Trump’s aggressive pursuit of China is essentially an economic war waged against a country that had previously been economically strong. As a Communist and developing nation, China faces ideological and institutional differences with the US, but these differences were exactly what American companies wished to take advantage of when outsourcing their business there. Lower levels of enforced regulation, lower costs, a stable political regime that looked benignly upon free trade—these forces attracted multinationals to China. Trump has changed all of this.
Corporate Exodus: Companies are Dropping China
For companies moving out of China, high tariffs imposed by the US are a major reason for the shift. The flight is real: American, European, Japanese, and Taiwanese companies are leaving their Chinese factories behind as costs become too high to remain profitable. This shift is creating new costs and complications for firms making the transition rather than acting as a means to take meaningful action against China’s forced tech transfers and against reshoring companies to the US. As a result, the trade war has become a war on globalization and an economic war on China.
Companies are forced to move prematurely
Moving to another country may make sense for companies whose new grounds of operation have sufficient infrastructure to provide a proper manufacturing environment. Firms reshoring to Japan and Taiwan find themselves back home with well-constructed roads and telecommunications systems, although such factors may yield higher costs of production. Those shifting to Vietnam and Thailand are faced with poorer conditions and potential added costs of production.
Vietnam has a lack of transport infrastructure, power supply networks, and urban infrastructure. Ho Chi Minh City and Hanoi face severe traffic congestion. Government funding and planning fall short of providing sufficient resources to improve the infrastructure environment. It has been estimated that the country needs to invest $400 billion in infrastructure over the next decade. However, corruption and lack of skills prevent this from occurring.
Thailand has better infrastructure than Vietnam, but it has experienced bottlenecks in pushing infrastructure development further. This is because it takes the central government a long time to approve projects, and state governments lack the capacity to build the infrastructure projects that are slated for construction. Thailand’s political elite view infrastructure projects as long term, while their tenure may be short term.
As companies move to developing Asian nations to take advantage of Asian supply chains, they are facing challenges. In Vietnam, companies have a harder time locating factories, and ports are struggling to coordinate container ship traffic. Costs of labor in Thailand are higher than in China, even after wage increases in China. Firms attempting to move to Indonesia, Malaysia, and Cambodia are facing similar problems. In Cambodia, for example, almost of half of all goods inspected in the last quarter did not satisfy inspection standards.
This means that the trade war is forcing some companies to shift production to less attractive locations prematurely. It’s one thing to move abroad in order to increase profitability, but quite another to move out from an established location due to complications resulting from an anti-free trade stance taken by the center country. So far, companies that make Crocs, Roomba vacuums, and Yeti beer coolers are moving out of China due to increased tariffs.
Reshoring hasn’t been successful
Sure, some companies have been planning to move out of China due to rising labor costs. Polaris, a snowmobile manufacturer, and Carter’s, a children’s apparel company, are moving back to the US. However, they are in the minority, as most companies leaving China are attempting to resettle in other low-cost developing nations.
The trade war has not prompted companies to reshore en masse to the US, which is what President Donald Trump promised as a candidate. This is because labor costs are far higher in the US than anywhere else. What the US-China tariffs have done is re-shift supply chains away from China to some extent while raising costs for companies continuing to do business there. This has been bad for American multinationals and will leave a dent in China’s economic base in the long run, as companies that have left the Asian nation do not plan to return.
War on globalization and economic war on China
Trump’s trade war has been a war waged on globalization and specifically on China, the country at the epicenter of the globalization process. Trump has railed against China’s trade surplus with the US as if it were a bad thing instead of merely a sign that China is a major producer for the US. This is because he doesn’t understand economics, which has driven the globalization process.
China has been a poster child of the globalization process. Certainly, the country needed to be called out for its practice of forced technology transfers, but few companies that have fallen victim to the practice actually believe the trade war addresses the issue. In addition, China will face lower levels of GDP due to companies shifting to neighboring nations at a time when its growth is slowing, causing unnecessary pain and suffering.
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- Joel A. Gallo CEO, Columbia China League Business Advisory Co.