Which Factors Will Decide Victory in the Sino–US Trade War?

The concept of China as the world’s factory has had its short time in the sun
September 22, 2018 Updated: October 1, 2018

As the Sino–U.S. trade war escalates, the tariffs imposed by the United States on Chinese imports can be seen as a “red light” on Chinese-produced goods, which will divert procurement and supply chains to other locations. As a portion of U.S. imports stops coming from China, it will cause a shift in the Sinocentric global industrial chain that emerged at the beginning of the century.

On Sept. 18, U.S. President Donald Trump announced that he would implement a $200 billion tariff on China in two phases. China’s Ministry of Commerce immediately announced that it would counter Trump’s move with equal tariffs on Chinese goods. The White House responded to this, saying that once China takes these countermeasures, it would impose tariffs on another $267 billion worth Chinese products.

Now that the trade war has begun in earnest, who will come out victorious? We cannot determine victory or defeat simply from the amount of the tariffs levied, but rather from how the tariffs impact the flow of international trade.

By turning on the red light of tariffs, the United States may cause the flow of goods to shift to other countries, and China would lose its “world factory” status that it has enjoyed since the start of the 21st century.

The Chinese State Media Are Fighting the Wrong Battle

Since the beginning of the trade war, Chinese media have often described the confrontation in military terms, talking about the U.S. tariffs and Chinese counter-tariffs as “bullets,” as if whoever imposes more tariffs on the other party will win the trade war. But this comparison is very misleading.

The tariffs imposed by the United States do not eliminate importers; instead, they are a warning—hence the term “red light”—for importers that the prices of goods imported from China will rise. One solution is to pass the increased costs to consumers, but if the price of imported goods becomes too expensive, consumers will lose willingness to buy. Another solution then is for importers to pay the costs, which risks a loss of profitability.

Mainland Chinese media and U.S. companies that testified and opposed Washington’s policies in government hearings believe that increasing tariffs will force U.S. consumers to buy price-hiked goods. In other words, the “bullets” that Trump “shot at China” will rebound to U.S. consumers. In fact, importers cannot actually force U.S. consumers to buy goods and Chinese products are not the only ones available.

Chinese Products Can Be Replaced

Importers in the United States, such as those that own large retail chains, have been purchasing large quantities of cheap daily necessities from China over the years, such as clothing, footwear, children’s toys, household appliances, office supplies, and the like. These are the main products affected by the tariffs. However, fears that consumers will suffer because of the increased cost of goods from China are unfounded.

Take clothing and bedding products as an example. More than a decade ago, American clothing stores and department stores were full of Chinese products. It was difficult to find anything not made in China. However, as the costs of Chinese clothing and bedding started to rise, U.S. importers saw their profits decrease and gradually began transferring their procurements to South or Southeast Asia. Clothing and bedding products increasingly came from countries like India, Sri Lanka, Indonesia, Bangladesh, Vietnam, or Malaysia.

From this example, it can be seen that Chinese manufacturers exporting consumer goods, household appliances, office supplies, and hardware tools are not filling an irreplaceable role. In fact, China’s low-end manufacturing industry faces competition from many countries around the world. It’s not difficult set up similar companies in South or Southeast Asia, or to train employees there, as the successful transfer of clothing and bedding supply chains from China to these countries proves.

Stopped at a Red Light

At the hearing on increasing tariffs on Chinese products held by the Office of the U.S. Trade Representative, many American companies expressed strong opposition since products imported from China have the ideal balance between price and quality and that increased tariffs would force them to shift the burden to consumers. At the hearing, the government asked the companies if they could place orders with producers in other countries, but industry representatives denied this possibility.

But does this hold water? The American clothing and bedding industry has already completed the supply chain transfer; why can’t companies in other industries follow suit? The problem is not that the supply chain cannot be transferred, but that doing so would inconvenience the importers, although they do not want to admit this. These companies have long relied on Chinese manufacturing and are familiar with their suppliers, which saves them a lot of trouble when doing business.

However, no importer in the United States has a monopoly in the business. If some of these companies start to look for manufacturers to provide stable supply chains in countries other than China, those companies will soon dominate the U.S. market with lower prices. Lazier importers will be forced to do the same, or face bankruptcy.

If some U.S. companies insist on using products made in China, they will not only have to face competition from other U.S. companies which have their supply chains in countries other than China, but also competition from Chinese companies. In order to keep the U.S. market and dodge Washington’s tariffs, some Chinese companies have begun to transfer production to Southeast Asian countries and elsewhere. The doubled pressure will compel American importers to shift their orders and adjust supply chains.

Daily necessities such as office stationery and hardware don’t even have to be manufactured abroad at all. As the price gap between U.S. and Chinese manufacturing closes, the added 25 percent tariffs will allow American manufacturers a chance at competition. This will help revitalize American industry and bring down unemployment, which is one of the reasons Trump began the trade war.

As Washington’s tariffs on China turn on red lights for trading firms, the flow of imported goods will “detour” from China to other source countries. Within a few years, as part of the U.S. imported goods flow leaves China, part of the Sinocentric industrial chain that formed during the economic globalization in this century will also be transferred to other countries.

The concept of China as the world’s factory has had its short time in the sun, soon to be replaced by the other nations of Asia. One consequence of this is that as China’s foreign currency reserves decline in tandem with the fall in exports, the Chinese regime can be expected to further tighten controls on foreign exchanges.

Dr. Cheng Xiaonong is a scholar of China’s politics and economy based in New Jersey. Cheng was a policy researcher and aide to the former Party leader Zhao Ziyang, when Zhao was premier. He also served as chief editor of the journal Modern China Studies.