Trade War with China

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Zool

Junior Member
Part 2:
The Problems – Made in China 2025, Belt and Road Initiative
Much of the problem exists in the shape of the US feeling that China may be getting a bit too big for its boots. High profile plans such as “Made in China 2025” which aims to reduce China’s reliance on foreign technology with a shift to domestic technology along with the “Belt and Road Initiative” which is trying to make China the centre of trade for emerging economies, coupled with concerns over long term intellectual property transfer, the rise of Chinese technology on what some perceive as the result of that transfer, Chinese stockpiling of assets such as US sovereign debt and gold bullion, along with a significant trade imbalance have all led the US to the situation we’re in today.

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China openly touting its objectives is problematic…
To be clear, this is not a situation entirely of Trump’s making. Democrats and Republicans alike have both had long term concerns over American corporations doing business with China, particularly in sensitive areas such as technology and defence. China has embraced many of the hallmarks of western capitalism but retains sufficient independence from the rules the western world is used to which enables it to progress in a way that many see as unfair. Fairness is part of the issue but realistically it’s more like an “I’ll play fair when I have to but not when I won’t get caught” approach, all too evident in numerous US – European conflicts over Boeing and Airbus over the decades. State subsidisation of favoured or strategic companies has long been the modus operandi of every country/bloc in the world, in that sense China is no different from others.

Recent developments in the trade war have seen a cooling off from some of the fanfare China has touted in recent years including the news this week that Beijing no longer requires local governments to work explicitly towards the Made in China 2025 policy (
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), although it is clear that the policy should still be implemented and that the drop of the name seems to be more about the show than the substance.

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China, looking to dominate Eurasian trade…
It’s also worth keeping in mind that China is not alone in the avenue it is pursuing. South Korea has its famous chaebols that were significantly favoured and had huge sums of money thrown at them to catch up with western competitors, decades of investment which culminated in the likes of Samsung now being the world’s largest chipmaker and its carmakers in many ways being the modern equivalents of Japanese carmakers in the 80s and 90s. The difference of course is that South Korea and Japan are about making money within a framework which is regarded as non-detrimental to US interests while China is increasingly regarded as a geopolitical competitor and/or threat.

The Source Discussion
I had the opportunity to ask some questions to a reasonable sized PC hardware assembler/manufacturer/retailer recently and this is what they had to say on the topic. Special thanks to Usman for getting me an industry source willing to talk on the topic. The source remains anonymous but I am convinced of their authenticity.

Wccftech: What is your view on the level of intellectual property transfer that is occurring between US and Chinese companies?
Source: Quite a bit of IP transfers from OEM to ODM. For our tooling projects, the ODM we select is responsible for taking our sketches and producing the image renderings. Then, after we provide our feedback on these they are responsible for prototype fabrication, modifications of design from our feedback, making all the tooling and then mass production. We lean quite heavily on Chinese ODMs in the design and development process and completely on them for the mass production.

W: Do you feel that private sector focus on making quarterly profits has made it misstep strategically with regards to gaining access to Chinese markets/manufacturers?
S: On the question of tariffs, I believe the electronics industry is too reliant on Chinese manufacturing because of the reduced labour cost and the availability of natural resources. Cheap items such as motherboards and peripherals are expected to remain in China since the cost to move the manufacturing is too high, even when factoring in tariff costs. Many Taiwan AICs are finding out that factory space is very limited and resources for building new factories non-existent in their homeland. As a result, most AICs are absorbing the tariff cost and passing on some or most of it to the consumer in subtle ways. Some have a clear advantage since they had existing manufacturing based in Taiwan which now allows them to have cost and sales advantage on NVIDIA RTX graphics cards sales in the US as the other AICs are impacted by the tariff but even those that do have quite limited manufacturing capacity in Taiwan so it’s only high end RTX graphics cards and not lower end GPUs or motherboards which will be able to avoid the tariffs.

AICs and other electronics OEMs are in a holding pattern right now since the 25% tariff isn’t in play yet and the possibility of trade agreements or the end of tariffs mean there is no incentive to expend the high investment right now to move manufacturing to other countries. Some are announcing plans to move some manufacturing out of China with Channel Well (large PSU manufacturer) planning a factory in Vietnam, while Quanta (Dell) and Foxconn (Apple) have plans to ramp up manufacturing in the US in the event that products are hit by tariffs

Memory is mostly unaffected by tariffs since large OEMs such as Micron and WD have existing manufacturing outside China, as do smaller firms like Avant.

W: Is there sufficient talent available in other economies to allow for a reasonably efficient on-shoring to take place regardless of the cost implications?
S: An AIC did express to me that moving manufacturing outside China or Taiwan wouldn’t be considered at this time given the lack of talent and presence and the uncertainty regarding the duration of the tariffs, they’ll aim to exhaust their options in Taiwan first before considering moving elsewhere, but it’s unlikely to go to the US and they’d look at places like Mexico, Malaysia, Singapore and Vietnam. It would also have to be quite clear that the tariffs were going to persist for a long time for the investment to be deemed worthwhile as they would have to relocate many personnel to do this too. The decision would be made in anything from a few months to a year but then the hard work would start and both the cost and effort to move would be enormous.

W: How difficult would it be for your company to continue operations in the current way if the US continues to impose restrictions on selling to Chinese companies it suspects of IP theft?
S: If the 10% tariffs increase to 25%, then we would have to raise prices to cover the costs but customers would not see a huge increase as we are sourcing inexpensive components and peripherals from China that do not make up a large percentage of the overall computer cost (things like motherboards, CPU coolers, PSU, fans, cases, keyboard and mouse). The expensive components such as CPU, RAM, SSD, some GPUs (depending on the AIC) and OS would generally not be hit. We would also explore setting up system integration in Mexico and import some of the components we buy from Chinese ODMs to Mexico in order to avoid some of the import tax.

Another factor which also increases reliance on Chinese manufacturing is the Made in China 17% tax credit provided by the Chinese government to its ODMs as long as they can show that payment was received from and the product was shipped to a country other than China, which provides a huge advantage over ODMs not in China.

If the unlisted items such as monitors, laptops and complete desktop systems were hit with a tariff then the impact would be much greater as prices would certainly rise on these products. Companies like Dell and Apple that do business with tier 1 ODMs like Quanta and Foxconn which have the capability of ramping up US manufacturing may gain a cost advantage. If either of these two scenarios were to occur, we would start attending many more trade shows in search of ODMs with factories outside of China to avoid paying the tax.
 

Zool

Junior Member
Part 3:
The Decouple Detail
So what would we be looking at if indeed there was to be a serious attempt to reduce western technological reliance on China?


Well the first major problem that needs to be overcome is that China is the world’s largest rare earth producer. According to
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, China produced 100,000 tonnes of the stuff in 2013, accounting for more than 90% of global production and given it is the manufacturing plant for global technology, unsurprisingly consumed 60% of global supply itself immediately. Estimates put its reserves at being approximately 40% of global total reserves. In a genuine shift away from China, Brazil probably stands to gain the most in that it has approximately 20% of rare earth reserves, although its 2013 production was a paltry 140 tonnes so clearly huge infrastructure investment would be needed to tap into those reserves.

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Much like the oil problem, the lack of oil is not really a problem for the world, the lack of cheap oil is the real economic issue. Digging a well in the Middle East is significantly cheaper than fracking or extraction from Canadian oil sands and it remains to be seen how cheaply rare earths could be extracted in sufficient volume from countries other than China but in all likelihood it would take years if not decades and demand billions in investment. Those costs would obviously be significantly amortised across production but it’s still a cost which puts the end price of the phone in your pocket or the graphics card in your PC up assuming that China acts to protect its interests if its technology industries are threatened.

“If other locations can supply sufficient rare earths at an appropriate price level to compete, the global supply chain logistics need to shift to compensate for this. Brazil would seem to indicate a move towards Mexican production, meaning NAFTA or whatever future equivalent for it exists becomes more important.”
Transport links between Brazil and Mexico would need to be beefed up and criminality in both countries reined in significantly to prevent security costs rising too high.

Once that is done, factories need to be built, relocation packages agreed (because let’s be honest, as we covered
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it would still be predominantly Chinese companies that have the expertise to get these new locations up and running relatively quickly), visas applied for and granted, local talent hired and more importantly trained, export controls negotiated and global shipping planned. Emissions legislation investigated and manufacturing processes refined to adhere to new environmental protection laws. This amounts to a huge investment in sunk costs, additionally corporations may have to take massive hits on the book value of Chinese infrastructure, selling or repurposing it towards different use.

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None of this comes cheaply of course, the costs for lawyers, accountants and regulatory specialists alone will dominate budgets and much like the finance industry in the wake of the 2007-08 crisis, massive investment will need to be sunk into adhering to a differing rule regime with those costs coming straight out of the bottom line and contributing nothing to increasing revenue. It makes for grim reading.

Ultimately, these costs will need to be amortised and absorbed or passed on. Some companies will no doubt die off and others will come to the fore but one thing is for sure: 3 decades of tying global technological manufacturing and expertise to one country will take a concerted effort of at least years and possibly tens of years to unpick. That kind of investment is unlikely to come about if there is even a hint of uncertainty over the political will to pursue the kind of punitive trade relationship the US seems to be intent on with China. Even with as hard-nosed a President as Trump in the White House, a single term would likely bring about a more staid approach to international trade than is currently the case.

What is important to keep in mind however is that it’s not like all of these costs will come barrelling towards consumers at once. Incremental increases over time will be used as costs of transfer will ramp up and it’s likely instead that inflation on tech products will creep up over time. What does this mean? Well, it’s important to keep in mind that one of the goals of central banks is price stability with a generally accepted goal of approximately 2% inflation being “good”. It’s also important to keep in mind that different countries will weigh technology products differently but in general, the pressure on prices and potentially wages in that case will be upwards in nature. Central banks may use this period to increase interest rates further in an attempt to keep a lid on inflation although it could be written off as a once off cost increase (over a prolonged period however) of the cost of shifting away from Chinese manufacturing, much like inflation in the UK spiking post-Brexit and the weakening of the pound has also not directly resulted in a tightening of monetary policy.

The End Result
Capitalism has a lot of flaws in it, however its use is as widespread as it is primarily because it is the single best wealth creation engine that we know of. Does it create inequity? Absolutely. Will some people scramble their way to the top of the heap while others are unable to get onto the bottom but one rung of the ladder? Completely. Will capital allocation be inefficient in places? You bet. The thing is, there’s no better model for bringing wealth to the world and bringing wealth to the world is what furthers our advancement as a species as well as prevents some wars, famines and other nasty things that we could do without.

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Inefficient capital allocation has absolutely been a problem for the technology industry when you look at the huge amounts of offshore profits held by (largely technology) corporations in tax havens doing nothing other than not being taxed. But although this has been a glaring inefficiency of the industry in the past, there is much that it has done right and the lowering of costs of production is an important factor in the value chain towards competitive pricing and giving consumers the best bang for their buck. In this sense, capital allocation has been absolutely efficient in that it has sought out the cheapest reliable means of producing high technology products and for the last 3 decades, this has been China.

Governments exist however to (among other things) make sure that the inefficiencies such as tendencies towards monopolies are ironed out (or at the very least managed) and that the strategic direction which takes account of things other than quarterly earnings cycles are taken into consideration. Sometimes it gets it right, sometimes not, but either way one thing is clear. If you have a significant portion of an economy (which has found the cheapest and most efficient means of production it can), is forced to move away from that, it will cost money and time and will ultimately mean that profit margins are eaten into, consumers pay higher prices or some combination of the two.

“From an investor perspective? It should be obvious to anyone with a vague interest in the markets that the rumbling trade war between the US and China is the key driver of global economic jitters these days.”
If the impasse is not genuinely resolved with more than lip service it’s hard to see anything other than the beginnings of a downturn. Indeed, many markets are already in correction territory for the year and tech stocks have borne a large part of the brunt given the significant exposure the industry has should a genuine US China trade crisis emerge. The problem is, if that happens then realistically, technology stocks won’t matter and the general rotation out of equities and into bonds will become widespread. In this event, expect equities to drop with technology stocks suffering disproportionately more than other stocks.

In a worst case scenario, the prospect of stagflation becomes a possibility with a trade war and protectionist global policies leading to a period of recession, high unemployment and high inflation as onshoring and other protectionist policies bite into the cost of production. Our best hope for reasonably priced graphics cards? As ever, it remains competition, free market mechanics and a settling of trade disagreements in a sensible way. Sometimes the carrot works, China has been given the carrot for decades and President Trump clearly thinks it’s time to use the stick.
 

zgx09t

Junior Member
Registered Member
Good article that discusses the realities of moving business away from China (mostly tech in this case/interview), and how companies are viewing tariffs as they stand and what could happen if additional 25% were levied. They kept the politics to a minimum and focused on pros-cons from the perspective of business, which I appreciated.

PART 1:

In all likelihood, this tariff standoff would only be a marginal headwind for China's growth target in 2019. China's real fight is reform in macro financial stability, aka taming the shadow banking. It looks like policy makers thought China already have a good run and strong enough it's time to deal with this head-on. Trump tariff tantrum is just an unfortunate sideshow.

China is already in policy-induced growth slowdown in H2 of current year, tackling shadow banking portions of what is called total social financing. Both entrusted and trust loans have sharply declined since H2 of 2017, sucking out the available funds for private business. PBoC has tried to countervail it by RRR cuts and guiding repo rates, monetary wise. Government has also planning fiscal support by way of tax cuts and special bonds issued by local governments. China doesn't want RMB to depreciate too much too fast out of control. Lack of 2008 like stimulus this time around tells the story of government steady focus on overall systemic financial stability. They are not falling fast asleep at the wheel like what happened in 2008 in US of A.
 

vincent

Grumpy Old Man
Staff member
Moderator - World Affairs
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The problem with the authors' conclusion is that prices will only increase for the Americans, not the rest of the world. I know Americans like to think they are the centre of the universe, but the reality is there are plenty of people outside of the US.
 

Tam

Brigadier
Registered Member
Boeing completes first 737 in partnered COMAC plant in Zhoushan, China. The aircraft industry has been barely isolated from the trade wars.

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Note this paragraph:

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reported that Boeing estimates China will need 7,680 new planes worth $1.2 trillion over the next 20 years, plus $1.5 trillion in commercial services to support the new fleets. This will help the company stay aligned with European competitor Airbus. Meanwhile, China is set to surpass the U.S. as the world’s largest air travel market by 2022, according to the International Air Transport Association.

Trade war is costing Americans $453 per family, and will cost nearly 300,000 jobs, according to conservative think tank.

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Here's a breakdown of some of the effects of the currently imposed tariffs, according to the study:

  • A decrease in GDP by 0.12% over the long run — the equivalent of $30.4 billion lost.
  • The elimination of 94,300 full-time American jobs.
  • A decrease in after-tax income of 0.3% for all Americans — and a greater decline for the middle class. According to York, for Americans in the middle quintile of income earners, the after-tax wage decrease amounts to 0.33%, or $146 per taxpayer.
While the tariffs in place are expected to be a negative for the US, Trump's threatened
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and the remaining $255 billion worth of Chinese goods would make things even worse.

If Trump follows through on his threats, here are a few of the downsides, according to the study:

  • A decrease in GDP by 0.38% over the long run — the equivalent of $94.4 billion lost.
  • The elimination of 292,600 full-time American jobs.
  • A decrease in after-tax income of 0.92% for all Americans. For Americans in the middle quintile of income earners, the after-tax wage decrease would be 1.04%, or about $453.
 
now I read
China's foreign trade to remain steady in 2018: report
Xinhua| 2018-12-16 23:08:33
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China's foreign trade will maintain steady growth in 2018, as the country's economy posted stable performance amid mounting external uncertainties, according to a report released by the Ministry of Commerce.

China's foreign trade saw fast growth in the first three quarters, the report said.

The country's goods trade rose 11.1 percent year-on-year to 27.88 trillion yuan (about 4 trillion U.S. dollars) in the first 11 months this year, customs data showed.

Exports rose 8.2 percent year-on-year to 14.92 trillion yuan in the January-November period while imports grew 14.6 percent to 12.96 trillion yuan, resulting in a trade surplus of 1.96 trillion yuan, which narrowed by 21.1 percent.

However, the growth of foreign trade might be pulled back because of a high comparative base during the same period last year, the ministry added.

The report also said that the Chinese economy currently showed many favorable conditions to sustain medium-high growth and move toward a medium- to high-end level, laying a solid foundation for the development of foreign trade.

The fundamentals of China's economic development have remained steady and positive over the past 11 months. China's gross domestic product posted an increase of 6.7 percent year-on-year in the first three quarters, above the government's target of 6.5-percent.
 

PiSigma

"the engineer"
The third way is through exchange, which you might call as trade. I exchange what I have in surplus, storage, owned, manufactured, farmed, mined, fished for what you need and want, in exchange for what I need and want.
Yes. But got to make it, grow it first. Only small societies can be compleltly dependent on trade. And in the end someone still need to make the good, do the research or grow the food.
 

localizer

Colonel
Registered Member
Lol
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“It is incredible that with a very strong dollar and virtually no inflation, the outside world blowing up around us, Paris is burning and China way down, the Fed is even considering yet another interest rate hike. Take the Victory!”
 

Dizasta1

Senior Member
China to mark economic miracle that pulled 700 million people out of poverty

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A nation that attains power, economic and military, it's real test of character comes with what it does with that power it has. Pulling 700 million Chinese (double the population of America) from poverty and put their citizens in good standing. That shows the character of the nation. Alleviatin poverty is but the first phase of a nation's progress, then comes development of the society, research in science and technology. Finding new ways to not just progress, but also establish means to protect the environment as well. In comparison, America has been a super power for 70 years now. In retrospect, it's most prized accomplishment, a vibrant and commanding Middle Class population, has been on an inevitable trajectory of decline.

China's rise as a powerful nation has lessons for other countries to learn from and improve upon. Not the American example. And if there is something that all nations must be wary of, is the very powerful temptation of being pulled into darkness as America is consumed by.

1. Close to a thousand military bases and installations around the world, in other countries.

2. Continuous state of war for since 1945. Korean War, Vietnam War, Invasion of Grenada, Invasion of Panama, Gulf War, Bosnia War, Invasion of Afghanistan, Iraq Invasion, obliteration of Libya, devastation of Syria and the trend continues.

3. Explosive national debt of $21 trillion, forced cuts in public spending, lowering taxes for the rich and powerful corporations which contributes to the fast shrinking Middle Class Americans.

These three points alone are reason enough to not to follow America's example. And gives reason for China to be cautious in not repeating history.

Trade War with China, gives the world every reason to trade with China and Russia. To trade for commerce, not political exploitation. Focus on your economy, security and safety of your land and people, build alliances with those who aren't consumed by hubris.
 
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