Sep 17, 2018, by David A. Andelman
China is fully prepared to win any kind of tariff war that Donald Trump can throw at it with some quite simple stratagems that might all be grouped under a single rubric: Autocratic Capitalism.
After U.S. markets closed on Monday, Trump announced he would impose a 10 percent tariff on $200 billion worth of Chinese exports to the United States – half the level previously contemplated, but still designed to move Beijing toward bilateral talks. As an added incentive to come to the table, he announced that figure would surge to 25 percent at the end of the year, after the U.S. holiday selling season.
Yet, this autocratic capitalism that China has effectively embraced will make it harder for Trump to cause the kind of economic pain that might produce any kind of victory for the White House.
There are several key elements of this plan that have received little or no attention in Washington, but that should lead to head-slapping, “ah-ha” moments. One came to me as I was examining some new equipment for our kitchen. “I guess we’d better buy this Haier stove before the Chinese tariffs kick in,” I observed to our appliance salesman. Naw, no worries, he smiled. Haier’s assured us they won’t go up in price.
The store associate may simply have been repeating his company’s placatory line on charges. But the next day my college friend, David Bostwick, a venture capital investor from Silicon Valley and CFO of Crystal Solar, observed that’s how China got a strangle-hold on the American solar panel market. It reduced prices, helping to gut the American solar panel manufacturing industry. “All the Chinese have to do is cut their prices 20 percent and they can keep selling their products in the U.S. without any disruption,” Bostwick observed.
Some of these changes may even make Chinese companies more efficient and, in the long run, more competitive. At the same time, those companies whose thin margins make them unable or unwilling to slash 10 percent from their wholesale prices may find other, quite inventive options, at home and abroad. For years, China has been on a determined push to rid itself from a reliance on exports to drive its economic growth. And that plan has been working. Exports as a percentage of Chinese GDP have fallen every year for the past decade, except for 2009 in the depths of the global recession. China’s entire export sector accounted for just 18.5 percent of China’s GDP in 2017, down from 35 percent in 2007. At the same time, Chinese exports to the United States represented just 18 percent of its total exports last year.
Of course, the rising role of China’s state-owned enterprises under President Xi Jinping can also be used as a counter against the tariffs, with Beijing able to adjust profit levels at will, keeping vast numbers of workers fully employed, while potentially devaluing the yuan by 10 percent as well. Together with the effect of the dollar’s rise against the Chinese currency, this could neutralize most effects of the new Trump tariffs.
In addition, many Chinese privately-held companies could profit from the attempted slowdown in American imports from China by increasing their marketing and sales to Southeast Asia – where economic growth rates are robust and the OECD predicts“resilient domestic demand” in coming years – and further afield to Africa, where China has been especially active, and Latin America.
Some Chinese companies might even move production offshore as well. Haier, for instance, already has manufacturing operations in five American states since its purchase of General Electric’s appliance businesses. Haier also has manufacturing facilities from Mexico to New Zealand through its acquisition of Fisher & Paykel, which also manufactures in Mexico, Italy and Thailand. Moreover, as Charles Freeman, senior vice president for Asia at the U.S. Chamber of Commerce, pointed out to me in an interview on Friday, “Mexico was [once] a higher cost production site. But now Chinese labor is more expensive than Mexican labor, so these things can start shifting.”
There are other potential moves that could insulate Chinese companies and the country’s broader economy from the impact of American tariffs at any level. Many companies that are unwilling to cut costs or shift production “are more likely going to Beijing and [telling the government to] drop the value of the renminbi to compensate,” Freeman said. “That of course raises enormous problems [in the United States] as to policy, which is already sensitive to undervaluation of the renminbi.” At that point, however, in the midst of a full-blown trade war, how attentive would Beijing be to American sensibilities?
The final, and still unanticipated, benefit could be the long game. “These tariffs could help Chinese companies and the economy rationalize and become more competitive and profitable,” Siva Yam, president of the U.S.-China Chamber of Commerce in Chicago, told me. In short, very much a lose-lose proposition for the White House.
Along the way, there may be a bit of pain. But many in the Chinese leadership, expecting Trump to lose the 2020 presidential election, or the Democrats to sweep the midterms in November, calculate they can manage until the next administration sheds the tariffs, allowing matters to return to a normal, free market reality. Of course, Xi doesn’t have to win an election. He’s president for life, utterly in charge of his system of Autocratic Capitalism.