Breaking free of Chinese suppliers could take “months”

Nobody said a breakup would be painless, but it may be a lot easier for the US to cut its dependency on Chinese suppliers than is generally assumed. From the blog of trade expert Alan Tonelson (emphasis mine):

Throwaway lines are among my favorite aspects of opinion writing, largely because in a simple, usually brief, and almost by definition understated sentence or two they can thoroughly debunk or at least gravely weaken shibboleths that have reigned virtually unchallenged for decades. And Financial Times columnist Rana Foroohar had a doozy yesterday.

As is well known by anyone who’s been closely following the development of President Trump’s trade policies and the uproar they’ve triggered, some of the biggest fears surrounding the prospect of the “trade wars” they’re deemed all too likely to ignite concern the impact on global supply chains. As explained this morning by Nobel Prize-winning economist and New York Times columnist Paul Krugman;

“[C]orporations have invested trillions based on the assumption that an open world trading system, permitting value-added chains that sprawl across national borders, was going to be a permanent fixture of the environment. A trade war would disrupt all these investments, stranding a lot of capital.” […]

Just how fast they took place, and can still take place, is where Foroohar’s column comes in. In yesterday’s column, she echoed my point about supply chain movements that are either already underway or being contemplated:

“Over the long term, China and the US are headed towards regional supply chains for high-growth technologies of the future.” She continued – consistent with the conventional wisdom, “But in the short term, the interdependencies will be difficult to untangle.”

Then, however, came the kicker – which received no special emphasis from the author at all:

“Several executives who supply Fortune 500 companies have told me it would take months if not years for the biggest US companies to break completely free of Chinese components.”

To repeat: Months – and at the outside years – for many companies to marginalize China’s role in particular in global supply chains. And then remember the reward: Greatly diminishing China’s still-burgeoning influence over the American economy and over the broader global economy, and in the process blunting the growing threat it poses to U.S. security interests both in the Asia-Pacific region and around the world.

Buckle up

US Trade Representative Robert Lighthizer

The tariffs cometh:

U.S. Trade Representative Robert Lighthizer said Wednesday the administration would likely be unveiling tariffs against China soon, but cautioned that the precise details are still subject to change.

“The president is going to make a decision in the very near future,” Lighthizer told the House Ways and Means Committee. “Our view is that we have a very serious problem of losing our intellectual property, which is really the single biggest advantage of the American economy. … We are losing that to China in ways that is not reflective of the underlying economics.” […]

He said that the existing world trade system, including the World Trade Organization, was “wholly inadequate” to deal with China because it is “state-dominated economy that rejects market principles.”

Better dig a bomb shelter and stock up on canned beans and shotguns shells, as we are reliably informed that tariffs will lead to a “trade war.”

Protectionist China

Reuters provides a handy rundown of China’s restrictions on US imports. They are… significant:

TECHNOLOGY

China keeps close control over the use of tech within its borders, including full or partial blocks against many popular U.S. firms including Google, Facebook Inc, Twitter Inc and others.

The Chinese government has adopted a raft of strict new cybersecurity regulations, which foreign business groups complain either put China off limits or require them to provide sensitive intellectual property for government checks. […]

AUTOS

Global carmakers can only operate in China, the world’s largest auto market, via joint ventures (JVs) with local partners, with their stake limited to 50 percent, part of a government drive to protect home-grown auto firms.

Tesla Inc chief executive Elon Musk said on Twitter earlier this month that China trade barriers created an unfair playing field and that it was “like competing in an Olympic race wearing lead shoes.” […]

China also imposes a 25 percent duty on imported vehicles, versus a 2.5 percent import tax in the United States.

BANKING AND FINANCE

Foreign financial firms face long-standing equity caps to participate in some services in China, including a 50 percent limit on life insurance and a 49 percent cap on foreign-invested securities broker-dealers. […]

ENTERTAINMENT

China has a strict quota system for imported movies, limiting the number allowed to be shown on domestic cinema screens through the scheme to 34 each year. Hollywood producers also get around 25 percent of the box office, compared to nearer 40 percent they received in other overseas markets.

FOOD AND AGRICULTURE

China bans imports of poultry, poultry products and eggs due to avian flu. It conditionally lifted an import ban on U.S. boneless beef and beef on the bone in June last year. […]

RAILWAYS

China requires rail equipment suppliers to its domestic train networks, which are among the world’s longest, to prove that at least 70 percent of their supply chain is in China.

Embracing “free trade” when your trading partners are severely protectionist is a bit like leaving all your doors unlocked when your neighbors are thieves.

Tariff talking points

Some thoughts from trade expert Alan Tonelson on the impending metals tariffs:

>Many countries have declared their intention to retaliate against the American tariffs with higher barriers to U.S. exports. Curiously, they are overlooking the Chinese government-subsidized overcapacity at the root of the long-time distortions in world steel and aluminum markets.

>Many of these countries want the problem tackled multilaterally. But the World Trade Organization (WTO) has failed to stem this overcapacity (or deal effectively with many other forms of Chinese trade and broader economic predation), and a G20 forum specifically addressing the steel issue has produced nothing since its founding in December, 2016.

>Although major steel-producing powers like the European Union have imposed their own steep tariffs on shipments from China, the global glut has continued. One reason may be that, since the global economic recovery took hold in 2010, according to World Steel Association data. the United States has been the major steel producer that has suffered by far the greatest loss of global production share by volume. (See this post of mine for the 2010 figures and the Steel Association’s latest report for the most recent – January, 2018 – figures.) And as of the most current World Steel Association data (2016), the United States is also the steel producer with the highest steel trade deficit by volume (21.7 million tons).

As a result, charges that American steel tariffs in particular will jeopardize the rules-based global trade system seem to be arguing that this system requires the United States to remain as the world’s dumping ground for government-subsidized steel.

Also don’t miss the follow-up post.

Who’s afraid of a trade war?

Can you be afraid of something that doesn’t exist?

Economist Ian Fletcher writes in the HuffPo:

Trade wars are mythical. They simply do not happen.

If you google “the trade war of,” you won’t find any historical examples. There was no Austro-Korean Trade War of 1638, Panamanian-Brazilian Trade War of 1953 or any others. History is devoid of them.

Please don’t respond with that old canard about the Smoot-Hawley tariff of 1930 starting a trade war and causing the Great Depression. It doesn’t stand up, as actual economic historians from Milton Friedman on the right to Paul Krugman on the left have documented. See here, and here, and here.

The Depression’s cause was monetary. The Fed allowed the money supply to balloon during the late 1920s, piling up in the stock market as a bubble. It then panicked, miscalculated, and let it collapse by a third by 1933, depriving the economy of the liquidity it needed to breathe. A wave of bank failures in 1930 spread the collapse around the country. Trade had nothing to do with it.

As for the charge that Smoot caused the Depression to spread worldwide: it was too small a change to have plausibly so large an effect. For a start, it only applied to about one-third of America’s trade: about 1.3 percent of GDP. Our average tariff on dutiable goods went from 44.6 to 53.2 percent—not a large jump. Tariffs were higher in almost every year from 1821 to 1914. Our tariff went up in 1861, 1864, 1890, and 1922 without producing global depressions, and the recessions of 1873 and 1893 managed to spread worldwide absent tariff increases.

Now, there will be much sound and fury about the decision by the US to slap tariffs on steel and aluminum imports (of 25% and 10%, respectively). China, which accounts for 2% of US steel imports, will mostly shrug:

But most analysts said the move was more of an irritant to China than anything serious at this stage.

A glut of steel from China has fueled global oversupply, but Lu Zhengwei, chief economist at Industrial Bank in Shanghai, said China had already been working to cut overcapacity in its steel industry.

Anti-dumping duties imposed by the Obama administration on China two years ago had also helped cut U.S. imports from China and protect a restructured U.S. steel industry based around mini-mills, experts said. Last year, China’s steel exports fell 30 percent […]

The uproar over trade in nineteenth century commodities is drowning out the far more important issue for the US, which is the destruction of the American edge in advanced manufacturing thanks to trade and technology transfers:

America produced every important invention in the digital age, from integrated circuits to semiconductor lasers, solar cells, flat panel displays, sensors and light-emitting diodes. Except for integrate[d] circuits, Asia now produces virtually all the world’s output of these building-blocks of the electronics industry, and China has a crash program underway to become the world’s major producer of semiconductors.

The steel tariff could be just an opening salvo, as the US prepares to take action on high-tech manufacturing. That’s when the sparks would really fly. On the other hand, there are no clear signs that this will actually happen, so we’ll just have to wait and see.