The flip side of trade war talk

 

    We have been hearing a lot about trade deficit with China, and a trade war seems looming. According to Mr. Trump the trade with China is a total loss for America and almost all the sufferings of American workers can be blamed on China; Americans are suckers and victims of global trading, especially with China. Let us just calm down a little bit and take a look of some facts behind emotions; the flip side if you will, since trade is never one sided.

 

    The first type of Chinese imports we are familiar with are the goods sold in Walmart, Target, Home-depot and so on: Mainly household goods, textiles, apparels, toys, shoes, low end furniture etc: These are labour intensive products and the manufacturing of these products started leaving America as earlier as in 1970’s, first to Korea, Taiwan, and other Southeast Asian countries for cheaper labors; then to China for more and even cheaper labors. Production of these goods will never come back to America, instead, some are moving to even lower cost countries like Vietnam, Cambodia, Bangladesh, and some African countries. The workers there are paid less then $2 per hour

 

    American consumers have benefited tremendously from these low cost goods which have kept inflation in check for decades. More importantly, American businesses are beneficiaries too, which own most brand names and distribution/sales channels of the products, and have made most of the money.  The makers in China are actually “contract manufacturers” who just make the products according to American firm’s design and requirements and put American company’s brand label on the products and ship to the US. If you know a little about international business and supply chain you’d understand  that manufacturing is the smallest portion of the total cost of goods sold; most of the profits are from brand name, product design, marketing and sales which are all controlled by American businesses.  

 

    Trump can impose tariff on these products and it will hurt Chinese manufacturers and workers for sure, but bigger looser would be American consumers and Businesses. American consumers, especially middle and low income ones, will foot the bill as inflation ensues. American businesses will be scrambling to find alternative contract manufacturers elsewhere, and it’s not easy at all from global supply chain stand point. There is no other comparable production base for low and middle range products as in China. Basically this is a lose-lose proposition. 

 

    The second type products are consumer electronics, computers, TV, appliances, smart phones and son on: These products are not really made in China; to be specific, they are just assembled in China by contract manufacturers. Most key components are imported from Japan, Korea, Taiwan, Germany and other countries and put together by nimble figures of young and disciplined Chinese workers whom are paid about $3 per hour. China is simply an important link of the global supply chain, which makes electronics products more affordable for American consumers. 

 

    Again, Chinese manufacturers and workers are not making a lot of money; instead, the brand owners, key component makers and American middlemen are raking most of the profit. You hardly see any Chinese brand names of consumer electronics in American stores. Unlike Chinese contract manufacturers, most Japanese and Korean consumer electronics companies own whole supply chain, from product design, key components, assembling, sales and distribution, and of course enjoy higher prices and handsome profit in the US market. 

 

    iPhone serves the best example illustrating how this works:  Foxconn, a Taiwanese-owned contract manufacturer, employs up to one million young Chinese workers to assemble iPhone for Apple. Actually assembling iPhone only accounts for less than 6% of the total cost. Most costs are from key components like hard drive, display screen, camera, memory chips, softwares and so on, which are imported from Korea, Japan, Taiwan, Germany, US, and other countries to China.  When a finished iPhone is shipped to US and sold to American consumer, Apple pockets more than 30% of selling price as profit, while only less than 1% goes to the contract manufacturer in China. 

 

    If Trump administration throws a monkey wrench to this global supply chain by imposing tariff on the products, consequences would be disastrous. The biggest loser would be Apple and other American tech companies, as well as American consumers. It’s impossible, at least in two to three years, to rebuild the global supply chain without China, which not only provides massive number of low paid, yet disciplined assembly-line workers, but supplies most of the cheap, but necessary accessories for the electronics products.  

 

    The third type is steel and aluminum:  Trade dispute started a few months ago from these metals. During 2016 presidential champion we heard a lot of accusations that Chinese competition killed American steel industry, yet it turned out that imported Chinese steel is less than 2% of the total steel imported, ranked 11th in tonnage, even behind that from Turkey and Indian.  

 

    Listening to them talking about imported steel you would think it’s just like a chuck of monolithic metal. Actually the steel comes in different shape, grade, quality, and prices, and the Chinese steel is mostly the lower end product, mainly for construction and pipes. American steel companies probably need to compete more with Japanese, European or Korean companies for high grade, high quality, highly priced steel products, and move up the value chain, instead of racing down and holding on to low end products. 

 

    These are just some facts about the nature of trading with China which you may have not heard in the current highly charged political atmosphere. Of course there is a big trade deficit with China, but you can see now that China is just a link of the global supply chain, which assembles final products and then ships them to US. In a sense, those are not truly Chinese products, they are just lumped components from other countries imported by China. With about 1/5 of the population on earth, China happens to be the world’s largest assembling line. The US would still incur the same, if not more trade deficit, without China in the equation, simply because of American consumerism. 

 

    On the other hand, the US exports to China, even smaller in total value, are truly “Made in USA”, such as jet airliners, automobiles, machine tools, construction equipment, semiconductor chips, chemicals,  softwares, soy bean, corn, beef, pork and so on. The export volume to China is growing in double digits yearly; China is the largest “emerging market”!

 

    To narrow the trade deficit we’d better to push to sell more American products to China, such as the stuff mentioned plus oil and gas extracted with our new fracturing technology, to create more high paid manufacturing jobs at home. Trade war should never be an option. If history is any guide, trade war will never come out with any winner.