Who’s Leaving Whom?

According to the New York Times today, the Chinese government is compiling a list of companies and individuals to penalize in response to the US block on Huawei.

The piece ends with these thoughts:

Forcing out American companies from China’s electronics supply chain could have a major impact on Chinese manufacturers. It would also likely hasten strategies by American technology firms to diversify their supply chains away from China.

Yet if Beijing were willing to take that hit, many companies would struggle to immediately replicate production elsewhere. China’s density of component makers and assembly factories is unmatched around the world.

“It’s a really high-risk way to go about it,” said Andrew Polk, a founder of Trivium, a consulting firm in Beijing. “They are effectively forcing companies to choose, and companies will probably choose the U.S.”

Much has been made over whether Western companies will bail on China if it were to put the screws to them on trade. But if China were to retaliate against the US by shutting down access to certain markets or supply chains, is it unrealistic to think any Chinese companies might relocate as well?

Actions Count More than Words

China is a country that should be viewed through its actions, not its words.

It’s important to keep that in mind when considering the news today from the Associated Press, which is reporting China will cease its practice of forcing multinational companies wishing to do business there to share their IP.

If this turns out to be true — and the China legislature ratifies the law — one of the big
trade hurdles between the US and China will be eclipsed.

As usual, the devil’s in the details, and this case is no different. Per the AP, the new rule simply bars “government authorities” from making demands of foreign firms. So if, for instance, the steep duties China places on imports remain in place, an MNC will almost have to partner with a domestic company.

And that’s the rub. As the AP reports: “[T]he central government routinely says it has little control over commercial agreements between Chinese and foreign firms.”

So for most firms, the Catch-22 will remain.

China has a history of saying one thing and doing another. Sometimes it does so brazenly — such a ignoring WTO trade practices or currency interference. Other times it is on the sly, such as when it says it doesn’t believe in meddling in other nations’ affairs all while it’s meddling in other nations’ affairs.

Take China at its actions, not its words.

Researchers’ Take on Trade Wars Hard to Swallow

A group of researchers are asserting that onshoring low-cost manufactured goods back from China would not solve the US’s current economic woes.

The cost of an Apple iPad, they point out, includes about $10 for the workers who assemble it (and that may actually be high, from what I’ve heard). Meanwhile, each device sold helps maintain thousands of higher-paying design, software, management and marketing jobs.

OK, that’s all believable. But it’s the next part is harder to stomach. “Without China, Apple couldn’t be so successful and Apple products wouldn’t be so affordable,” said Yao Shujie, professor of economics at the University of Nottingham in England.

Not so fast. Apple’s margins are by far the highest in the industry. With lower margins, Apple might not be so profitable, but the affordability (an Apple comes at a premium for no other reason than consumers are willing to pay it) is a whole different bag of potatoes. Apple could pay a significantly higher price for onshore EMS work, yet given the fairly low labor content of an electronics assembly, could do so with no effect to the end-product price.

And it says here, those design, software, management and marketing jobs would exist regardless of where the product is manufactured.

Furthermore, the researchers extrapolate from this the idea that the effects a big change in the price of the yuan would have on US manufacturing would be fairly limited in scope. “Multinational firms that think currency appreciation is going to have a big effect on their export capacity from China to the United States are going to shift to other countries, not to the United States,” one researcher said.

Good point. But I would counter that the monies pouring from US consumers into Chinese hands serve to boost the latter’s national coffers, from which its military is deriving great benefit. Cuts in purchases of Chinese-made goods would help reduce China’s ability to assert itself militarily around the world. That would be a positive, too.

Should the US wean itself from its Chinese teat, the benefits would be seen in multiple, if somewhat less obvious, ways.

Trading Up

A group of five Democratic Senators (including Arlen Specter) this week introduced the Trade Enforcement Priorities Act of 2009 (S. 1982), which among other things mandates the US Trade Representative to identify trade enforcement priorities and prioritize which foreign countries’ practices on which it will focus its enforcement efforts in the coming year.

It’s nice to see this bill taking shape, as trade — particularly with China — has been a constant sore spot for out industry for a decade.

America needs a well-established policy, and one that has some teeth. This appears a step in the right direction.