Are We Winning The Trade War?

11Jun, 2019

Since we regularly travel to China for client meetings, Brian and I are constantly asked about the ongoing Sino-US trade war. Which side is winning? What is the perception over in the Middle Kingdom?

These are not necessarily easy questions, and their answers may vary depending on what and whom we are actually talking about. Like most warfare, trade wars are complex – and not all that “easy to win.” In the end, there will certainly be winners and losers, but it will not be so simple as “US 1, China 0.”

Anyone following media coverage of the trade war knows, for example, that the tariffs have had adverse effects on US farmers. And there is no doubt that US consumers will be paying more for many goods.

However, even if the monetary value of the tariff gets passed on the US consumer, that does not mean Chinese companies can evade repercussions. All of a sudden many Chinese businesses find their supply chains to be in flux, and several businesses have told us that the effects to date have forced them to pivot from the US to other markets. To President Trump’s point that China is a country rife with fraudsters, US tariff pressure has been so intense that exporters have tried to avoid them by labeling their shipments as “Made in Vietnam.”

To be sure, China’s manufacturing sector has bad actors. This is no secret, and Chinese bosses have no problem admitting this openly. To get a sense of just one manner in with some vendors try to cheat the system, check out Davide Nicolucci’s excellent deep-dive into the “black hat” tactics deployed on Amazon. In some instances, these bad actors make it impossible for US manufacturers to compete on their own soil. In others, the bad actors conduct industrial espionage to filch US ideas for their own profit.

It has been argued here in the States that Trump’s trade war actually has nothing to do with the US economy or its citizens but is simply an example of “Yellow Peril,” an updated version of the “Red Scare” in which a foreign foe is needlessly targeted. There is little evidence for this, considering the legitimate grievances US companies have with Beijing’s stance on matters such as intellectual property.

That said, the “Yellow Peril” barb could have a point when it comes to US consumer reaction to various products from China. The government has succeeded in whipping up a frenzy over Huawei, which in addition to 5G networking equipment sells everyday goods like smartphones and tablets throughout the world. One wonders: Could this lead to a mass boycott of Made in China?

Probably not. Data has repeatedly shown that Americans are not willing to pay more to Buy American. The dog leashes and wine decanters you buy on Amazon are going to be manufactured in China, whether you like it or not. But recent events might give Americans pause when shopping in some sensitive categories, like consumer electronics. Security cameras? Robotic vacuums? Americans may worry that China-made versions of these would provide Chinese companies, and therefore the Chinese government, direct access to the inside of their homes. The US Government has tried to warn Americans about this in the case of DJI Drones and the data they send back to the manufacturer’s cloud.

This is where it becomes important to remember that the US and China are not monoliths and that both countries are made up of a wide range of individuals and businesses, both for good and for ill. Just as there are companies in the Pearl River Delta that operate in bad faith, there are earnest entrepreneurs and small business owners trying hard to sell their product in a distant and culturally foreign land. And just as our country has innovative successes like Apple and Amazon, we also have our own breed of charlatan who goes over to the Far East peddling false information. 

What can we take away from this? In the end, the trade war could very well be a boon to US industry. Perhaps Beijing will begin to clamp down on theft and labor abuse and will forego the forced technology transfer required for entrée into its domestic marketplace. But as we wait for the statesmanship to that end, we must remember that Chinese companies are not necessarily the same as the Chinese government; just because Huawei is suspect does not mean that, say, OnePlus is.

Both American consumers and Chinese producers need to realize this, especially as mutual trust wanes during the ongoing “decoupling.” Chinese companies should invest in ample market research to understand US consumers and figure out how to alleviate their concerns. Americans should demand more transparency from obviously Chinese companies that claim on their website to be based in LA or Seattle or Denver. Honesty from both sides is the only navigable path ahead and the only palatable solution for the increasingly nasty trade war. Let’s get it going before it is too late.