My career in manufacturing has spanned over 40 years that have been primarily spent in China. I received my Ph.D. from a Chinese University, 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 relocate from China. Since I will now be out of the mix regarding first-hand experience in China, this will likely be my last IndustryWeek article.
For this article, I think it’s appropriate to summarize what my Chinese friends and colleagues feel about the current trade relationship between the United States and their country. My approach here will not be judgmental. I’ll just relay what I’ve heard and let you make your own conclusions regarding the feedback I’ve received.
The Trade Gap between the Two Countries
The Chinese understand the alarm that the huge negative trade imbalance between the United States and their county created. What they don’t understand is why the U.S. blames China for creating it. In their minds, the solution is simple. The U.S. only needs to reduce what they are buying from China to even out trade between the two countries. To them, it seems that the root cause of the trade gap is that U.S. corporations and consumers have become addicted to Chinese goods, which is a U.S. problem, not a Chinese trade problem.
The Chinese see tariffs as a Band-Aid tactical approach towards “fixing” the trade gap that doesn’t address the actual root cause described above. To them, tariffs seem hypocritical—since while the U.S. preaches to China on free trade, they are the first to impose non-free-trade punitive tariffs. They also see the tariffs as a tit-for-tat action, with China having just as much—or more—leverage as the U.S. As a result, they are surprised when the U.S. reacts negatively to any of China’s counter-actions—such as when China stopped buying corn and soybeans from the U.S., which lead to a $43 billion federal government bailout of Midwest farmers.
The Weaponization of Trade
The U.S. government banned U.S. company purchases of 5G technology from the Chinese corporation Huawei and successfully prodded Canada to arrest the daughter of that company’s owner. Not content with this, the U.S. also launched a global push to pressure other countries to ban Huawei, including threats of trade sanctions on them—many traditional allies—if they didn’t. The Chinese see this as “weaponization” trade and don’t think that the U.S. understands that by opening this door, China can take similar actions.
Governmental Trade Strategy
The Chinese are amazed at the lack of a strategic U.S. trade policy. For instance, the Chinese government just published a strategic white paper that emphasizes the need to conserve natural, finite resources such as rare earths. It will likely become government policy, and as it comes into effect, export of such items will require a special export license.
Reading between the lines, China can apply this policy across any exported product it chooses. Fertilizer—for which China previously accounted for about 30% of the world’s production—is already banned from export, forcing many American farmers to switch from wheat to less fertilizer-intensive crops like soybeans.
Relative to the above, China has all but monopolized the availability of rare earths, now accounting for about 85% of global production. Without rare earths, U.S. technology and defense sectors would become paralyzed. All 17 critical rare earths are mined and refined in China in high volume. Some are mined in other countries, but only in smaller volumes, making them more expensive. China knows that developing alternative sources would be a very lengthy process. For the foreseeable future, China decides who gets rare earths, and who doesn’t. In effect, they see rare earths as a commodity they could weaponize should they so desire.
Recently, there has been a lot of talk in the United States of developing self-sufficiency relative to the manufacture of strategic goods and products. China has also recognized this issue. The difference between the U.S. and China is China has already started taking strong action to address this.
For instance, even though China is the largest producer of microchips in the world, a world-wide chip shortage caused a slowdown among many of China’s own tech dependent sectors. China has already increased its domestic production at a pace not possible—due to their unique political system—in any other country.
China is also stockpiling food and other commodities at unprecedented levels. It is now believed to hold more than half the world’s grain and maize, with other basic foodstuffs being stockpiled at similar levels. Similarly, iron ore, steel and other industrial raw materials are also being hoarded in previously unforeseen quantities. In a world of chronic shortages, the Chinese have realized that commodities hold more value than cash. They also understand that with manufacturing contributing only 13% to the GNP, U.S. self-sufficiency will be a long-term project
China’s Nuclear Option
China has the largest holdings—trillions of dollars—of U.S. debt of any country in the world. They have seen the value of these holdings decrease due to U.S. inflation, devaluing of their holdings. Should they decide to do so, China could dump its dollar holdings, which would further reduce the value of the dollar. This would damage the holdings and economies of its other U.S. trading partners around the world. China doesn’t want to do this, but it is available should the U.S. decide to get more combative in its trade relationship with China. The Chinese are amazed that the U.S. allowed their country to become so financially dependent on a single country.
The Chinese believe that there is nothing that the U.S. produces that China can’t make internally or buy elsewhere. As previously pointed out, the Chinese understand that the U.S. is highly dependent on Chinese goods. For example, without them, the American economy would grind to a halt. The extent of this dependency has been highlighted by the ongoing supply chain chaos. And for these reasons, China sees no short-term threat for the U.S. decoupling their industrial dependence on their country.
Their view: China didn’t start or want a trade war with the U.S., and the U.S. didn’t understand the risk they exposed themselves to when they initiated the war by applying tariffs to U.S. goods.
The Chinese feel that the U.S. is conducting a one-sided assault on the Chinese economy. China has not retaliated or employed any of the measures it could have in response, at least until now.
They also believe that any decoupling of trade between our two countries will be on their terms, and result in a much higher level of damage to the U.S. economy than their own.
Eamon McKinney, Ph.D., M.B.A., (sinologist) is an expert on China-related business issues in the world. He has contributed numerous articles on the subject to publications including the Financial Times, the Economist and the Far Eastern Economic Review.