Chinese Manufacturing Solutions Blog

Complete Manufacturing and Distribution Blog

The US-China Trade War 101: What you need to know in 5 minutes

Jun 21, 2018

US-China Trade War

Before diving in, there are two things we’d like to disclose: 

First, publishing this piece is tricky – what we know today could change (or even be reversed) with breaking news.  Parts of what you see here could have been rendered obsolete by today's news headlines we haven’t read yet. Things are changing that fast.

Second, the spirit of gathering this information is to present facts vs. opinions. So if something below reads like an opinion; it was not intended that way. Our mission here is to provide a framework in which developments on trade can be more easily understood. One thing was clear as research got underway: the more we investigated trade, the more complex the issues became. 

Why is global trade so convoluted?
The days of vertical integration are long gone. Today’s supply chains are complex, highly connected, and messy. They blanket the globe and unraveling them is almost impossible without hurting consumers.  In the old world of vertical integration, a price hike on one part could be absorbed by a price concession on another. But that doesn’t work today, where specialization is rewarded.  In the spider web of supply chains today, imposing a tax or tariff on one member of the supply chain forces a price increase to be passed on to the next, and ultimately to passed on to the consumer. 

“Centers of excellence” for specific manufacturing competencies have migrated to regions with easiest access to materials, resources, and specialized skilled labor, trade by trade. As reported in the NYT, Michigan-based Lucerne “used to source more products from within the United States. But when the financial crisis hit, her [Lucerne’s] American suppliers started to fold, and the company had to look abroad.”  Today, China is the world leader in high-quality, low-cost forging, casting, and stamping parts. While not impossible, it’s hard to find specialty trades like these and many others in Western markets. Niche production transitioned out over decades to best in class producers all over the world.  

What does the US want from China?
The US ultimately wants less friction when investing in Chinese business. A large part of this entails:

  • Reducing the trade deficit by $200 billion USD by 2020
  • Better protection of US intellectual property

What does China want from the US?

  • Continuing the inflow ­­­­­­­­­­­­­­­­­­­­­­­­­of global production opportunities 
  • Satisfying consumers in sectors where Chinese supply cannot satisfy Chinese demand (e.g., pork, poultry)
  • Avoiding slow-downs that result in labor instability
  • Access to technology to jump-start home grown industries

What are the concerns on both sides with the trade deficit?  
On the US side, America has run a trade deficit since 1975 and closing the gap in the near future is unlikely.  US consumers have higher purchasing power than Chinese consumers, for now. China’s middle class is booming - expected to expand from 430 million today to 780 million in the mid-2020s.  The gap is closing.  

America’s top five trading partners also have the largest deficits:

Country

Total Trade

USA Deficit

China

$636 billion

$375 billion

Canada

$582 billion

$18 billion

Mexico

$557 billion

$71 billion

Japan

$204 billion

$69 billion

Germany

$171 billion

$65 billion

A number of large Chinese companies have already been affected by US actions. Two notable cases include the blacklisting of e-commerce giant Alibaba and a (temporary) technology export ban of one of China’s largest telecom company, ZTE.   Famous for sales of fake handbags, watches, and other counterfeited luxury goods, what has Western brands worried are instances of automotive parts, brake pads, airbags, and more - popping up on Alibaba as well. 

What are the top IP flashpoints?
The US Government estimates that “IP-intensive industries directly and indirectly support 45.5 million American jobs, about 30 percent of all employment in the United States.”  

Top US government concerns regarding IP include:

  • Copycat trademarks: US brand owners have reported for years how Chinese companies are granted trademarks in China in which are very similar (and even indistinguishable) from established, and in some cases, famous existing brands. The damage to balance sheet goodwill can be substantial. China is taking steps to combat the practice. Two famous examples include BMW’s win against a Chinese clothing company, and American fashion designer Michael Bastian’s win against a trademark squatter.  The takeaway for any foreign firm doing business in China is to register your brand, mark, and translation sooner vs. later to have a leg to stand on. 
  • Unlicensed content: A thorn in the side of the music and film industries for decades, the violators continue to grow more clever as new technologies make streaming faster and easier than ever.
  • Inconsistent application processing: Brand owners report denial of applications in Chinese markets, even though their brands are accepted by other major markets.
  • Pressure to release: The USTR has received repeated reports of US brands being forced to give up control of their IP in China in exchange for access to the Chinese market.
  • Foreign ownership restrictions: Examples here include joint venture requirements and foreign equity limitations, which ultimately require or pressure US companies to transfer technology.
  • Unfair technology regulation: These regulations favor Chinese recipients as they force US companies looking to license their technology to Chinese entities under non-market based terms.
  • Technology transfer pressure: There are two factors at play. The first is foreign ownership restrictions, namely joint venture requirements and foreign equity limitations. The second is the direct and unfair facilitation of the systematic investment in, and acquisition of US assets and intellectual property by Chinese companies. Both these acts ultimately force, pressure, or generate the transfer of technology to Chinese companies.
  • Intrusions into US company networks: China taps into US companies’ trade secrets and sensitive commercial information by means of unauthorized computer network intrusions.
  • Repeated invoking of cyber-security:  In order to force US companies to either disclose sensitive IP to the Chinese government or transfer it to Chinese companies, China invoked laws to "address security concerns." A prime example here is the Cyber-security Law which took effect on June 1, 2017, which forces US companies to choose between protecting their IP and profit from sales in major portions of China’s economy.

Given the number and magnitude of issues above, it is unrealistic to expect problems to be solved in the coming months.   China's hunger for technology (and IP)  will continue for decades.  To accelerate high-tech industry in China, MIC 2025 was unveiled in 2015.  

What does the MIC 2025 initiative hope to achieve?
China has reached a level of development where an economic growth model based on high-volume, low-wage production is no longer sufficient for long term growth.  Once known as the world's low-cost manufacturing hub, China's rising labor, social, and overhead costs have resulted in competitive disadvantages, especially in high-labor manufacturing sectors.  Countries in SE Asia are eager to close the gap.   The outflow of manufacturing from China isn't limited to just clothing, textiles, and shoes.  Samsung's 2 KM long plant is not in China, but in Vietnam.  

In response, China announced Made in China (MIC) MIC 2025 to develop strategic, home-grown industries capable of competing globally.   China's focus is on home-growing (independent of foreign investments) and building specialties in the following industries:

  • Aerospace and aviation equipment
  • Electrical power equipment
  • Rail transportation
  • New generation IT
  • Maritime engineering
  • Biomedicine and advanced medical technologies
  • Agricultural equipment
  • New energy vehicles
  • High-end robotics
China's success with the program depends on two things:  government funding and access to technology, since many agree that China cannot accelerate R&D fast enough on its own.   China had a limited window of opportunity to acquire foreign technology which has largely closed around the world.  Many governments, including the USA, have banned China from acquiring companies in key technology sectors.   According to AmCham, China has set aside $330 billion USD in a development fund to jump start key industries. 

What actions can companies with China interests take? 

Companies need a constant inflow of accurate information to thrive in China's ever-changing landscape.  For example, which sectors are under threat for tariffs?  What options do companies have to mitigate risk?  Is manufacturing in SE Asia a smart move...now?  After 30 years in China, experts at CMD are well prepared to answer these questions and more. 

Let's Talk

Topics: Operations, Risk Management, Thought Leadership