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
Hopefully, by now, it is beginning to dawn on Donald Trump’s trade team how naive it was to think that trade wars might be good and easy to win. What they have yet to realise as they ratchet up their tariff “punishments” is that the main victims of these actions are their own global multinationals, and of course America’s own consumers.
And no, I am not even talking about the price they will pay as purchasers of more expensive imported steel and aluminium, or car components. Steel prices in the US have increased by 40 per cent since March.
Rather, I’m talking about a fascinating piece of research by Mary Lovely and Yang Liang at the Washington-based Peterson Institute, which lays bare a reality that has been hiding in plain sight: Trump’s tariffs “largely tax the exports of foreign enterprises operating in China, whether US-owned or with parents domiciled in other advanced economies (all US allies)”.
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.
Sitting in Hong Kong, I should have quantified this long ago: the great majority of exporters operating in the Pearl River Delta are Hong Kong and Taiwanese manufacturers that flooded in after Deng Xiaoping launched the special economic zones in the early 1980s, and enterprises from the United States, Japan, South Korea and Europe that have arrived since.
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.
Trump's 25% import tariffs on China's unfair trade apply to these 1,333 products
...a Section 301 word cloud... pic.twitter.com/E0Pil4t6vc
— Chad P. Bown (@ChadBown) April 4, 2018
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.
Here, they would discover that US multinationals like GE, Nike, Starbucks, Ford, Tyson, Monsanto and so on have sales inside China that were at last count worth US$221.9 billion – far more than US exports. All are bracing themselves for the harm that will be done to their businesses as China inevitably retaliates, and as the Trump team tries to identify a further US$200 billion of imports from China without hitting “goods commonly purchased by American consumers”.
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.
Trump’s team say they are targeting unfair business practices inside China that are hurting foreign businesses, and the protectionist aspects of the “Made in China 2025” initiative. That is a fair concern, shared by European and many other companies trying to build businesses inside China. But the tariff strategy – if you can call it a strategy – is shockingly inept, with US and other foreign companies the main casualty.
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