China U.S Trade War Basics (1/4)
A Summary of the China-U.S. Trade War and the Impact to China’s Manufacturing, Technology and Service Industry (1/4)
On May 10th, 2019, Trump announced that once again, the highly anticipated China- US trade deal fell through. Ten days later, a group of undergraduate students from the Wharton School flew to China, in part to discover why. Through our ten-day trip, we were able to study in detail the manufacturing, technology and service industry, as well as develop our own framework of understanding what the China-US Trade deals mean to both countries. Finally I will explain how each of these three industries have contributed and been affected by the trade tensions as well as the way in which the two countries can move forward together.
For the past 18 years, I have been living in and out of Beijing, China, watching as this once developing economy manifest into an emerging world superpower. But, with such rapid growth, China also became the target for further scrutiny from other world superpowers. The most recent conflagration was incited by U.S. President Donald Trump that resulted in the China-US Trade War. The conflict boils down these few point:
- Trade Imbalance
One of Trump’s election cries was that we should blame China because China exported 540 Billion dollars worth of goods and services to the US in 2018 while the U.S only exported 120 Billion to China, leading to a trade deficit of 419 Billion in 2018.
2. China is stealing America’s Intellectual Property
A 2015 paper by the Federal Reserve Bank of Minneapolis concluded that more than half of all technology owned by Chinese firms was obtained from foreign companies. The U.S. Trade Representative has estimated that this practice has resulted in an annual loss to China at between $225 billion and $600 billion.
3. Government Subsidies for Research and Development
A point brought up by US tech giants is that unlike a capitalist system, where individual companies are responsible for developing and innovating new technology, the structure of the Chinese Communist Party allows it to provide incentives and subsidies to grow China’s capacity in different industries. In some way this changes the business ecosystem from a direct competition between Chinese and American market competitors to an unfair competition pitting an individual U.S. firm with the Chinese government.
4. Further Opening China Up to Foreign Companies
China had long closed the doors on foreign competitors in certain industries, such as banking and the pharmaceutical industry. For example, most of the banking industry in China has been owned by State-Owned enterprises. This pushes out major competitors and stops foreign companies from accessing China’s market.
Because of these aforementioned reason, Trump’s administration decided to incur tariffs on trade goods coming into the U.S. from China to put pressure on China to purchase more products from the United States, negotiate on intellectual property rights agreement and open up the financial industry and pharmaceutical industry etc
With these four points in mind, our team of students spent ten days visiting some of the leading companies such as Baidu, Sina, China Merchant Bank etc.
First to dissect rhetoric from facts on the first point, China is not benefitting as much as Trump claims from the trade imbalance. The trade deficit is calculated through China’s export to U.S. minus U.S.’s export to China. However, exports also include intermediate goods. Let take the example of an I-Phone. An I-Phone contains individual parts which make up the device, including a camera produced by Sony in Japan, an accelerator by Bosch produced in Germany, a 4G/LTE chip produced by Qualcomm in the U.S. etc. All of these parts are together first exported to China. These intermediate goods then are assembled in a factory like Foxconn and then is sold back to the U.S. When U.S. claims that China is taking advantage of them in trade, The U.S. is discounting the fact that out of the 600 dollar retail price of the 2009 version of the I-Phone , Chinese companies earned only 6.5 dollars, or approximately 1% of the supposed import cost. Meanwhile Apple and other American companies made 70% of the profit. However, U.S. data shows the entire value of an I-Phone as belonging to China, when in reality most of the value of the I-Phone comes from the value of intermediate goods, which Germany, Japan, the US and other countries profited from. A study conducted by Oxford indicates that if we took out all of the intermediate goods in the process, the trade deficit between China and the US would be cut in half.
However, to understand how government subsidies, intellectual property right infringement and Chinese policy affect U.S corporations, we must understand how China has positioned and promoted their economic expansion in the past three decades. Furthermore, we must study the history of the successes and failures of companies entering China and how Chinese policy has influenced these outcomes.
In the next article we will specifically address how China became a manufacturing powerhouse and how increasing trade tensions will alter China’s manufacturing industry. This will be followed by separate analyses on the tech industry and the retail industry amid the trade tensions.
