The US-China trade war has disrupted global value chains as tariffs increased costs and uncertainty. It reduced US GDP by 1.78% in 2019 and is estimated to reduce it by 1.25% by 2030. The Covid-19 pandemic further threatened global value chains by exposing their vulnerability and could lead to companies relocating or reshoring production due to supply chain issues and economic impacts. Experts predict a 13-32% drop in global trade and a 30-40% reduction in foreign direct investment over 2020-2021 as a result of the pandemic's effects.

1. The Effects of China-U.S. Trade War on the Global Value
Chains and how Covid-19 is shifting the GVCs
The two largest global economies, the United States and China, have traded rounds of
increased tariff rates against each other, which has intensified into the US-China trade war.
When the U.S. decided to impose import tariffs on steel and aluminum in March 2018, China hit
back in April with tariffs on aluminum, meat, fruit, and wine imported from the United States
(Itakura, 2019). It was also noted that other countries that exported steel and aluminum to the
U.S. also increased import tariffs against the U.S. in retaliation. There were additional tariffs
levied on imports against each other between July and September of the same year.
The trade war, where both countries impose tariffs on specific products, has created
indirect effects on other countries through links in the global supply chains (Mao & Gorg, 2020).
For example, while some of the largest P.C. makers and Apple's iPhone parts suppliers are based
heavily on China, the fear of sales slowdown would cast an impact on the Microsoft Windows
(M.S.) demand for the Operating System (O.S.) software. With higher tariff rates, it is evident
that overall product costs also increase. In turn, these costs will be passed on to domestic
consumers and to other countries where the U.S. subsequently exports the finished goods. These
countries include Canada, Mexico, the European Union (E.U.), Russia, Japan, India, and Korea.
Furthermore, the trade war subsequently reduced the U.S. GDP by -1.78% in 2019 and

2. -1.25% in 2030 (Walmsley & Minor, 2018). The significant GDP loss can be attributed clearly to
the trade war's wide scope effects and the substantial hike in import tariffs.
While there have been peace talks between the two countries in late 2018 and after the
G20 Summit in June 2019, it remains uncertain whether the import tariffs will continue or will
further escalate. Experts also firmly believe that the trade war's uncertain outcomes may directly
impact the portfolio investments, the productivity of the two economies, and global growth
(Itakura, 2019). As a significant trading partner, it looks like China's decline in economic growth
would likely hit the Indonesian economy and other ASEAN countries, given the export structures
and the lack of strategic GVC integration (Pangestu, 2019). While there are likely losers that
come out of these unfortunate circumstances, there are also winners that will benefit from trade
diversion and investment relocation to get around the trade war, such as Vietnam. Vietnam's
success story and its attractiveness as a GVC location can be attributed to a series of factors such
as trade liberalization, a favorable investment climate, and a substantial pool of low-cost labor
(World Development Report, 2020).
The current global health crisis has created economic chaos across continents, which may
compromise the existence of global value chains and expose the model's weakness as
demonstrated by the high interdependencies among organizations, firms, and suppliers
positioned across international borders (Fortunato, 2020). Furthermore, the current situation is
reflected in the increasing temporary export bans and other restrictions on critical commodities
ratified by several countries following the outbreak. Experts believe that relocation and reshoring
are expected as a result of the global health crisis. While most economies suffer partial or full
lockdown, notwithstanding the trade and investment contracting, offshoring strategies remain
uncertain in the future. The World Trade Organization (WTO) predicts a trade deficit between

3. 13% and 32%. Simultaneously, the United Nations Conference on Trade and Development
(UNCTAD) estimates a foreign direct investment (FDI) reduction of 30% to 40% during 2020
and 2021.
References
Fortunato, P. (2020). How covid-19 is changing global value chains. Retrieved from
https://unctad.org/en/pages/newsdetails.aspx?OriginalVersionID=2460
Itakura, K. (2019). Evaluating the impact of the US-China trade war. Asian Economic Policy
Review, 15, 77-93
https://doi.org/10.1111/aepr.12286
Mao, H. & Gorg, H. (2020). Friends like this: The impact of the US-China trade war on global
value chains. The World Economy, 43, 1776-1791
https://doi.org/10.1111/twec.12967
Pangestu, M. (2019). China-US trade war: An indonesian perspective. China Economic
Journal, 12(2), 208-230. http://doi.org/10.1080/17538963.2019.1611084
Walmsley, T. & Minor, P. (2020). US trade actions against China: A supply chain perspective.
Foreign Trade Review, 55(3), 337-371
https://doi.org/10.1177/0015732520920465
World Development Report. (2020). Trading for development in the age of global value chains.