. The uncertainty of the changing rules also hurts Canada (where trade represents a quarter of their economy) as it keeps their investments on hold when they should be expanding.
Regional economies are sufficiently robust to withstand the effects of contagion. The economies of Japan and South Korea, for example, are strong and active investors in the region. This is especially true if the trade war is not long-lived; the scale of the effects depends on the length of the war. Furthermore, the claim of long-term loss of investor confidence assumes that China will fare poorly in the trade war, thus triggering contagion. This is false; investor confidence will be restored as China weathers the storm successfully.
[P1] The trade war with China causes economic collateral damage to the region. [P2] Foreign investment has slowed globally as a result of fear of the trend towards protectionist policies. [P3] Global economies are being hurt.
Rejecting the premises
[Rejecting P1] If the trade war doesn’t damage the Chinese economy, then economic collateral damage to the region doesn’t occur, even if regional economies are closely linked.