Just as the United States and China seemed to be getting close to finalising a deal on the trade war, negotiations have faltered again. Chinese Vice Premier Liu He’s visit to Washington D.C on May 8 was expected to bring negotiations to a close. Instead, miffed by the changes the Chinese negotiators have reportedly made to the draft agreement, the Trump administration announced new tariffs at 25% on $200 billion worth of Chinese exports with plans to raise tariffs on an additional $300 billion worth of exports soon.
On the face of it, the U.S. is seeking to reduce its merchandise trade deficit with China, which totalled $419 billion in 2018, up from $376 billion in 2017.
The steep rise in imports of computers, electronics and electrical equipment may explain the U.S.’ concern. A report by the U.S. Economic and Security Review Commission, published in July 2018, shows that American imports of computers and electronics from China totalled $184.4 billion in 2017, or 37% of total U.S. imports, and imports of electrical equipment and appliances, totalled $43.3 billion, or 9%, of imports. Within computers and electronics, communications equipment imports from China reached $78 billion in 2017, a dramatic 98% increase from 2011, mainly driven by imports of wireless communications equipment.
The U.S. also has claimed that China is conducting trade unfairly. The American administration wants China to strengthen Intellectual Property (IP) protections. A report by the U.S. Trade Representative asserts that China forces American firms to transfer technology by restricting foreign ownership of enterprises in China and through other regulations. The U.S. report refers to a news story by the Wall Street Journal that cited DuPont, General Electric, Advanced Micro Devices and Micron being at the receiving end of this strategy. The USTR report also draws its arguments from a 2018 survey by the American Chamber of Commerce, based in the People’s Republic of China, that showed 21% of American companies with operations in China were concerned about technology transfer and more than 40% of the aerospace and chemical companies indicated “notable” pressure. In short, American firms in China were seriously concerned about losing their competitive edge to Chinese firms.
The U.S. strategy in the negotiations – to impose steep tariffs on Chinese goods shipped to the U.S. – has been puzzling since the tariffs are most likely to hurt a large number of American enterprises that are based in China and account for a substantial share of the Chinese exports.
China’s Information Office of the State Council stated that 68,000 U.S.-funded enterprises were operating in China. The influential presence of American businesses in China can be gauged by a 2019 U.S. Bureau of Economic Analysis study that estimated U.S. FDI stock in China to be $108 billion (compared to $40 billion of Chinese stock in the U.S.) or by a 2015 Deutsche Bank analysis that estimates total sales from branches in China at $223 billion (compared to China’s branches in the U.S. that conduct sales of $22 billion).
An examination of these numbers by Peterson Institute experts Adam Posen and Ha Jiming provided surprising insights on the role of American enterprises in China. They showed that 77% of the high-tech exports from China were by foreign-invested enterprises in 2016 (including ones in Hong Kong and Macao). This is corroborated by a 2015 study by the Centre for International Governance Innovation (CIGI), showing that foreign-owned enterprises were responsible for 50% of China’s exports, 40% of which service North America and Europe.
By September 2018, the American Chamber had reported that more than 70% of American firms in China were hit by the sanctions. They reported loss of profit, higher production costs and decrease in demand for products produced in China.
What, then, are the U.S. government’s core concerns?
One goal may be to force American companies operating in China to return home. Speaking to reporters on 14 May 2019, President Trump remarked that he wanted U.S. firms to come home, acknowledging that hurting American firms based in China was, actually, part of the Trump administration’s strategy. In a new paper, John Lee, a trade expert based at the University of Sydney, elucidates how the Trump administration has knowingly forced high-value American firms to consider moving supply chains out of China, especially those which are based there only for exports.
This strategy aligns with Trump’s tax cuts for corporations to retain American firms in the U.S. even though American consumers and American multinationals will certainly feel the pain of higher costs of products and services.
The other reason is to arrest China’s rise as a technology superpower. It is already close to achieving goals it set for itself in the 2006 Medium- to Long-Term Plan (MLP) for establishing China as a technology and scientific superpower by 2020. MLP covers 11 sectors, such as energy, mineral resources and defence, and it prioritises 68 areas such as biotech, advanced manufacturing and aerospace technology, with a specific push for certain emerging scientific fields such as nanotechnology, quantum physics and reproductive science. One of the expectations from this programme is for China to reduce its dependence on foreign technologies to less than 30% by the year 2020.
This worries the United States, whose firms have been the primary technology players in China and globally. Chinese enterprises have become more competent in exports over the years. This is evident from the American Chamber’s survey that showed American research and innovation firms were the most pessimistic about their future. A significant 38% of the technology firms lost profit due to rising industry costs and 25% of the firms lost profits (lower Earnings Before Interest and Tax) because of increasing competition from private Chinese firms. Chinese private enterprises have already outgrown state-owned enterprises in exports.
For now, the American firms conducting business in China seem to be doing okay. The stock of the parent firms has risen 20% to 70% since 2017, indicating that these firms remain unclenched by the U.S.-China trade dispute.
|Top 10 U.S. companies among the S&P 500 with the highest level of sales, in U.S. dollars, in China|
|Company||Stock price in 2017 (May 10th)||Stock price in 2019 (May 10th)||Rise in stock price|
|Micron Technology Inc.||$29||$37||29%|
|Cisco Systems Inc.||$31||$53||69%|
|Texas Instruments Inc.||$80||$107||34%|
|Procter & Gamble Co.||$86||$106||23%|
It’s possible that American firms did not expect their complaints to escalate into a full-blown trade war. Perhaps that’s why American enterprises operating in China have begun to downplay their concern about IPR. A 2019 survey by the same American Chamber of Commerce found that market access, regulatory transparency and U.S. tariffs on exports from China were the primary concern for technology firms – no different from what companies want in any nation. Firms that moved their operations out of China cited U.S. tariffs on exports from China as the main reason. Concerns about IPR were subdued, except for a few American firms focused on innovation. Consumer and services-oriented firms, on the other hand, remained bullish on China’s domestic growth.
China is infamous for subsidising its enterprises, both state-owned and private. This alone can be the rationale for imposing tariffs on Chinese imports under Section 301 of the U.S. Trade Act of 1974 which empowers the U.S. government to take action against “unreasonable or discriminatory” business practices and those that “burden or restrict U.S. commerce”.
The U.S. Justice Department also launched a new programme, called the China Initiative, to combat economic espionage by Chinese firms and individuals after a grand jury indicted a Chinese company and a Taiwanese one, along with their staff, for stealing an American company’s business secrets.
Therefore, some action against China’s trading behaviour, even if it hurts the American enterprises in the short-term, seems justified.
America’s deteriorating trade deficit with the world has other explanations. Its declining savings-to-investment ratio and obsolete trade measurement processes that only account for goods transported across border (and not measuring value or business operations) are issues policy experts know only too well. Shang-Jin Wei, former chief economist with the Asian Development Bank, drove home this point in an op-ed in Project Syndicate by explaining that Apple sells more iPhones and iPads and General Motors more cars in China than the U.S. exports statistics imply.
An interesting side effect of U.S.-China geopolitical relations and the trade war, as shown in the American Chamber report, is that American firms in technology and industrial sectors are not only thinking of moving business out of China, but out of the U.S. too. Many of them are considering relocating operations to other parts of Asia. The American Chamber survey from September 2018 showed that only 6% of American firms in China were considering relocating back to the U.S. South East Asia and the Indian sub-continent were more favourable.
If this is true, India should benefit. The U.S.-India Strategic and Partnership Forum, a business chamber that supports the bilateral commercial relationship, reported in April 2019 that 200 American companies were planning to shift operations from China to India.
Clearly, America’s long-term strategic interests against China are dominating its short-term corporate interests. If this means more American commercial attention towards India, this can elevate U.S.-India economic relations to a new level.
Akshay Mathur is former CEO and Director of Research, Gateway House.
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 Executive Office of the President, Office of the United States Trade Representative, “Statement By U.S. Trade Representative Robert Lighthizer on Section 301 Action,” press release, 10 May 2019, <https://ustr.gov/about-us/policy-offices/press-office/press-releases/2019/may/statement-us-trade-representative>
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