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Why the Trade War is Not Slowing Anytime Soon

Oct 25, 2018

Takeaways from 12th Annual China Town Hall

On October 9, 2018 the National Committee on US China Relations hosted their 12th Annual China Town Hall in Tampa Bay, Florida. The National Committee is a private, non-partisan, non-profit organization whose purpose is to promote understand and cooperation between two of the world’s great nations.

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At the 12th Annual China Town Hall, Secretary Condoleezza Rice  along with industry experts discussed the rising US-China tensions, the US-China business landscape, and what comes next. I spoke with David Alexander, CMD’S USA Partner and CEO of Bay Source Global who participated as a panelist to collaborate on a summary. Here are the main takeaways:

Rising US-China Tensions

The US-China trade war continues and shows little signs of slowing down. Sparked by political motivations, the back-and-forth tariffs threaten existing supply chains while burning US and Chinese consumers. As negotiations ensue, what is each side looking for?

US wants:

  • China to ease conditions on foreign business
    • E.g. Joint ventures between US and China shouldn’t require China to own 51%
  • Protections of US intellectual property (IP) and enforcement of said protections

China wants:

  • To know who in the United States is making decisions
  • To wait and see how midterm elections will play out
  • To demonstrate its economic strength by not subduing to US will

 

US-China Business Landscape

As tensions rise and forecasts grow more volatile, many US companies are mitigating risk by moving outside of China. Panelist Sareet Majumdar, President of ICTC USA of IC Intracom USA, Inc. and leader of Global Manufacturing Operations, has had success with a light electronics assembly operation in the Philippines to benefit from lower labor costs, reasonable material costs, and less political uncertainty.

Companies are leaving because:

  • Political uncertainty
  • Rising costs incurred by tariffs
  • Enticing opportunities offered by Southeast Asian nations interested in picking up the business

 

Although many US companies are leaving, China remains viable for startups because:

  • Has existing infrastructure
    • Contains nearly every manufacturing discipline
    • Specialized equipment
    • Mature supply chains
  • Its abundance of capital & strong government investment
  • Access to raw materials
  • Variable cost options over large upfront capital expenditures

 

What Happens Next?

We don’t know what we don’t know. There is no certainty with this trade war. Moving into mid-terms, changes in the US political landscape will have major effects on how the US-China trade war plays out.

Current forecast:

  • Supply chains and labor markets will be impacted for 3-5 years
  • The US, China, and the world economy will never be the same again
  • Jobs are unlikely to return any time soon
  • Citizens will pay the prices
    • American, Chinese, and world citizens caught in the ripples
  • China will find other markets to buy goods
    • E.g. Just a few months ago, China was buying two out of every three rows of US soybeans. As China finds alternative source, the business may never come back.

 

The current status of the US-China relationship remains volatile and ambiguous. With so many stakeholders, an accurate assessment of landscape becomes difficult. Thereby, forecasts grow unstable making navigating the landscape a challenge even for industry experts.

We suggest to begin exploring alternative options, mitigating as much risk as possible. This is not the time to gamble big. Southeast Asia has a variety of viable options. Capacity will be limited, so the time to hunt is now. When preparing to move operations to another country, be sure to perform proper due-diligence. Complete Manufacturing and Distribution is here to help with the entire process. Time for Plan B outside of China? Let’s talk.

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Topics: In The News, Risk Management, Manufacturing