China: Friend, Enemy, Supplier, Customer

Are we doomed to go to war with China?

Thucydides said yes.  

Writing 24 centuries ago, the Greek historian Thucydides examined the conflict between Sparta and Athens and concluded that conflict was inevitable when a rising power grew to challenge and frighten an incumbent power.

Port of Shanghai

A country whose economy is huge and growing bigger has interests it wants to protect. It builds a navy. It builds ports and garrisons. It develops relationships and it loans money to future trading partners and allies. It acts proudly and with impunity when it deals harshly with internal ethnic minorities and potential troublemakers. The USA did all that as we grew big, rich, and powerful in the 19th and 20th centuries. Now its China's turn to do the growing and muscle-flexing.

The behaviors that make sense for the rising power threaten the hard and soft power of the incumbent. They are competitors, then rivals, and then enemies. Then at war. Maybe. 

David Landis is a high school classmate who wrote here two weeks ago about his family's troubling experience with a prescribed drug. He brings a perspective based on another up close experience, this time with trade with China. He understands tariffs because his clients are American importers, and their American customers are the ones paying that tariff tax.  At this point, the U.S. and China are just jostling. Maybe it is the prelude to war. Maybe it is what countries do instead of war.

www.asiasourcenow.com

Landis' company, Access International Inc., has sourced and arranged contract manufacturing in Asia for North American and Western European importers for over 30 years. He has traveled to Asia on business over 80 times including to Mainland China at least 50 times.

Guest Post by David Landis

About 18% (worldstopexports.com) of China’s exports come here while 9% (census.gov) of our exports go there. We are inextricably intertwined. And there’s the rub, or is it?

For 4 decades, China has been modernizing, with great success on many fronts. Xi Jinping wants to vault China into what he believes is their destiny, to overtake the U.S. economically.

Landis, with a manufacturing client

But human rights violations, island building, other South China Sea transgressions, the Belt and Road Initiative, the bullying of Hong Kong and Taiwan, the Huawei incident, COVID obfuscation, Fentanyl, and intellectual property infringement haveChina at odds with much of the world.

So what to do? Is a “hot” war inevitable? The good news is that China is unlikely to shoot its best customer. The bad news is they’re going to continue this behavior unless thwarted. They will only be stopped by a team effort of dozens of countries, led by the U.S. We must rebuild the international relationships damaged during the last administration and bring China to the table. Given the urgency of the issues, there is no time to waste.

Using tariffs to bring China to heel was doomed from the start. The current 25% punitive tariff (in the business it’s called “HTS Chapter 99”) affects over $450 billion worth of goods imported from China. It’s a crushing blow to American importers, especially those of higher ticket or price sensitive items.

America has been gaslit into believing that China pays these tariffs. This is ludicrous. The American consumer usually pays the tariffs, except in a limited number of cases, when the American importer pays them. This occurs when prices cannot be raised beyond current levels. In no case does the Chinese government pay them, however.

The International Trade Commission estimates that the tariffs are raising an additional $57 billion annually paid directly by Americans. Of that, $46.5B (cato.org) went to farmers to offset China’s retaliation. While this provided the necessary safety net for farmers unable to export their products, the need for this assistance was based on a false presumption: that the tariffs would induce new behavior from China. It did not. It did garner Trump plenty of support, at least for a period of time, from the farming community. A sound approach to dealing with China would have avoided both the tariffs and the need for the subsidies.

Rather than see China as a threat for producing goods we import, consider it as a bulwark. If made here, many of those imports couldn’t be sold because the retail price for those goods would be multiple times higher. In a perfect world, we’d import nothing. It’s not a perfect world and much of what we enjoy cannot be produced and sold here.

Currently we need China to need us and they do. Being their best customer assures this. Manufacturing in China isn’t so much a threat as China’s actions are. The key is how we deal with China while not harming ourselves as we are currently. It can be achieved.

The administration should eliminate most tariffs, aside from PPE, pharmaceuticals, and categories that relate to our R & D and American heavy manufacturing. Tariffs should be used to encourage domestic production, not as a cudgel in lieu of a multinational strategy. Besides continued misbehavior, all we’re getting in return from China are reciprocal tariffs on our exports. The American auto industry has been hit especially hard.

Let’s rebuild our alliances and create a unified strategy to control China’s behavior. It’s what American business wants and needs, across the board.