With the US and China locking horns, we take a deeper look at the tangled and complex web of multinational relationships in the global economic ecosystem.

12 minute read

“Trade wars are good, and easy to win,” US President Donald Trump boasted in March 2018. One year in to his trade spat with China, it is clear they are anything but.

While trade representatives were close to reaching agreement in May, the 11th round of talks ultimately broke down amid bitter recriminations. According to reports, China balked at the idea of the US policing its compliance with the new deal.

Part of Trump’s problem is that having broadcast his vow to shrink the deficit with China, as a way of repatriating lost industrial jobs, so loudly ahead of the 2016 election, he has so far got little to show for his efforts. Far from shrinking, the bilateral deficit has expanded to new records, as the chart below shows. In the year to the end of June 2019 it totalled US$401 billion, compared with US$350 billion in the 12 months before he entered office.

Figure 1: US trade in goods deficit with China, rolling 12 months

US trade in goods deficit with China, rolling 12 months
Soure: US Census Bureau

Can outsourcing be reversed?

In terms of halting and even reversing the shift of manufacturing production to China, as Trump looks to win back some of the five million jobs lost in the two decades up to 2017, there is some, albeit patchy, evidence of success. For instance, Stanley Black & Decker in May said it planned to move production of its Craftsman wrenches back to the US from China, citing raised cost of imports.1

However, with a tight US labour market having led to widespread skills shortages, Aviva Investors’ head of global equities Mikhail Zverev believes there is limited scope for other companies to follow suit.

Insourcing production actually predates Trump’s presidency

The process of ‘insourcing’ production actually predates Trump’s presidency. GE, for example, brought much of its appliance-manufacturing operations back to its Appliance Park site in Louisville, Kentucky in February 2012.2 Decisions such as these are partly explained by the increased use of robots and artificial intelligence. Unfortunately for Trump, that suggests insourcing is unlikely to create as many jobs as he would like. This probably helps explain why job creation in US manufacturing has lagged that of the broader economy since he came to power.

It is certainly true an ever-expanding list of companies have been rejigging supply chains in order to evade tariffs. The American Chamber of Commerce in South China in October 2018 said more than 70 per cent of US companies operating in southern China were considering delaying investment or moving their manufacturing facilities.3 However, other Southeast Asian countries were the most likely destination.

“Steady wage inflation meant China ceased to be thecheapest supplier in a number of manufacturing categories some time ago. Countries such as Vietnam and Bangladesh have been the main beneficiaries,” Zverev says.

Apple has reportedly asked its major suppliers to assess the cost implications of moving as much as 30 per cent of it's production capacity from China to Southeast Asia and India as it prepares for a restructuring of its supply chain.4 PC makers HP and Dell are likewise thinking of re-locating up to 30 per cent of their notebook production in China to Southeast Asia and elsewhere.5

However, Aviva Investors’ head of emerging market equities Alistair Way says margins in some of these supply chains are so low the end result will almost certainly be higher prices for US consumers.

More than 50 multinationals have announced, or are considering, plans to move production out of China

It is not only US firms that are being forced into restructuring their supply chains. According to a July 2018 report in Nikkei Asian Review, more than 50 multinationals have announced, or are considering, plans to move production out of China. 6 Japan's Nintendo is to shift a portion of its Nintendo Switch game system production from China to Vietnam, while Panasonic in 2018 said it would transfer production of in-car stereos from China to Thailand and Malaysia, as well as Mexico.7,8

And the reconfiguring of supply chains does not solely consist of companies moving out of China. After all, it is not just tariffs imposed by the US they are having to skirt. German automaker BMW in June 2018 said it would ramp up Chinese production of its X3 SUV to avoid Chinese tariffs.9 This was another unintended consequence of Trump’s policies since ironically the X3 had been made exclusively in South Carolina.

In April, a survey of 600 multinational corporations by US law firm Baker McKenzie found nearly half were considering “major” changes to their supply chains, and over 10 per cent a complete overhaul.10

Zverev says that for less complicated businesses, such as those operating within the textiles industry, it is relatively easy to shift supply chains from one country to another. For others, however, where customers and manufacturers have invested in tooling and training specific to the product, it is much harder to shift production. Most will want to hold off for as long as possible to see how the trade war develops before moving supply chains out of China. And once they have moved, they are unlikely to shift back even if trade tensions were to subside.

Shortening supply chains

Way says the recent trend has been for companies to shorten their supply chains, where possible looking for new domestic suppliers of components. He expects this to continue. Citing Samsung as an example, he argues while the South Korean conglomorate has in the past been happy to rely on Japanese and American suppliers, that is changing: “Faced with so much uncertainty over the outlook for global trade, companies like Samsung are being forced to get much more control of their supply chains.”

He points to Japan restricting exports to South Korea of three chemicals, crucial for producing memory chips and displays for consumer electronic devices, citing national security concerns.11

Finding new suppliers and altering supply chains is costly and risky

Reconfiguring supply chains is taking a toll on multinational companies' bottom lines and has injected an element of uncertainty into business planning. As Stanley Black & Decker’s chief executive James Loree said in 2018, finding new suppliers and altering supply chains is costly and risky. “We don’t know what the lifespan of these tariffs is going to be, a couple of months, a couple of years, for ever, who knows?”.12

Dutch health technology company Royal Philips revealed in October last year that the trade war could shave €60 million from its annual profit as it was forced into redesigning some of its supply chains by creating regional manufacturing hubs.13 The same month, Panasonic said Trump’s threat of additional tariffs on China could hit its annual profits by 10 billion yen (US$89 million).

Having suppliers on your doorstep means they can be more responsive and might help to lower costs in the long run

While most firms will lose out as a result of rising protectionism, some are likely to benefit. Wonik IPS, a small-cap company based in South Korea could be one such example. It makes machines that manufacture semiconductors and has been picking up orders from both Samsung Electronics and Hynix, another Korean technology company. He believes even from Samsung’s perspective the long-term advantages of switching supplier could outweigh the short-run costs. “Having suppliers on your doorstep means they can be more responsive and might help to lower costs in the long run,” says Way.

US companies in China

On August 23, Trump called on US companies to “immediately start looking for an alternative” to China or face the threat of being forced to cut ties. Once again, his calls threaten to have unintended consequences.

With the US being a relatively closed economy, China accounting for less than ten per cent of its total exports, and the large bilateral trade deficit, Trump appears to reckon China has far more to lose from an all-out trade war. That could be a miscalculation. After all, the trade deficit fails to account for the fact that, according to one estimate, US companies based in China sell nine times more to Chinese customers than Chinese companies operating in the US sell to Americans.14

Despite the worsening trade war, investments by US companies in China actually grew in the first half of 2019

Interestingly, despite the worsening trade war, investments by US companies in China actually grew in the first half of 2019 as firms looked to tap into the country’s fast-growing retail market, which according to one recent report will overtake the US as the world's biggest this year. In total, US companies invested US$6.8bn in the first half, up 1.5 per cent from the average during the same period over the past two years, according to the Rhodium Group, a consultancy.15

Somewhat ironically, there are signs China is starting to open up its economy to foreign competition. For instance, BMW in October 2018 became the first automaker to take control of its main joint venture in the country as Beijing started to relax ownership rules for the world’s biggest auto market.16

US rival Tesla is building a plant near Shanghai – its first outside the US – where it plans to start making its top-selling Model 3 electric car later this year. The company has had significant support from China, securing as much as US$521 million in loans from local banks. On August 29, China said Tesla’s cars will be exempted from a ten per cent purchase tax, something typically reserved for domestic makers of electric vehicles. The news helped propel Tesla’s shares up as much as 4.8 per cent.17

With Rhodium Group reckoning 70,000 US companies invested US$256 billion in developing operations in China between 1990 and 2017, it is difficult to see the logic in Trump trying to force them to pull out of the country. After all, foreign competitors would almost certainly try to step in to fill the void.

Already there are signs Trump’s actions are hurting American producers. US goods exports to China totalled US$52 billion in the first half of 2019, a 19 per cent drop on the corresponding period a year earlier.18 While the fall has been driven by a sharp decline in US exports of agricultural products as well as petrochemicals, manufacturers have also been affected. For example, exports of automobiles reportedly dropped 20 per cent over the same period.

Chinese hostility

There are signs Trump’s policies are backfiring in a more dangerous way for other US companies. For them China is becoming a more hostile place to do business. Take Boeing, the world’s largest aircraft maker. China is threatening to single it out as a result of the trade dispute. In March it became the first country to ground its 737 Max jet after the plane’s second fatal crash in just five months. Two months later, Hu Xijin, editor-in-chief of the Global Times, a state-affiliated publication, tweeted China may “reduce Boeing orders” as one of its retaliatory tactics. 19

In 2018, Chinese airlines placed no new orders for Boeing jets for the first time in 16 years

Although the problems with the 737 Max may go a long way towards explaining why Chinese airlines have placed virtually no orders for Boeing jets this year, intriguingly the drop in orders preceded the crashes. Chinese airlines in 2018 placed no new orders for Boeing jets for the first time in 16 years.

Any embargo would be costly for Boeing. Although China may have placed no orders for its planes in 2018, deliveries still generated US$13.8 billion, 13.6 per cent of global revenues.20 That made it the company’s second biggest market. Furthermore, ongoing rapid growth means China is expected to boast the world’s biggest aviation market within a decade. Boeing itself forecasts Chinese airlines will buy 7,690 new aircraft, valued at US$1.2 trillion, by 2038.

While China is developing its own airliner, the C919, to compete with Boeing and Airbus, the programme is well behind schedule. For now, Boeing’s loss could be Airbus’s gain. In March, French President Emmanuel Macron landed a €30 billion contract for the European aircraft maker during a state visit to France by Chinese President Xi Jinping. China said it would buy 300 aircraft, the value of the deal twice what had been touted.21

China fined Ford Motor Co.’s main joint venture in the country 162.8 million yuan ($23.6 million) for antitrust violations

Although it may be the most prominent example, Boeing is far from alone in being caught in the crosshairs of the trade dispute. On June 5 China fined Ford Motor Co.’s main joint venture in the country 162.8 million yuan ($23.6 million) for antitrust violations. The country is the automaker’s second most important market, accounting for around 30 per cent of revenues.22

While Beijing did not link the fine to rising trade tensions, the suspicion is the two are related, not least since just four days before it said it was investigating FedEx Corp for the “wrongful delivery” of parcels. The logistics group allegedly diverted two Huawei Technologies' packages, intended to go from Tokyo to China, to its global headquarters in Memphis, without notifying the Chinese company. China's state-run broadcaster CCTV said the investigation "will be a warning to other foreign companies, organisations and individuals violating China's rules and regulations".23

How will the US respond to the rapid emergence of China as an economic superpower

According to most commentators, the battle over trade is just part of a much broader question: how the US responds to the rapid emergence of China as an economic superpower; moreover one with a very different ideology and competing strategic interests.

Technological Cold War

This helps explains why the trade war has already begun to morph into a conflict over technology, encompassing issues such as China’s forced transfer of technologies, who builds the world’s 5G networks, and artificial intelligence.

The ‘Technology Cold War’ threatens to present companies with even bigger challenges than tariffs

“The US sees China’s global ambitions, especially to be the global leader in a number of advanced technology sectors, as a threat. But China is not going to abandon those ambitions. The tensions created by that are going to be very difficult to resolve,” says Mary Rosenbaum of macroeconomic policy advisory Observatory Group.

According to Peter Fitzgerald, chief investment officer, multi-asset and macro, at Aviva Investors, the ‘Technology Cold War’ threatens to present companies with even bigger challenges than tariffs and heap further damage on the world’s economies.

“Trade is the battle, but the real war is over technology. It’s going to be much more disruptive than tariffs,” he says.

The Trump administration has blacklisted more than 140 Chinese companies, severely limiting their access to US components they rely on. Most prominent among them is Huawei, the world's largest telecom provider and second-largest smartphone seller. Accused of being a threat to national security, violating US sanctions and being a vehicle for espionage, it has been barred from buying from key American suppliers. The sanctions also prevent Huawei’s US subsidiary from transferring technology abroad.

Some US companies are dominant in the production of key components

Zverev says this has highlighted how dominant some US companies are in terms of producing some of the key components in many supply chains. He expects China to invest heavily in building up its domestic capability in some of these areas since it realises this is a strategic weakness.

“There are listed Chinese companies that are domestic champions and likely to be given every advantage under the sun to catch up and overtake. Other Asian companies will be eager to equip China as well,” says Zverev.

In the meantime China is retaliating. It says it will compile a list of so-called unreliable entities that damage the interests of domestic companies. It will single out companies that have stopped supplying to Chinese partners for non-commercial reasons and limit their business transactions.

Shares in Qualcomm fell sharply on August 1 after the US chipmaker warned “continued weakness in China”, where it earns 65 per cent of its revenues, was set to push earnings to a seven-year low.24 Two weeks later, shares in Cisco Systems plunged almost nine per cent after the US computer networking equipment company issued a profit warning, citing decisions by Chinese government-controlled enterprises to work with local vendors.

“We certainly saw an impact (of the trade war) on our business in China this quarter,” said Cisco chief executive Chuck Robbins.25

Rare earths becoming rarer

China is fighting back in other ways. With the country controlling more than 90 per cent of the global output of rare earths, the threat to block off supplies of these 17 metallic elements is one of the most strategic weapons in its arsenal.

China is in no hurry to ban rare-earths exports and the best choice is to maintain a deterrent force on the US in the long run by using rare earths as leverage

A recent editorial in the Global Times warned Washington not to push it “too hard" if it wanted to retain access to supplies. "China is in no hurry to ban rare-earths exports and the best choice is to maintain a deterrent force on the US in the long run by using rare earths as leverage", the newspaper said. 26

Rare earths have been deemed critical by the US Geological Survey for multiple sectors, including the country’s defence industry. They are used in military jet engines, satellites and laser-guided missiles, as well as a wide range of consumer products, from smart phones to car batteries.

However, while an embargo could be problematic for many companies in the short run, rare earths are more abundant than their name suggests. Although China is currently the world’s dominant producer, it only controls about one-third of the world’s deposits.

Its near monopoly of production is largely explained by its lax labour and environmental regulations. Since the process of refining rare earths is laborious and generates large amounts of toxic and radioactive waste, countries such as the US have until now been happy to cede production to it. That looks set to change. On July 22 Trump ordered the Pentagon to support domestic production, labelling rare earths critical for national defence.27

Bad vibrations: Europe caught in the middle

The impact on supply chains from the trade war goes far beyond China and the US. In some cases other countries and their producers could benefit. For instance, according to a recent report from the Peterson Institute, while China has increased tariffs on US exports to an average 20.7 percent, it has simultaneously reduced tariffs on competing products imported from everyone else to an average of only 6.7 per cent28

As recently as early 2018, the report said, firms in both the United States and the rest of the world competed in China with each other on a level playing field, facing an average tariff of eight per cent.

China is widely expected to overtake the US as the world’s biggest economy within the next two decades

With China widely expected to overtake the US as the world’s biggest economy within the next two decades, non-US companies could benefit if Beijing embargoes their US rivals’ goods.

In the majority of instances, however, the consequences seem more likely to be negative. Germany, for instance, is on the brink of recession as industrial production contracts at its fastest pace in nine years. Sales of machine parts and cars to China, an engine of the country’s economic growth in recent years, have been falling sharply.

Not only has Chinese demand for European exports been hurt by the trade war, it seems China may also be trying to divert exports intended for the US to Europe. As the chart below shows, until this year China’s exports to the US and Europe had moved largely in lockstep. That is no longer the case. While the rate of growth of exports to the US has decelerated, exports to Europe have continued to grow at a healthy rate. And that is despite much of the region teetering on the brink of recession.

Figure 2: Is China diverting exports to EU from US?

Is China diverting exports to EU from US?
Exports, 6 month moving average, annual change, USD. Source: Macrobond

The European Commission in January imposed anti-dumping measures against imports of a number of items from China, including electric bicycles, arguing Chinese exporters were benefiting from state subsidies. Two months later it labelled China an “economic competitor” and “a systemic rival”, a seismic shift in its stance.29

The time of European naïveté towards China had ended

In March French President Emmanuel Macron declared the “time of European naïveté” towards China had ended and called for a robust and co-ordinated response by the EU towards Beijing.30 At the same time, both he and other European leaders have been urging the US and China to pull back from their conflict. So far, their calls appear to be falling on deaf ears.

Observers say Europe, caught in the middle of the unfolding US-China rivalry, is set to become an important battlefield in the two nations’ geopolitical ambitions. For instance, the US is pressuring European allies to exclude Huawei from their 5G networks on security grounds. Spain, Germany, and the Netherlands have refused, but Britain has said a provisional decision to allow Huawei to take part in some non-core parts of its network is under review.

Pressure to choose sides is not limited to Europe. Brazil, Mexico and Argentina — Latin America’s three largest economies — are due to decide this year or in early 2020 whether they will allow Huawei to participate in the rollout of 5G mobile infrastructure in their countries. The Trump administration has been pressing for it to be excluded. For now, the signs are the countries are likely to resist, not least because faltering economic growth makes Chinese investment and financing especially attractive.

Britain is under pressure from Washington to drop plans to tax big US tech firms

Trump’s trade war is colliding with global politics in other ways. Eager to secure a trade deal with the US as it exits the EU, Britain is under pressure from Washington to drop plans to tax big US tech firms as well as to adopt a tougher stance on the Iranian regime. Elsewhere in Europe, Italy caused consternation in Washington when in March it became the first G7 nation to endorse China’s controversial Belt and Road Initiative. The US has voiced concern about China using the initiative to gain influence or control over strategically important assets across the world. However, as with the three Latin American nations, Italy is desperate for help in financing investment in its ailing infrastructure.

Reading the runes

According to some, the current conflict between the US and China was an inevitable consequence of China’s emergence as an economic superpower, which has put it in a position to challenge US hegemony.

Fitzgerald says it is hard to remember a time when investing was more about geopolitics.

We’ve now got a technology war that is forcing countries to choose sides

“Not only has the trade war laid bare the intricate ways in which the world’s economies have become intertwined over the past quarter of a century or so, we’ve now got a technology war that is forcing countries to choose sides. It all threatens to upend global political alliances, the consequence of which is hard to calculate,” he says.

That financial markets are finding it difficult to work out the full implications of what is occurring is apparent when one considers that US$17 trillion worth of government bonds now carry negative yields, a sure sign markets are fearful the trade war is about to plunge the world into recession. But strangely, while other safe-haven assets such as gold have surged as well, riskier asset classes such as equities are also close to record highs.

Fitzgerald believes the disconnect cannot persist. “We believe equity markets will ultimately have to follow bonds. If you accept the enmeshment of the Chinese and US economies has led to favourable investment conditions for the past 25 years, you have to believe if we’re now entering a new Cold War there are going to be some fairly major adverse consequences,” he says.

It always seemed as if Trump’s claim that trade wars are good and easy to win was little more than hyperbole, said largely for dramatic effect. But if he did think there was a grain of truth to the boast, there are at least signs he is having second thoughts.

Apple has been complaining that tariffs are hurting it more than its rival Samsung because so much of the iPhone’s supply chain is in China. Following a dinner with the technology giant’s chief executive Tim Cook on August 17, Trump said he was “thinking about” a remedy.31 As the unintended consequences of his actions become ever more apparent, Cook is unlikely to be alone in hoping Trump can find a way to close Pandora’s Box – and soon.


  1. 'Stanley Black & Decker Announces Opening of New CRAFTSMAN Plant in Fort Worth, Texas', Stanley Black & Decker, 15 May 2019
  2. Charles Fishman, 'The Insourcing Boom', The Atlantic, December 2012
  3. American Chamber of Commerce in China
  4. James Kynge and Mercedes Ruehl, 'Apple considers supply chain shift out of China', Financial Times, 19 June 2019
  5. Cheng Ting-Fang, Lauly Li, Coco Liu and Shunsuke Tabeta, 'HP, Dell and Microsoft look to join electronics exodus from China', Nikkei Asian Review, 3 July 2019
  6. Masamichi Hoshi, Rei Nakafuji and Yusho Cho, 'China scrambles to stem manufacturing exodus as 50 companies leave', Nikkei Asian Review, 18 July 2019
  7. 'Nintendo Switch to be made in Vietnam', Financial Times, 9 July 2019
  8. 'Trade war drives Asian manufacturing out of China', Nikkei Asian Review, 24 October 2018
  9. Gabriel Nica, 'BMW X3 Chinese Production to Kick Off This Year', BMW, 21 March 2018
  10. 'Trade War Sees AP Execs Reworking Supply Chains; Bullish On International Investments; UK Out Of Favour', Baker McKenzie, 24 April 2019
  11. 'Japan restricts exports of chip and smartphone materials to South Korea', The Japan Times, 1 July 2019
  12. Stanley Black & Decker company website, Q2 2018 earnings conference call
  13. Bart Meijer, 'Philips shifting 'hundreds of millions' of production due to trade war', Reuters, 29 January 2019
  14. James Kynge, 'Why the US has a lot to lose in a tech ar with China', Financial Times, 23 August 2019
  15. Rebecca Fannin, 'China-US Investment Flows Showcase A Love-Hate Scenario', Forbes, 29 August 2019
  16. Norihiko Shirouzu, 'BMW to buy control of China venture in 'new era' for foreign carmakers', Reuters, 11 October 2018
  17. 'Beijing grants Tesla exemption from auto tax', Financial Times, 30 August 2019
  18. US Census Bureau
  19. Hu Xijin, Twitter @HuXijin_GT
  20. 'Quarterly Reports', Boeing
  21. 'Airbus secures multi-billion dollar jet order from China', BBC News, 26 March 2019
  22. Brenda Goh and Yilei Sun, 'China fines Ford's Changan venture $24 million for antitrust violations', Reuters, 5 June 2019
  23. Takashi Kawakami, 'China probes FedEx in 'warning' to foreign companies', Nikkei Asian Review, 1 June 2019
  24. 'Qualcomm shares drop after sales forecast signals weak demand in China over next few quarters', South China Morning Post, 2 May 2019
  25. Yifan Yu, 'Cisco's China revenue drops 25% and outlook dims amid trade war', Nikkei Asian Review, 15 August 2019
  26. Global Times News, Twitter @globaltimesnews
  27. Ernest Scheyder, 'Pentagon races to track U.S. rare earths output amid China trade dispute', Reuters, 12 July 2019
  28. Chad Bown, Euijin Jung and Eva Zhang, 'Trump Has Gotten China to Lower Its Tariffs. Just Toward Everyone Else.', Peterson Institute for International Economics, 12 June 2019
  29. 'EU-China – A strategic outlook', European Commission and HR/VP contribution to the European Council, 12 March 2019
  30. 'Macron hails ‘end of Europe naïveté’ towards China', Financial Times, 22 March 2019 
  31. 'Apple CEO warns Trump about China tariffs, Samsung competition', Reuters, 18 August 2019

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