What Will Be The Implications For US Businesses If They Leave China?
Maham Babar Khan writes about US President Donald Trump’s recent statement that called on American companies to pull out of China, and the implications that this move will have for US companies if they actually leave China abruptly.
Ever since the president of the United States (US) started the infamous trade war with China in 2018, things have only taken a turn for the worst. With constant retaliatory tariffs being imposed by both sides on each other and their refusal to compromise, a solution to this problem is still missing.
Known for conveying his views mostly through Twitter, the US President Donald Trump recently ordered all ‘American companies’ to pull out of China. So what exactly would happen if US companies leave China abruptly?
For one, Trump himself announced delaying tariffs on certain items, which were to come into effect on September 1 and remain active till December 15 of the ongoing year, so that the American public can carry out Christmas shopping without worrying about inflation.
Second, the trade war would have no winners. Instead, it would end up costing the US companies dearly. The American agriculture industry is among the primary sectors being impacted by the trade war, especially after China retaliated to American tariffs by refusing to buy their agricultural products.
This move has brought down the American agriculture imports to China from $19.5 billion to $9.2 billion in 2018, due to which individual farmers have suffered the most. One farmer complained about suffering losses of $70 per acre yield, whereas the aid package handed out by the government barely covered $15. Import of soybeans, which is the single most important crop that US sends to China, fell drastically by 75 per cent from September 2018 to May 2019.
And the relief the government is handing out is of no help either. The Trump administration gave $16 billion from federal aid to farmers, who pointed out that it barely covered 8 per cent of their losses.
Similarly, electronic and technological companies find themselves in a quagmire due to the China-US trade war. While a few have switched operations to Vietnam and other Southeast Asian countries, giants like Apple cannot make this switch easily and still hope to churn out the same level of profits as it did in the past.
In order to switch to other countries, big technology companies would have to import specialised labour and management since the countries they would be moving to do not have the expertise and know-how that China has readily developed over the last few decades.
To keep production going at the same speed, these companies would also need already-established customised factories and warehouses in the countries that they switch to. This is also not possible on such a short notice. Foxconn, the Taiwanese electronics company, had to first acquire land-use rights in Vietnam before pumping in millions of dollars to set up a production plant there.
Specialised parts of high quality and quantity are not easily available in other Southeast Asian countries. In China, all suppliers are within reach and the waiting time is also extremely short. Apple produces nearly 600,000 phones a day only because all sources of production are near and easily accessible to them. China also has a large labour force that works for small profits while other countries in the region don’t have this advantage (Vietnam’s population is 96 million against China’s 1.4 billion).
‘American products’ is a slogan as old as the US itself. In the 18th century, Americans started using homespun clothes as a protest against the British. Several steps had been taken in the past by the US government to protect local industries or to force other countries to come to the negotiating table (US’s infamous tariffs on Japan in the 1970s comes to mind).
This time around, the slogan of ‘US-based products only’ is inconceivable. In the globalised world of today, no economy can remain closed off and even China and Russia eventually had to open up to international markets.
Manufacturers and buyers working in an open market like the US would always look for the best quality but at the cheapest price possible. They would always want huge profits and low production costs.
In such an environment, the only ones facing the brunt of Trump administration’s tariffs are US companies, especially those who still have manufacturing plants at home. The tariffs on steel and aluminium, for example, has decreased supply and increased costs of productions. General Motors, Caterpillar Inc and others are also complaining about rising costs of production.
General Electric imports raw materials from China for its high-end medical equipment manufactured in the US state of Wisconsin. Now, they are paying 25 per cent tariffs on imports from China, which has increased the costs manifold.
St. Pierre, another company whose manufacturing plant is based in the US, needs to import foreign raw material or specialised parts to keep up with cheaper foreign rivals already present in the US market. Even if it buys American steel, due to tariffs, supply has decreased whereas demand has increased, thus increasing the prices by 40 per cent. So even with local products, production costs have risen and prices would eventually rise. This is something that haunts the owners of US companies. Ultimately, the US-based companies would have to increase prices to cover up costs and customers would prefer to switch to alternatives.
With other new realities emerging in a technologically advanced and a more connected world, retailers have switched over to e-commerce. These retailers only send consumer items once a customer places an order with them. While this has proven to be more economical for retailers who don’t have to buy mass bulk from companies anymore, it has just added up to the list of grievances for manufacturers. Overall, production has consequently fallen and individual orders just increase manufacturing costs.
One TV assembling plant in North Carolina was subsequently shut down as huge costs from tariffs incurred heavy losses on them. They had no other option but to lay off hundreds of workers.
And while US companies have invested billions of dollars in China, Chinese companies have also have invested $180 billion in the US from 2005 to June 2019, most famously in its chemical industry.
In 2018, Wanhua Chemical planned to invest $1.25 billion in one small US town of Louisiana alone, due to easy access to the much-coveted shale gas hubs.
Chinese firms also have other industrial plants in the US. For example, a glass-manufacturing plant in Dayton, Ohio, employs people from a town where the majority of blue-collar workers were unemployed ever since General Motors closed production there.
The current trade war would most probably result in the closure of these plants, which would render many employees jobless, who were earlier courted by Trump during his election campaign on the promise of bringing back jobs to the US.
The planned chemical plants in Louisiana, presently nearing completion, are also facing uncertainty as workers are robbed of potential employment opportunities, thus costing the companies millions of dollars.
The chemical industry in the US imports chemicals from China either to directly sell in the domestic market or use them to manufacture other high-end products. With more tariffs set to take effect from September 1, a report from the American Chemical Council warned how almost 1,517 chemicals and plastics integral to the industry would suffer due to tariffs. The entire industry fears that China’s retaliatory tariffs on chemicals alone would cost 55,000 American jobs and $18 billion losses in domestic activity.
With such uncertainty looming in the air and hundreds of thousands of jobs at stake, what is the next step? It looks like Trump is making good on his promise and would not rest until the US manages to achieve all its goals. However, these companies have a lot to lose, and in such a decentralised and free economy, ultimately they would do what they want.
For instance, China aims to buy over 7,700 planes in the next 20 years from Boeing, reportedly at a price of $1.2 trillion. If the company decides to pull out of China, it would lose huge profits to its European rival. Will Boeing then take such a ruinous step?
Another important point is how while the US has one main supplier for cheaper, quickly-produced high-end products in the shape of China, the latter has access to vast markets. Already, it has exported construction materials to the United Arab Emirates (UAE) and other Gulf states in a short time. This is a good example of how Chinese can easily find markets elsewhere if in the long run no satisfactory deal is reached, though this would not be the most ideal situation.
The Chinese government is already taking steps to tap the rural domestic market to offset the losses and demand from abroad. There are already plans of renovating old neighborhoods, building facilities required by Chinese firms and even setting up more economic zones to attract investment from the rest of the growing Asian market. Instead of tapping into real estate as an ill-conceived short-term solution, the Chinese government is already thinking long-term.
For now, China is absorbing the blows and pooling money to keep its industries going. However, this approach is unsustainable. While the two sides are refusing to completely comply with the other party and with leverages on both ends for the near future, this ill-thought-out tussle would continue in the future as well.