Trade With China: An Enigmatic, Essential Market

Winston Churchill famously once described Russia as being “a riddle wrapped in a mystery, inside an enigma.”

While Churchill’s assessment of Russia may well still hold true, it could also be argued that—in 2017–his famed description could just as easily also be applied to Russia’s neighbor, China.

Geographically–as well as culturally—China remains as distant from the United States as any nation on earth; as recently as the final decades of the 20th Century, most Americans—and American businesses—were far more concerned about the geopolitical power of the former Soviet Union than the most populous nation on earth.

But that was ‘then’, and this is now—and by virtually any metric, China is now one of the most critically important players in helping to shape the global economy; in fact, the GDP value of China represents approximately 18 percent of the global economy, and also stands as the world’s second largest economy after the United States.

Additionally, China is the US’s largest trading partner, with over $578 billion in total goods traded in 2016—including $115 billion in exports to China, as well as a US goods trade deficit of $347 billion.

Not surprisingly given the scope of trade between the two nations—and China’s enormous impact on global economics—China also is a vital link in the global supply chain management (SCM)—an integral part of many businesses’ operations, and essential to ensuring most companies’ success.

There are numerous factors contributing to China’s critical importance in the global supply chain. These include:

  • The sheer volume of Chinese goods and services– as well as the size of the Chinese workforce—that enables US businesses to lower costs—often dramatically
  • Unlike many other countries, China has a proven ability to rapidly bring goods to the marketplace; contributing factors include the country’s lax environmental laws, and the ability of the government to institute policies with little or no political opposition
  • The availability and access to Chinese human and non-human resources and capital have evolved over the last quarter century, and are now considered essential to the global economy’s daily operations

Of course, anyone who was cognizant of the 2016 US election would be well aware that the relationship between the US and China became one of the primary areas of focus for debate, when then-candidate Donald Trump railed against the size of the US trade deficit between the United States and China.

In addition, then-candidate Trump also accused China of being a ‘currency manipulator’—meaning that the country’s leaders manipulated the value of the Chinese Yuan in order to increase Chinese exports, and undercut other nations.

Still, as any experienced debater knows, for every argument there is a ‘counter-argument’—and in the case of US trade with China, there are solid arguments in favor of maintaining high levels of trade with China with a minimal amount of restrictions.

As a business professional with firsthand experience in this matter, it is my opinion that any actions taken by the US government designed to curtail trade with China could have serious implications for US businesses.

The potential negative consequences of tariffs or similar measures impeding trade with China could easily trigger:

  • A dramatic rise in the cost of many goods—inevitably resulting in higher prices for a multitude of goods purchased by US consumers
  • A potential increase in inflationary pressures, both domestically as well as globally
  • US tariffs could trigger a recession within China—one of the world’s largest importers of goods—which could then spread the economic contagion throughout the global economy, including the United States
  • Although many US industries would be negatively affected by restrictions/high tariffs of goods from China, the burgeoning IT sector would likely be hit hardest
  • Without question, American consumers could expect to see hikes in the prices of many commonly purchased goods—in some cases, dramatic jumps in pricing–as companies pass along the added costs of Chinese tariffs to their customers
  • The geopolitical impact of a failing Chinese economy could also be very significant—in addition to its enormous economic global impact, China is also a major military power, with nuclear capabilities; with North Korea already creating an unstable political environment in the region, adding political instability in China could have severe—and immediate—consequences, endangering America and it’s regional allies.

Still, it is understandable that President Trump—or any US president—would feel it is incumbent upon him or herself to promote the interest of American businesses and consumers, and ensure that trade with China took place on as ‘even a playing field’ as possible.

However, a preponderance of economic experts agree that instituting high tariffs—and potentially triggering a trade war between the world’s two largest economic superpowers—is not the optimal route to accomplish that goal.

During the 2016 presidential campaign, President Trump and his supporters touted the president’s vaunted ability to “close a business deal”, a skill he has developed over decades as a real estate developer at home and abroad. In keeping with that theme—and heeding the advice of President Theodore Roosevelt to ‘speak softly—and carry a big stick’—a far preferable route to fairer trade with China would be for the president to utilize his considerable negotiating skills and (along with experienced, knowledgeable experts in international trade) develop a strong personal relationship with Chinese President Xi Jinping, and other senior Chinese government leaders.

Thankfully, there have been some indications that the President is willing to tone down the ‘anti-China’ rhetoric, and roll up his sleeves to conduct the type of difficult negotiations that could result in a ‘win/win’ trade relationship for both China and the US.

After their initial meetings at the president’s Florida residence this spring, Trump was effusive in his praise of the Chinese president; in addition, the president claimed after his meetings that China had agreed to allow U.S. beef to be imported, no later than July 16, with conditions consistent with international food safety and animal health standards. For its part, the US is expected to issue a proposal to allow Chinese cooked poultry to enter the U.S. market.

While the agreement represents only a small step towards righting the imbalance of the US trade deficit with China, it provides a fine example of the type of ‘win/win’ scenario that successful trade negotiations can accomplish; unlike presidential campaigns, international trade agreements need not require that one side ‘wins’ while the other one ‘loses’.

There are also multiple sectors within China that could—and should–be opened for international trade; industries ranging from finance to telecommunications remain tightly controlled by the Chinese central government. Successful negotiations that led to the opening of those markets have the potential to create thousands of American jobs, and benefit American companies and workers, far more than any possible tariff ever could.

Given all of the above, this would be the Executive Summary of my suggested “Action Plan” for the President, designed to improve US trade with China–and correct the current trade deficit:

  • Success breeds success; Washington and Beijing should take stock of both the successes—and failures—of our trade relationship over the past 20 years; learn from mistakes, and build upon existing strengths
  • As the world’s leading sources of foreign direct investment, the US, China, the European Union and Japan should develop a ‘shared financing and investment framework’ that also complies with best climate practices. Given the Third World’s enormous infrastructure requirements, adopting strategies and technologies that limit the impact on the climate—while providing much-needed capital—is yet another example of a ‘win/win’ trade and investment scenario; the Asian Infrastructure Investment Bank could play a leading role in this effort
  • Go Green: Rather than approaching the issue as trade rivals, the US and China should partner on the issue of climate commitments; again, there is a need to go beyond politics and a desire to see ‘winners and losers’, and rather view the challenges of climate commitments as enormous business opportunities, not burdens
  • Heed Reagan’s Advice: President Reagan famously used to say that while he wanted to strike arms restriction deals with then-Soviet leader Gorbachev, his fallback position was always “trust…but verify!” There will be many among the President’s most avid supporters who will be dubious as to whether China can be ‘trusted’ to uphold their end of any trade agreement; therefore, the Administration should institute strict methods of verifying any actions resulting from a Chinese/American trade deal.
  • Draft a Plan B: And finally, as with any successful negotiation, the Administration should draw up a ‘Plan B’ if negotiations with China are unable to reach an acceptable trade agreement. There are several other possible sources for lower cost labor and manufacturing markets to provide for the global supply chain (leading contenders include Cambodia, Bangladesh, Vietnam, Latin America among others.)
    In summary, there can be little doubt that—circa 2017—China is one of the world’s dominant economic players, and its importance in the global supply chain cannot be overstated.

As a new Administration wrestles with the formidable task of formulating economic policy to deal with the geopolitical ‘enigma’ that is modern China, it would also do well to recall another renowned Churchill quote:

‘Continuous effort—not strength or intelligence—is the key to unlocking our potential.”