If President Donald Trump continues with the China Tariffs trade war, China may not dominate the World!
The earth shakes, when two giants wrestle! That may no longer just be a figure of speech! With America and China involved in a major trade war since President Donald Trump entered the White House- there’s no saying when the Trump China Tariffs war will end.
China has been the workshop of the world for quite sometime now! Many, many products that we now buy are Made in China. With an abundance of raw materials and large manufacturing facilities, it is possible for corporations to push down manufacturing costs significantly – making them much cheaper than what it would cost to manufacture in another country. This has allowed corporates across the world to manufacture in China and sell products across the world at a fraction of the cost.
The biggest benefit that China has enjoyed is a significant inflow of capital for a long long time. By investing in superior manufacturing facilities, it has become a manufacturing behemoth and can export to each and every country in the world. This provided them with a lot of financial capital (Dollars) which would otherwise remain in the respective countries manufacturing it.
Many large corporations have shut down their factories in their home nations and are now operating mainly out of China. All these actions have resulted in significant job cuts and tax revenue losses for the countries losing these factories.
Another challenge faced by corporates is the terms and conditions imposed by China. A corporation can do business in China only if it has a local partner in place. This has forced them to share technology which has taken them years to develop, with another Chinese partner. This partner has no oversight and sees no problem in using this technology for other businesses. This blatant theft of technology and hurts the original innovator as he loses his competitive advantage.
China may be the workshop of the world, but America continues to be the World’s biggest and the most important market. The challenges faced by corporates have been around for a few decades now. President Donald Trump has introduced tariffs on products manufactured in China. With these China tariffs in place, Chinese products sold in America are now priced at a premium and in some cases they are expensive than those made in America.
With additional tariffs on products in a hyper competitive industry, corporates are finding it tough to sell their products. No customer will buy an expensive product when he can get the same product at a fat discount. This has pushed many America facing manufacturers to look for other alternatives that could benefit them.
Countries like Vietnam, Taiwan, South Korea Malaysia, Chile, India, Mexico, Thailand, etc., stand to gain a lot from this trade war. Companies manufacturing in China are looking at these countries for manufacturing their products. Many companies have already shifted their production lines to these countries which also have an abundance of raw materials and cheap labour needed for setting up manufacturing. Companies which planned to shutter their factories in USA and shift to China, shelved the idea and have continued to operate in the United States of America.
Giants, the world’s largest manufacturer of bicycles has shifted its production from China to Taiwan. Vietnam is said to have experienced a 7.9% increase in its GDP due to the shift of manufacturing away from China into Vietnam.
The impact of tariffs is very clear. Many large corporations are now not operating out of China and continue to move out of the country to please Uncle Sam. This proves that the impact of the tariffs has been quite strong and has hurt the Chinese economy.
China bets that this is just an aberration where larger corporates such as Walmart, Costco, Amazon, Apple, etc, will get the US Government to back off from these tariffs. They believe that the era of Made in China products is a permanent fixture.
The assumption in China is that President Donald Trump, with a fixed constitutional term of 8 years, may be the only person willing to take on China in order to fix its trade imbalance. The next US President may not be willing to continue the same policies, as it is hurting both economies.
This view is echoed by many industry veterans who feel these are temporary measures, which will have to be rolled back sometime soon, as they are hurting both the countries.
Farmers in America are said to be the worst hit! Ex: China has now substituted American Soyabean with Brazilian imports. Lobsters, a major export from the north eastern states of America, especially Maine have lost a lot of major market like China to Canada. China now buys lobsters from Canada, which has access to the same fishing areas as Maine. These are just two multi-billion Dollar industries that America has lost.
With these tariffs in place, the bottomlines are getting negatively affected. However there is a catch here! The political establishment strongly supports the actions of the Donald Trump, as they see China as a nation out to dominate America and the world. They believe that China has used unfair means to get technology and an upper hand in international trade.
The American Government is pushing China to open up its economy, just like America has done for other Chinese companies. Restrictive rules are the primary concern for America and this is something they want China to do away with. Without a level playing field, Chinese companies continue to gain an unfair advantage.
With the slowing economy, it seems that China may blink sooner rather than later. China as an economy is still heavily dependant on its access to the US markets for earning foreign exchange. Without the foreign exchange/ Dollars it earns, China may have to significantly cut back on its expenditures on domestic infrastructure, military, foreign acquisitions and other research and development activities that are necessary for it to be globally dominant.
China has had long term plans in place to dethrone the US as the most dominant global force and this is exactly what this trade war is about. USA trying to halt the dominance of China. China is attempting to break the US Dollar’s stranglehold on the world economy by promoting oil trade in Yuans instead of Dollars. It aims to be the most dominant player in telecom and IT with Huawei. There are many other fields where it already dominates globally and this threatens American hegemony.
The trade war is primarily America’s way to thwart China and maintain its dominance. While it may look like a long shot, it seems to be the best bet for the world. This Chinese challenge is faced by many countries across the world and this is the first time that some action is being taken against them.
Having a determined USA and the world against itself, China may find it difficult to resist reform, but we still don’t know how strong are the cards held by China. China is the largest foreign holder of US bonds. It is a staggering amount – $ 1.17 trillion The day it decides to sell all these bonds or simply refuses to participate in further bond purchases, could result in a stuttering halt of the US economy, with the Government left with little to spend/ boost its economy.
In which way does this road turn? We will have to wait and watch, but one thing is certain! When two giants fight, the earth shakes. So brace yourselves!