In Trump’s trade war, US companies will be the first casualty of friendly fire
David Dodwell says an understanding of the interdependent dynamics of global production chains points to the conclusion – backed by research – that Trump’s tariffs on Chinese exports will hurt many foreign-owned businesses, including America’s corporate giants
Lovely and Liang reveal that 46 per cent of China’s exports in 2014 (the latest available data) were accounted for by foreign-invested enterprises. Of exports to the US, 60 per cent come from these enterprises.
As far as China’s exports go, most come from foreign companies operating there. And Guangdong, which in 2016 exported over US$1 trillion of goods, accounts for 29 per cent of China’s exports.
Watch: What a US-China trade war could cost Americans
These companies were allowed to set up in Shenzhen and Dongguan exclusively as export processors. Inputs were brought into the factories in the special economic zones (mainly through Hong Kong) in bond. They stayed in bond as goods were processed. And the finished products were exported, again through Hong Kong, still in bond.
Back in the 1980s, most of these exports by foreign-invested enterprises were low-value consumer goods – textiles and garments, toys, shoes, Christmas trinkets, leather goods. Today, exports are mainly computers and telecoms devices, electrical equipment and machinery.
And these exports are part of long and complex production chains, in which US-owned enterprises have cleverly kept most of the high-value-added activity in the US, and “offshored” the “mug’s game” part of the chain, where low-wage migrants work for starvation wages to assemble these increasingly high-value products.
It is exactly these companies that will be clobbered by Trump’s tariffs.
Chad Bown, also at the Peterson Institute, has examined the 1,333 products targeted on Trump’s original US$50 billion tariff list, and 85 per cent of them are intermediate inputs and capital equipment destined for technology-intensive products being exported not by Chinese companies, but by US-owned businesses and other foreign-invested companies.
As the Peterson Institute’s Theodore Moran and Lindsay Oldenski have argued, as noted by Lovely and Liang in their piece, US production “would not be as strong as it is without access to global supply chains, which reduce costs, raise productivity, expand the market share of US firms, and allow the US to focus on what it does best: innovating, researching and designing the cutting-edge goods and services of the future”.
Thus, according to Lovely and Liang, “it is fair to describe the tariffs as taxes on American productive inputs purchased from affiliates of foreign firms operating in China, many of them wholly-owned foreign subsidiaries … They drive up costs for US-based manufacturers and disadvantage American workers competing in global markets...
“President Trump’s Section 301 tariffs are a commercial own goal in that they harm American interests more than their intended targets.”
China may today be the world’s biggest buyer of semiconductors and other hi-tech inputs, but the most sophisticated and expensive of these are being bought from the US to be put into computers and other hi-tech products being made by foreign-owned companies for export – often back to the US. So Qualcomm, a leader among such sophisticated semiconductor makers, last year sold 66 per cent of its global US$22 billion in sales to Chinese customers and intellectual property licencees. It is companies like Qualcomm that are in Trump’s tariff firing line.
Complementing the Peterson Institute research, James Kynge at the Financial Times also notes that, instead of looking at crude trade balances, the US should be looking at its “aggregate economic relationship” with China.
They are also ignoring the US services exports in peril. According to official US government data, earnings from Chinese tourists visiting the US last year amounted to US$33 billion, more than double the US$14 billion value of its soybean exports. Strangling the issuance of tourism visas to the US would be a simple retaliatory move by Beijing.
As Lovely and Liang conclude: “Made in China 2025 remains an aspiration, not a reflection of current manufacturing prowess. It is impossible to hit tomorrow’s exports with today’s tariffs.”
David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view