The UN logo at a press conference of United Nations Conference on Trade and Development (UNCTAD) in Geneva

GENEVA — The implications will be “massive” for the world economy, including for the textiles and apparel sector, if the U.S. and China fail to reach a deal and punitive retaliatory tariffs escalate from 10 percent to 25 percent on March 1, a U.N. trade report warns.

“First, we will see an economic downturn due to the instability in commodities and financial markets. Additionally, there will be increased pressure on global growth as companies will have to impose adjustments costs which will affect productivity, investment and profitability.…The impact on currency markets will also be deleterious. There will be currency wars and devaluation…job losses and higher unemployment,” said Pamela Coke-Hamilton, director for international trade at the U.N. Conference on Trade and Development.

More importantly, she told reporters during a launch of a report on trade tensions, UNCTAD fears “the possibility of a contagion effect leading to a cascade of other trade distortionary measures.”

Foremost, the report concludes that the intended effect of retaliatory tariffs imposed by the U.S. “has not resulted in increased domestic production but rather will lead to diversion in trade to third countries. If the tariffs rise to 25 percent what will occur is simple: They will limit trade from China. However, it will not be effective in protecting domestic firms. So suppliers in the rest of the world will be more competitive.”

Coke-Hamilton said analysis by UNCTAD reveals escalation in tariffs will also adversely impact global value chains and intermediate suppliers.

“The relocation, for example, from East Asian value chains will result in a reduction of almost $160 billion away from East Asia. In addition to which, the European Union will be able to attract almost $90 billion of those value chains, which is great for the EU but not for East Asia and others along the value chain.”

The trade diversion effects will be in favor of third countries, she said.

“The EU will capture $70 billion from the U.S.-China trade ($50 billion of Chinese exports to the U.S. and $20 billion of U.S. exports to China), Japan, Mexico and Canada will capture over $20 billion each. Perhaps the ultimate irony is that Mexico’s capture of almost $27 billion of the U.S.-China trade will represent the equivalent of 6 percent of Mexico’s exports.”

The UNCTAD study estimates that of the $250 billion in Chinese exports subject to U.S. tariffs, about 82 percent will be captured by firms in other countries, 12 percent will be retained by Chinese firms, and only about 6 percent captured by U.S. firms.

Similarly, it notes, of the $110 billion in U.S. exports subject to China’s tariffs, about 85 percent will be captured by firms in other countries. U.S. firms will retain less than 10 percent and Chinese firms will capture only about 5 percent.

Asked if China firms might relocate to countries with preferential access to bypass the retaliatory tariffs, Coke-Hamilton told WWD, “Yes, there is the possibility the Chinese government might decide to move their production to countries that already have preferential access under various agreements.”

In addition, she pointed out, there will be a lot of trade diversion of trade from many East Asian countries because of their role in the global value chains and, she added, they could go into Mexico.

Pressed if that would include sectors that have already gone out of Mexico and downsized, like textiles and clothing, she countered, “Yes, it’s possible that they might be willing to go into Mexico to use what used to be the NAFTA, it’s now the USMCA, to gain access to the American market.”

On fears by European executives that firms in China, the largest supplier of textiles and apparel to the U.S. market, could try to divert lost sales in the U.S. by making inroads to the EU market, Coke-Hamilton told WWD: “It’s possible, but the European structure is so different in that the U.S. is a high consumption-driven market. The EU tends to be based more on high-end production. Their fashion is different. They don’t do the mass consumption in the same way the U.S. does. I’m not saying it can’t occur, but it’s not likely to occur in the same way.”