Apr 16, 2018 04:06 PM

Opinion: Shortsighted Business Strategies, Not Trade, Source of China-U.S. Tensions

* Global business, led in many sectors by U.S. companies, have made huge profits on the back of a once-in-a-lifetime opportunity to arbitrage prices and costs in China

* The China-U.S. trade gap results from an unholy compact between China Inc. — focused on its long-term interests — and American companies seeking short-term gains

Today’s clash between China and the U.S. is miscast as being about trade imbalances. At stake is a fundamental difference in how they do business. Most of all is their divergent appetites for the long-game over short-term gains.

Trade between China and U.S. is the tip of a much bigger economic iceberg. Like most global businesses benefiting from China’s opening up in the 1980s, U.S. business strategy was first to export from China, and then sell things to its citizens.

Given that, measured trade between the two countries does not help much to understand their economic entanglement. More interesting would be to measure the sales of goods and services produced by U.S. companies in China. Initially, this would reflect more accurately the global out-sourcing that has given U.S consumers access to U.S. products made in China at knock-down prices. Much of America’s consumer boom from the 1980s was founded on cheap Chinese labor and terrible environmental outcomes in China. Indeed, this deal-of-the-century was one keystone of the financial imbalances that eventually led to the financial crisis in 2008.

Global business, led in many sectors by U.S. companies, have made huge profits on the back of this once-in-a-lifetime opportunity to arbitrage prices and costs at such a vast scale. But the music could not go on indefinitely. U.S. consumer markets became saturated, not least because U.S. consumers becoming increasingly indebted on the back of these decades of excessive consumption.

Global business needed a new source of buying power to protect their run of super profits. The answer was to turn their focus to Chinese consumers. And so it was that U.S. business, and many businesses around the world, retuned their global outsourcing models to deliver to the burgeoning Chinese middle class. So the U.S.’ trade deficit with China does not reflect the on-going gains to U.S. business from its relationship with China. GE does export from the U.S to China, but the more important story is its growing domestic production, which for example makes it one of China’s largest health care equipment manufacturers. One in 10 cars sold in China in 2017 were produced by General Motors, of which only a fraction of the value is reflected in U.S. exports to China. And whilst some inward investment in China continues to have an export orientation, a growing proportion is with an eye to domestic sales.

Accessing Chinese markets turned out to be more complicated for non-Chinese businesses than the export-focused first phase. China demanded not only local production, but shared ownership and technology transfer. Of course, non-Chinese companies had a choice, but a negative decision choice would restrict access to China’s economic bonanza. And whilst U.S. and other non-Chinese companies bitterly complained, they did not in the main resist the allure of continued, short-term super profits.

The deal was clear, there was no subterfuge. Non-Chinese companies looked for ways to outrun their Chinese counterparts for as long as possible. Yet the bottom line was that most were willing to put their long-term competitiveness at risk in return for a few decades of inflated sales and returns. And they were encouraged, indeed massively rewarded, for such decisions, by their, largely Western, investors, who were also focused increasingly on short-term returns.

The U.S. trade gap is therefore in significant part a result of an unholy compact between China Inc. focused on its long-term interests, and U.S. Inc. seeking to extract short-term gain by willingly discounting the future. And the benefits have flowed. In the first phase, U.S. consumers and Chinese development were both major winners. Likewise, Chinese consumers and U.S. businesses have been massive beneficiaries of its second phase.

Contrary to financial folklore, however, the short-term does not go on forever. The longer-term that U.S. businesses discounted so heavily over the decades has arrived. Chinese companies are increasingly figuring out the technological, production and economic factors that enable them to dominate their domestic, and gradually the global economy. Global businesses are as a result facing downward pressure on their profits. For some, their very survival may be at stake.

Trade is not the problem, and tariffs are not the solution. The problem is the way in which the U.S. does business. It is suffering from its pursuit of excessive, short-term consumption and profits, a catastrophe largely of its own making. It is right to do what is needed to prevent illegal forms of technology transfer. But in the main, the rise of Chinese business on the back of U.S. and global business technologies and methods was driven by willing buyers and sellers, the philosophical and practical heartland of American capitalism.

Dr. Simon Zadek is a visiting professor and senior fellow at the Singapore Management University.

Read more about China-U.S. trade tensions.

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