If a manufacturing firm has a goal to sell products in both the US and China, locating the production in China gave them an unfair economic advantage. China imposes very heavy tariffs and regulations on almost all imported goods, making access to China’s market far more costly for the production of manufactured goods outside of the country.
The US has very low tariffs on most goods in an effort to encourage “free markets.” So if you were to select a single manufacturing location based on the economics of supplying both the US and China markets, China had a very unfair, asymmetric economic advantage. This produced tremendous manufacturing sector growth for decades. Now the Trump tariff war poses a serious threat to the idea of goods being made in China.
For the last few decades, the imbalance in tariffs has equated to jobs leaving US, Mexico and Canada. Production work not only went to China, it stayed there. Even when labor cost went up in China (compared to other low cost countries such as Vietnam or Bangladesh) companies, prior to moving out of China, would make sure that their in intra-China production would at least cover their domestic China consumption. This produced the “China Economic Miracle.”
Now that China is one year into the trade war with Washington, over 50 global companies including Apple and Samsung have announced they are planing to move manufacturing out of China, according to Nikkei research. Apple has asked their major suppliers to move 15% to 30% of iPhone production out of the country, as Apple is about to start beta manufacturing of its popular AirPods earbuds in Vietnam.
The Trump tariffs on China have changed the economic calculation, raising the total costs of production for companies located in China that also want to sell their products in the US. This has been a home run for Taiwan, Vietnam, Bangladesh and other low cost nations. It also applies significantly more pressure on China to begin to negotiate with the Trump Administration, or find some other solution. Trump is demanding that China end its unfair and illegal trade practices.
The US/China trade war is a problem for China, both in flows of capital and goods. During the last five months, China exports to the US fell over 10%, while those from India, Vietnam and Taiwan grew by over double-digits. The battle of giants also seems to be hurting the Chinese economy. Newly released data showed that Chinese economic growth slowed to 6.2% in the second quarter– the weakest rate in at least 27 years.
Chinese company TCL is moving its TV production to Vietnam, and Sailun Tire is moving production to Thailand, Nikkei reported. Other Chinese companies are also being forced to reevaluate based on the new economics of this prolonged trade war.
“The United States Tariffs are having a major effect on companies wanting to leave China for non-tariffed countries. Thousands of companies are leaving. This is why China wants to make a deal.” -Trump post on Twitter.
One outlook we find very possible is not a cold war like we had with Russia, but a cold business ecosystem. “The possibility of the world market dividing into China and non-China is growing,” said Yuji Miura, a senior economist with Japan Research Institute. “Decoupling”–that is an unwinding of economic ties between the U.S. and China and a division of the world economy into hostile blocs — is a real possibility.
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