My manufacturing career spans over 40 years, mostly in China. I received my doctorate. from a Chinese university, I am fluent in Mandarin and have worked with many Chinese manufacturers and made many Chinese friends over the years. Recently, I made the decision to retire and move from China. Since I will now be out of the mix regarding first-hand experience in China, this will probably be my last IndustryWeek article.
For this article, I think it is appropriate to summarize what my Chinese friends and colleagues think of the current trade relationship between the United States and their country. My approach here will be non-judgmental. I’m just going to relay what I heard and let you draw your own conclusions regarding the feedback I received.
The trade gap between the two countries
The Chinese understand the alarm created by the huge negative trade imbalance between the United States and their country. What they don’t understand is why the US blames China for creating it. In their minds, the solution is simple. The United States only has to reduce what it buys from China to equalize trade between the two countries. To them, it seems that the root cause of the trade deficit is that American businesses and consumers have become dependent on Chinese products, which is an American problem, not a Chinese trade problem.
The Chinese see the tariffs as a tactical band-aid approach to “fix” the trade deficit that does not address the root cause outlined above. To them, tariffs seem hypocritical, because while the United States preaches to China about free trade, it is the first to impose punitive tariffs unrelated to free trade. They also see the tariffs as a tit-for-tat action, with China having as much – if not more – influence than the United States. As a result, they are surprised when the United States reacts negatively to any of China’s counter-actions, such as when China stopped buying corn and soybeans from the United States, resulting in a $43 billion federal bailout to Midwestern farmers.
The armament of commerce
The U.S. government banned U.S. companies from buying 5G technology from Chinese company Huawei and successfully tricked Canada into arresting that company’s owner’s daughter. Not content with that, the US has also launched a global campaign to pressure other countries to ban Huawei, including threats of trade sanctions against them – many traditional allies – if they don’t. weren’t doing it. The Chinese see this as an ‘arms’ trade and don’t think the US understands that by opening this door, China can take similar action.
Government Trade Strategy
The Chinese are surprised at the absence of a strategic American trade policy. For example, the Chinese government has just released a strategic white paper that emphasizes the need to conserve finite natural resources such as rare earths. This will likely become government policy, and when it comes into effect, the export of these items will require a special export license.
Reading between the lines, China can apply this policy to any exported product it chooses. Fertilizers – for which China previously accounted for about 30% of global production – are already banned from export, forcing many US farmers to switch from wheat to less fertilizer-intensive crops like soybeans.
Compared to the above, China has practically monopolized the availability of rare earths, now accounting for around 85% of global production. Without rare earths, the US technology and defense sectors would be crippled. All 17 critical rare earths are mined and refined in China in large volume. Some are mined in other countries, but only in smaller volumes, which makes them more expensive. China knows that developing alternative sources would be a very long process. For the foreseeable future, China decides who gets rare earths and who doesn’t. Indeed, they see rare earths as a commodity that they could weaponize if they wish.
Recently, there has been a lot of talk in the United States about developing self-sufficiency in the manufacture of strategic goods and products. China has also recognized this problem. The difference between the United States and China is that China has already begun to take strong measures to solve this problem.
For example, even though China is the world’s largest producer of microchips, a global chip shortage has caused a slowdown in many of China’s tech-dependent sectors. China has already increased its domestic production at a rate impossible – due to its unique political system – in any other country.
China is also stockpiling food and other basics at unprecedented levels. It is now thought to hold more than half of the world’s grain and maize, with other food staples stocked at similar levels. Likewise, iron ore, steel and other industrial raw materials are also stockpiled in previously unforeseen quantities. In a world of chronic shortages, the Chinese realized that raw materials were more valuable than money. They also understand that with manufacturing contributing only 13% of GNP, US self-sufficiency will be a long-term project.
The Chinese nuclear option
China holds the largest holdings – trillions of dollars – of US debt of any country in the world. They have seen the value of these assets decrease due to US inflation, the devaluation of their assets. If they decide to do so, China could dump its dollar holdings, further reducing the value of the dollar. It would hurt the assets and economies of its other US trading partners around the world. China does not want to do this, but it is available if the United States decides to become more combative in its trade relationship with China. The Chinese are amazed that the United States has allowed their country to become so financially dependent on one country.
The Chinese believe that there is nothing the United States produces that China cannot manufacture in-house or buy elsewhere. As stated earlier, the Chinese understand that the United States is highly dependent on Chinese products. For example, without them, the American economy would be paralyzed. The extent of this reliance has been demonstrated by the continued chaos of the supply chain. And for these reasons, China sees no near-term threat to the United States decoupling its industrial dependence from their country.
Their point of view: China did not start or want a trade war with the United States, and the United States did not understand the risk it was exposing itself to when it started the war by applying customs duties on American products.
The Chinese feel that the United States is carrying out a unilateral attack on the Chinese economy. China has not retaliated or used any measures it might have taken in response, at least so far.
They also believe that any decoupling of trade between our two countries will be on their terms and will result in a much higher level of damage to the US economy than theirs.
Eamon McKinney, Ph.D., MBA, (Sinologist) is an expert on China-related trade issues around the world. He has written numerous articles on the subject in publications such as the Financial Times, the Economist and the Far Eastern Economic Review.