Corporate America: The Clear Loser in Trump’s Trade War (4 min read)

There’s little debating the cause of the US/China trade war. There is a bellicose Donald Trump determined to vanquish trade deficits. And there is growing unease over – if not outright hostility towards – China’s cumulative trade abuses that include subsidies for local industries, forced technology transfers, and intellectual property theft.

The curious thing is that as Trump wages the trade war that no one asked for nor anyone wants, much of Corporate America is still sitting on its collective hands. There are some protests about tariffs, in particular from industries like retail that will bear the full brunt of Trump’s chosen weapon. But no one has stepped up to lead the fight against China’s unfair trade practices.

It’s not that Corporate America is ignorant of what’s going on. The US-China Business Council (USCBC) recently released a survey of its members and 84% reported seeing signs of protectionism. About 95% of respondents believe state-owned enterprises receive some form of government support, and 75% believe private Chinese companies receive tangible benefits unavailable to foreign companies. Furthermore, 90% of companies said they had concerns about intellectual property rights in China, although there seem to be signs of improvement in the past year.

But what do they do about it? Not much. They defer to the US Chamber of Commerce, which reacted to Trump’s latest escalation of tariffs by saying that it has been calling out unfair trade practices for years but the way forward should be ‘continued constructive engagement’. Well, we all know how that’s gone over the past few years. And they seem more than happy to let Trump’s endless Twitter storms do the talking.

 

In the USCBC survey we find some interesting insights into why Corporate America is so passive:

○ 97% of companies report that their China operations are profitable, with 46% saying China is more profitable than other business lines.

○  83% of companies plan to maintain or increase investment in China in line with the past five years. Of the companies reducing investment, a key reason is rising costs, although concerns about rising US/China tension was also a factor.

○  For companies that are investing in China, 95% are seeking to access or serve the Chinese domestic market. Less than a quarter of companies are investing in supply lines or to export goods to other countries.

○  Only 5% of companies report being asked to transfer technology to Chinese companies – which may come as a surprise given the recent headlines! The survey suggests that the technology transfer problem appears to be confined to specific industries and companies.

○  Only 12% of companies report a negative impact from China’s ‘Made in 2025’ industrialization program, down from 20% in the previous two years.

 

It appears that that technology transfers and the ‘Made in 2025’ program – issues of paramount importance to US policy makers and national security interests – are largely a nonissue for Corporate America.

But the key takeaway is that whatever the costs of an unlevel playing field, American companies want to stay in China because it is very profitable. And they see huge upsides from positioning themselves to serve the rising Chinese consumer. For them it’s not about trade, it’s about access.

All the more unfortunate is that Corporate America finds itself yoked to Donald Trump and his unrelenting tilt at the trade deficit.

It’s hard to see how any of this benefits Corporate America, especially the slice that’s seeking to enter the Chinese domestic market. Whatever happens with tariffs, the US government will probably maintain pressure on national security issues raised by the ‘Made in 2025’ program and on the operations of companies like Huawei Technologies, among other things. None of this is likely to make it easier for Corporate America to do business in China.

For the past decade, Corporate America has been so anxious to gain entry to China that it collectively has acceded to and indeed enabled China’s ongoing abuses. But the reality is that China has needed foreign investment and know-how every bit as much as US and other foreign companies have coveted access to China’s market.

One wonders what might have happened if at some point Corporate America had simply said ‘no’ – as in, ‘No, we’re not going to do business with you on those terms’. If Corporate America had just said ‘no’, chances are US/China relations might now be in a very different place.

That ship has sailed, sadly. Going forward the process will be driven by constituents who are hurt by tariffs rather than those who stand to benefit from a more open China. In a nod to those who shout the loudest the tariffs will probably go in due course although not without serious collateral damage to previous trading relationships. And those companies that remain mute will probably retain access to China – but on China’s terms.

Over a 30-year career as a sell side analyst, John covered the structured finance and credit markets before serving as a corporate market strategist. In recent years, he has moved into a global strategist role. He can be reached here.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)

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