For decades, China has been crucial to U.S. companies, both as a source of revenue growth and as a means of reducing the cost of goods. However, U.S. companies trying to access its growing consumer market have faced trade policies that compelled them to offer concessions and share intellectual property (IP) with local joint venture partners.
As U.S. companies launched programs to move manufacturing to low-wage countries, China-based suppliers became an integral part of their supply chains. While the two powerhouse economies became more interdependent than ever, the U.S. trade deficit grew at a compound annual growth rate of almost 5 percent over the last 20 years. This sustained growth led to a substantial trade imbalance, reaching around US$380 billion per year by the early 2020s.
As U.S. policymakers debate ways to address China’s global political influence, trade with China has become a complex issue involving not just political and national security dimensions but also one that involves the economic interests of large U.S. companies.
History Provides a Key
This isn’t the first time the U.S. has stood toe-to-toe with an economic adversary, leading to strategic economic and technological efforts.
After World War II, the U.S. launched the Marshall Plan, providing economic aid to Western Europe to prevent the spread of communism and rebuild markets for American goods. This not only stabilized European economies but also created a more integrated global economy, boosting demand for American exports and fostering U.S. economic growth.
Simultaneously, the U.S. played a crucial role in establishing the Bretton Woods Agreement, setting the U.S. dollar as the global reserve currency, creating the International Monetary Fund (IMF) and the World Bank, and recommending the creation of the International Trade Organization (ITO). This framework stabilized the global economy and gave the U.S. significant economic leverage.
Together, the Marshall Plan and the Bretton Woods Agreement helped the U.S. confront its adversaries, promote international trade, encourage foreign investment and expand the global reach of American companies.
Similarly, the space race of the 1960s, launched by President John F. Kennedy, not only sent astronauts to the moon but also fueled a tech boom, positioning the U.S. as an innovation leader developing high-value IP in microelectronics and manufacturing.
The Role Of Tariffs
In 2018, the Trump administration imposed Section 301 tariffs on approximately $50 billion worth of Chinese imports, targeting sectors like electronics, machinery, aerospace and IT. These tariffs followed a U.S. trade representative investigation that found China guilty of unfair trade practices, including IP theft and forced technology transfers. China retaliated with tariffs on U.S. agricultural products, causing market volatility and uncertainty.
Although politically significant, this tariff escalation was a missed opportunity for the U.S. and China to foster fairer trade practices. Evidence suggests that companies advocating for equitable trade practices, rather than relying on protectionist tariffs, often appear stronger.
Consider Tesla’s experience in China. In 2020, China accounted for approximately 22 percent of Tesla’s global revenue, with the company’s sales growing at a robust 33 percent year over year. However, Tesla’s market share in China dropped from 10 percent to 6.5 percent, largely due to fierce competition from local electric vehicle (EV) manufacturers. Instead of seeking tariff protection, Tesla responded to this competitive pressure by ramping up production of an upgraded Model 3, specifically tailored to the Chinese market.
In the broader context of the U.S.-China trade war, Tesla’s experience highlights a critical point: While tariffs may offer short-term political leverage, a more forward-looking approach prioritizes creating transparent policies that promote fair trade competition and innovation across borders. This would not only help U.S. companies but also contribute to a more stable and prosperous global economy.
How Companies Can Win
In these uncertain times, it might seem logical to “wait and watch” for the policy approach. However, companies that view the trade war with China as a reason to rethink their supply chain can develop a resilient supply chain and form alliances that respect intellectual property while safeguarding U.S. economic and security interests.
Consider these actions:
Reassess your supply value chain to create better response. Steps include mapping the value chain, identifying elements where China-based suppliers play a role, and measuring the economic value added by China-based suppliers.
Visibility into the various value chain levels will enable data-driven decisions while allowing companies to reassess and restructure their supply chains in response to geopolitical and economic dynamics.
Rethink your manufacturing strategy to build a resilient supply chain that fits the growth strategy: China’s rapid economic growth has resulted in a sevenfold increase in income, reducing the labor cost advantage between its manufacturing hubs in urban areas to those in advanced industrial economies. This presents an opportunity for supply chain organizations to rethink manufacturing locations, avoid tariff-prone China, access high-growth markets, and promote domestic U.S. growth.
For consumer goods, a digitally enabled assembly line could be spread across countries with lower labor costs and growing local demand. In 2017, localizing iPhone manufacturing in India allowed Apple to tap into the world’s fastest-growing smartphone market of about 400 million consumers. In addition, by utilizing a skilled Indian labor pool at a third of the cost in China, Apple reduced its supply chain dependence on China, which previously handled 95 percent of iPhone production.
The production of goods critical to U.S. national security or essential to public welfare, however, should be relocated back to the U.S — at least partially if not entirely. The invocation of the Defense Production Act to meet the demand for medical ventilators and N95 masks during the pandemic should serve as a wake-up call: Investing in domestic manufacturing will not only accelerate development of technologies but also create a skilled domestic workforce.
Reorganize and upskill your supply chain teams to sense and respond rapidly. The benefit of moving away from China goes beyond merely diversifying sourcing and manufacturing locations; it’s an opportunity for U.S. companies to form Keiretsu-like partnerships. A Japanese business model, Keiretsu refers to a network of diverse supply chain-related businesses that have close relationships and shareholdings. The U.S. government could play a key role in fostering a Keiretsu-like network, collaborating with U.S. businesses to align economic and foreign policy based on shared social values.
To achieve this, companies must invest in talent that can monetize data and IP as a strategic asset. These professionals should excel in forming alliances with like-minded U.S. companies, while driving global market expansion. By embracing “ally shoring” (partnering with companies in friendly countries instead of offshoring to less favored ones), U.S. companies can strengthen economic ties with trusted nations, aligning their business strategies with U.S. government policies.
Reformulate products with alternate materials as part of contingency planning. This short-term strategy requires investment in R&D and building inventory.
R&D efforts should focus on identifying alternatives to commodities dominated by China. For instance, China produces 70 percent of the world’s mined rare earth elements (REEs) and 87 percent of refined REEs, which are essential for such industries as oil refining. During a trade war, these commodities will likely be used as leverage, which can harm industries in both countries.
To avoid the impact of volatility, companies should be proactive. Sourcing professionals need to predict tariff changes and limit price increases to prevent suppliers from exploiting the situation or passing on costs to customers.
To read the full article as it appears on the Institute for Supply Management Website, click here.