As China Debate Heats Up, Biggest Risk Is Shift In Focus


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The long China trade has been a dud since 2020. You can blame Xi Jinping’s Zero Covid policies. And you can blame Washington, too. The trade war continues to pick away at China’s stature as world’s most favorite market (after the U.S.) and world’s go-to manufacturer. It’s definitely not pretty these days in China, as I wrote about here.

If you bet President Biden would wipe out Trump-era China policies, you bet wrong.

Sure, Biden has thrown Chinese companies some bones – namely, the two-year moratorium on anti-dumping duties against its solar companies in Southeast Asia that Commerce has found to be circumventing U.S. trade laws. That was a biggie. Biden also ended a China-specific investigation project at the Department of Justice, calling into question the FBI’s ability to slow China espionage, influence peddling and IP theft, as a recent House Homeland Security subcommittee hearing highlighted.

But on balance, Biden has kept Trump’s China policies and expanded on some. Beijing hates them all.

The Section 301 trade tariffs are still in play, though they are under review this fall. Removing them would be a massive gift to China, a white flag raised high.

Section 201 solar safeguard tariffs were extended for another four years in February 2022, protecting the locals from a market China nearly wiped out entirely around 10 years ago.

Capital market sanctions were expanded under Biden, banning dozens of Chinese companies from American investment funds. This includes two telecom companies once listed here that were staples of any China fund – China Mobile and China Unicom. They’re no longer investable.

But close China watchers can feel a change in the debate. Once centered on trade, the original China issue is at risk of being taken over by defense hawks first. And decouplers second, who mainly want to pull supply out of China and often use the same China partners to source from Southeast Asia instead.

For Americans who have watched factories close, and job deserts grow, the question they may have is – what’s in this fight for me? While answers to such questions are not simple, the simplest answer is that there is not much in it for them at all if the narrative is going to be about saving Taiwan, and merely shifting supply chains to other Asian nations.

War, Wall Street & Widgets

Washington has taken a three-pronged defensive approach against China so far – trade tariffs, capital market sanctions, and export controls. They have also codified some of the government’s China concerns through offensive legislation, most recently via the Uyghur Forced Labor Prevention law, which bans certain products made in Xinjiang from being a part of the manufacturing process of goods sold here; and two laws in particular – the Inflation Reduction Act, which seeks to provide tax incentives to domesticate the solar supply chain and EV batteries; and the CHIPS Act, which provides tax incentives to companies making both commodity microchips mostly all made in Asia right now, to cutting edge semiconductors the U.S. wants to protect from becoming just another China-centric, Asia-dominant industry. This has led to a manufacturing boom, though it is a niche sector by and large.

The war narrative is centering more on “what ifs” – what if China makes a move on Taiwan? What if China takes over the sea routes of the all-important South China Sea?

As an aside, it is worth noting that the reason why the South China Sea route is so important is because Western policy makers and U.S. corporations have helped turn Shanghai and Guangzhou, among other China ports, into the places where everything Made in China goes before it is floods the U.S. market. Those ports are where your KitchenAid comes from, and all of your Temu clothes, and those funky little consumer items you see advertised on Twitter. They are shipped to us via the South China Sea.

Taiwan and the South China Sea, while important, are becoming a focal point of the China story. Some argue that Taiwan is important because it is a hub of American semiconductor production. But while Taiwan is a hub for that, it is true, the Taiwanese multinationals are just as reliant on mainland China and so if China wanted to make a move on semiconductors they could literally just nationalize Taiwanese factories on the mainland. They don’t need to invade Taiwan to take over that high-tech resource. NATO is talking about increasing its presence in the Indo-Pacific; an idea pushed forward by Washington. While all of this is pure war-gaming and speculation, the reality is that Washington risks becoming too focused on this at the expense of other, long term and more pressing issues – namely reindustrialization lost to Asia since the opening up of China and its ascension to the World Trade Organization in 2001.

The defense angle lets many members of Congress off the hook. After years of promising manufacturing jobs to their constituents, they’ll be able to put that aside, saying we have a national security matter that’s more pressing.

Anybody who knows Washington knows Congress prefers foreign intrigue. The defense narrative has no benefit to the U.S. unless you’re maybe manufacturing nuclear submarines in Connecticut.

Preparing for war can, of course, be good for industry, but the only way that will work today is if the U.S. reshores that industry.

This isn’t the 1980s Cold War with Russia. Back then, the U.S. had a stronger industrial base. These are different times. For the last 20+ years, China has become a major part of the U.S. defense industry supply chain.

Moreover, Hong Kong is part of the WTO’s Government Procurement Agreement, which makes the China city no different than Chicago in competing for U.S. government contracts. (Russia is not part of that agreement and never was.)

Turning China into a defense story might make for dramatic television and legislative committee hearings about “desperate times,” but none of this matters unless the U.S. can build things without China. Today, it cannot.

This brings us to the widgets part of the China story and talk of “decoupling.”

Fresh off his trip to China, Elon Musk said he was against decoupling from China, as did Treasury Secretary Janet Yellen on June 13, calling it a “mistake.”

The market now refers to the hawkish decoupling position as “de-risking.” What de-risking does is move supply chains off the mainland in order to avoid political risks (human rights laws, sanctions) and commercial risks (tariffs and outright product bans). This trend has led Chinese companies to set up shop in Vietnam so instead of making your furniture and kitchen cabinets in Nanjing for $2.00 an hour, they will do so in Saigon for about $0.75 an hour.

This is what derisking looks like: The Gap sources shirts made from cotton grown in India and turned into onesies in Bangladesh at a labor cost that is even lower than that of China’s today. It means Apple can avoid the compliance headaches of the Uyghur Forced Labor laws on polysilicon used to make microchips in iPhones and make them in India instead, or maybe Taiwan, where Apple’s main partner, Foxconn, is headquartered.

Is that a bad thing?

I asked Dan Harris, an international lawyer with Harris Bricken in (mostly) Seattle. He is of the mind that if decoupling means leaving China, even if the product goes to Vietnam and Mexico, it’s better than the status quo.

“It does not make sense for the United States to make low-end t-shirts, bed sheets and plastic toys,” he says. “I am of the view that every dollar that leaves China and ends up in Mexico is great for the United States and for the world and every dollar that leaves China for Vietnam is very good for the United States and for the world. I don’t see Mexico or Vietnam or India stopping to sell products for political reasons, but we live under that constant threat with China,” he said, pointing out how China hoarded personal protection gear for hospitals, things like masks and hospital gowns that are almost all made in China. “They stopped selling rare earths to Japan once for political reasons. Would Thailand do that? Would Vietnam? No. There is some reshoring happening. I know this. But it’s not a shame if most of it just leaves China and doesn’t come here. If it leaves China, that’s a good thing.”

Some on Capitol Hill who talk about decoupling are advocates for the failed Trans-Pacific Partnership Agreement, which Trump killed and Biden has not resuscitated.

There are a handful of legislators in both parties who want that Agreement to be revived. Some are trying to turn the fledgling Indo-Pacific Economic Framework into a trade agreement, but this is highly unlikely.

A June 2021 study on NAFTA
and the Korea-U.S. Free Trade Agreement by the International Trade Commission showed that the big beneficiaries of large trade deals were multinational corporations. Working-class minorities and those with less than a two-year college degree were negatively impacted by those trade deals due to offshoring production, according to the ITC report.

Paul Boardman runs the political action committee DecoupleChina.Org. Reshoring manufacturing is a part of that strategy. But that will require incentives to make businesses want to invest here. No return on investment, and Asia and Mexico will always look better thanks to cheaper currencies, cheaper labor, and – often – weaker environmental regulations.

“We believe in the ingenuity of the American people and incentives to really do Made in USA policies,” he says. “When you cede manufacturing to China, it is subject to volatile CCP economic coercion. By decoupling from China in all aspects, including trade, American incentivized capital will flow to fill the supply chain holes and will harness our core ingenuities and competencies,” he says. “Suddenly, you have a return on investment for the several trillion in research and development the public and private sectors are warehousing.”

On Thursday, U.S. trade ambassador Katherine Tai said in a speech at the National Press Club in Washington that the current version of economic globalization was “unsustainable.”

She said the U.S. needed “more options” for its supply chains, options that source from different regions. While she didn’t include the U.S. in those regions, she did mention that there needed to be a “shift in the way we incentivize decisions about what, where, and how we produce goods.”

She added that Americans cannot possibly withstand the “downward pressures that come from competing with workers in other parts of the world toiling under exploitative conditions.”

“Exploitive conditions” is a loaded phrase, though. It can mean people who toil under duress, such as forced labor. But it does not mean people who are earning the national wage average, a wage that comes nowhere near what an American worker would be paid to make the same widget.

The Trade War Continues…

The trade war continues, but one day it will end. What will the U.S. manufacturing landscape look like then? Right now, it looks good thanks to incentives given to a handful of sectors deemed strategic by the current government.

China will soon account for less than half of the U.S.’s low-cost imports from Asia for the first time in more than a decade, the Financial Times reported recently, citing a report from Chicago-based consulting firm Kearney.

According to their annual reshoring index, U.S. efforts to move supply out of China is driving imports from Southeast Asia. “By the end of 2023, China’s portion of U.S. imports” from low-cost Asian countries, which excludes Japan and South Korea, “will definitely have dropped below 50 per cent,” said Patrick Van den Bossche, one of the report’s authors.

The China problem began with trade. It’s an economic story that’s led to the hallowing out of much of middle America thanks to big multinationals, whether Ford or Walmart, preferring to source manufactured goods from China instead of here. This is the issue. It will be easy to lose sight of that if defense and derisking are allowed to steal trade’s thunder.

“Decoupling was not a dominant rhetorical framework when I was on the Biden transition team, but investing in America, building up U.S. capacity and avoiding sole source dependency on China were always front and center from day one,” Brad Setser, a Senior Fellow at the Council on Foreign Relations told me. Setser was a senior advisor to the United States Trade Representative from 2021 to 2022, where he worked on the resolution of a number of trade disputes.

Like Harris in Seattle, he does not think there needs to be a U.S. component to the derisking widget-making portion of the China “trade war”.

“In Mexico, you will have more American-made content. From a supply chain security viewpoint, you would rather have two producers in the U.S., for example, and some in Mexico rather than just have them all here or all in one country. If you want the U.S. to have control over the supply chain, then the product has to be under export controls or some restrictive policy. It depends on your goals. But, I will say that it is an illusion to think that just because you are importing less from China, you are not importing Chinese products from Chinese companies.”

CNBC reported on June 1 that reshoring was a topic of numerous earnings calls this season. Incentives help companies produce at home. China’s messy geopolitics help, too. But without incentives and tariffs one might argue that the entire argument about diversifying supply chains just ends up shifting supply chain risk to a few Southeast Asian nations and maybe Central America, as has been the case with some apparel and textiles. (Central America has a free trade agreement with the U.S.)

“A strong country can exist only with a commitment to a strong domestic manufacturing sector,” says Julianna Keeling, founder and CEO of TerraVive, a plastics alternative making compostable restaurant take-out and cafeteria products. “A lot of people were happy to ship our industrial capacity—and jobs—overseas. That’s not good for our economy or national security because, in case of conflict, our supplies of critical items will stop immediately,” she said.

Defending Taiwan and the South China Sea, and talk of decoupling to avoid political risk, is too easily packaged as the same old Washington story – getting ready for wars, and expanding Asian markets. That won’t be good enough. While defense and remapping supply chains are important, they won’t serve the trifecta of the China conundrum without the reindustrialization of America, which is where the China battles began.

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Nicole Lambert
Nicole Lambert
Nicole Lamber is a news writer for LinkDaddy News. She writes about arts, entertainment, lifestyle, and home news. Nicole has been a journalist for years and loves to write about what's going on in the world.

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