Trade War

Author Gary Moreau
Author Gary Moreau

What will happen if President-elect Trump makes good on a central campaign promise and begins an aggressive trade war with China? With 100% certainty they will retaliate. And that could bring down the entire global economy.

Starbucks, Coca-Cola, General Motors, Apple, Microsoft, and many other elite US companies have all made huge investments in China. And they will inevitably suffer if the US does initiate a trade war. I don’t think the Chinese government has to do anything. The Chinese people just won’t buy from them. The level of nationalism in China is hard to over estimate and the entire population is wired together through Chinese social media. As I’ve noted before, they already tend to see the US as a bit of a bully due to recent friction between China and the US on hot button issues like the South China Sea. The Chinese won’t need much to turn away from our corporate front line if it is perceived that we are trying to curb the country’s rise to power.

While it is certainly true that the US lost good middle class manufacturing jobs twenty years ago when US corporations moved production overseas, the jobs issue is not as simple today. As the manager of a Chinese plant belonging to a US multi-national it is true that my Chinese company only provided direct employment to two Americans. But we helped employ dozens of US engineers, technical specialists, accountants, lawyers, bankers, and IT staff that supported us from the corporate offices. These are among the best paying jobs in any corporation.

And we exported almost none of our production to the North American markets. Almost all of our production was sold in Asia, so we had virtually no impact on our US plants. In fact we only shipped to the US when there was a temporary lack of capacity here and the company would otherwise have to walk away from additional sales opportunities.

Would the US plants see incremental opportunities to sell in Asia if the China plant didn’t exist? No. Even if the product could be made at the same cost as that of a Chinese competitor, the transportation alone would make the idea impractical.

And the reality is that the US industries whose jobs were hit the hardest have already moved out of China due to rising wage costs. The production of furniture, textiles, and shoes has already been moved to other emerging countries in Asia and Central America. Other industries, such as steel, are sure to follow as China attempts to reign in its pollution problem. (The government, in fact, is already encouraging steel makers to relocate capacity out of China.)

The US President-elect actually has the problem upside down. While Trump’s solution may have helped twenty years ago, it is outdated today. The biggest problem facing America’s economy today is not cheap exports from China, but US access to China’s growing markets. In many key industries, where US companies might enjoy a significant competitive advantage, foreign companies continue to operate at a significant disadvantage to their Chinese competitors due to non-tariff barriers that often have little to do with central government regulation.

Understanding China is now available at Amazon in paper and electronic formats.
Understanding China is now available at Amazon in paper and electronic formats.

In terms of return to the US economy, in other words, Trump would be better served pushing for unfettered access to the Chinese economy than slapping tariffs on products that China no longer relies on anyway.

Unfortunately, the tide is working against the President-elect. As China strives to move its economy up the value chain and away from cheap, labor-intensive exports, there is an understandable tendency for government officials to want to support emerging Chinese companies. Trump’s trade war would only give them the ammunition they need to justify it. And they will; make no mistake about it.

But if Trump really wants to boost the US economy I think he would be better served to concentrate on US exports to China rather than US imports from China. China is already the US’s third largest export market and could easily be number one or two.

Perhaps the biggest constraint, which never came up during the campaign, is that the US has strict limits on the products and technology that US companies can sell to China. These are the products the Chinese are most interested in and would pay top dollar for. And the products that are least impacted by the cost of transportation.

The controls, of course, were initially justified on the basis of national security. It’s a good cause, for sure. But a restrictive ‘list’ is a blunt instrument, particularly when drawn up by politicians and bureaucrats with local constituencies and agendas.

I can tell you from first hand experience that our US-owned plant in China was prevented from buying very simple machines from US suppliers for the simple reason that they had electronic control systems that fell within the restrictions. And I can assure you that this technology had no military application whatsoever and was no better than that which was available from Chinese suppliers.

The policy is all quite disingenuous in this Internet age anyway. Trade secrets are not exchanged the way they used to be (by reverse engineering). It’s impossible to seal the border from the flow of information. It just can’t be done. And technology doesn’t have to be obtained illegally (by hacking, for example). There is nothing illegal about a foreign university graduate returning to their home country after they have had access to some of the best technology the country has to offer.

Obviously, there should be limits. But they should be carefully thought out. And I don’t believe they have been. If we were to do no more than review the list of products and technology that can be sold to China and elsewhere I am confident it would have an immediate and material positive impact on the US economy – and create more high paying jobs.

The US economy has two primary advantages in terms of global trade – efficient capital markets and an ability to innovate. The Chinese and others are catching up fast on both counts. But they still represent our best chance of promoting economic growth and the creation of good jobs.

China understands this, which is exactly why they are trying to pivot away from the kind of manufacturing jobs that we lost twenty years ago. It would not be prudent for us to simply trade places with them. We will only end up where they were twenty years ago, not where we were.

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Just for fun. A Giant Panda cools off from the sweltering heat of summer on a block of ice at the Beijing Zoo.
Just for fun. A Giant Panda cools off from the heat of summer on a block of ice at the Beijing Zoo.