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Trade War Between The US And China

According to WTO (2019), the global average decline in the real GDP and value of the exports in 2022 is estimated to be respectively 1.96% and 16.95% relative to the baseline. The surge in global trade conflicts is likely to discourage companies from expanding and innovating as well as pose a direct threat to jobs and livelihoods, a trend exacerbated by the imposition of the tariffs on exports, thus, increasing the costs for businesses and consumers and dissuading them from undertaking investments.

China’s GDP

China, (emerging economy) has a larger GDP when measured in terms of the purchasing power parity whereas the USA (advanced economy) has a larger nominal GDP and while the economic relations between these two pillars of the global economy have substantially expanded over the past three years as their mutual merchandise trade escalated from $2bn in 1979 to $579bn in 2016, the additional tariffs imposed on new product categories, business restrictions on individual companies, accusations of manipulation of currency and many other issues have increasingly exacerbated the bilateral trade dispute.

One of the biggest areas affected by the trade tensions is the technology industry as they are being disentangled into separate US-centric and China-centric supply chains. Although the trade war will have a negative impact on Apple’s profits from the hardware business and face difficulties if it continues to operate in China, its strategy to diversify its manufacturing unit beyond the US highlights signs of stabilization and could grow to be the world’s biggest company by market capitalization due to the following reasons. 

Apple

Apple is an innovative firm and has a competitive advantage by possessing unique assets that allow them to market internationally. Apple’s organization, marketing, and production management system and brand power can be considered as its own advantage. Its popularity has provided leverage in negotiations and therefore the risk of concentrating the manufacturing units in a few locations such as China has been counterbalanced by this ‘negotiation power’.

Huawei

On the other hand, Huawei’s ownership advantages include low cost, high efficiency, and differentiation. While Porter (1980) argued about three types of generic strategies such as cost, focus, and differentiation, Rugman extended his theory to the internalization strategy of MNCs from developing countries by stating that the MNE’s from emerging countries take advantage of the low cost. Despite the political hostility it faced in other parts of the world and companies such as Google, Intel, Qualcomm, and Broadcom cutting off trade with Huawei, its growing market share and technological prowess would dominate next-generation technology. 

However, they might face a struggle between two forms of capitalism that is, open, privatized western markets versus state-assisted Chinese markets.Despite facing many challenges, Huawei’s revenue grew by 34% in 2019. While there was a Yoy growth in the China market by 36%, the revenue from the overseas markets saw only 1% as explained in the figure below. The main strategy by investing euros in R&D facilities and manufacturing centers to countries including France, Netherlands, Germany, UK, India, and Poland was to prevent 7 of their attempts to restrict the use of its equipment in the 5G network. It can be argued that in both cases the social and cultural advantages influence the international decisions of the MNE’s as when doing business in another country, it is of crucial importance to understand the culture of that country and its workforce. 

Social Stability

With social stability being the major issue in China with respect to labor unrest, the conditions in the factories have become appalling. Therefore, Apple’s risk increases when it outsources its manufacturing to a location where its working culture fails to determine the worker’s health and safety. Therefore, those companies that want to establish themselves in the international markets would have to rethink their operations and structure in order to serve both these global supply networks, thereby, adding to the costs of the complexity of operating globally.

China has positioned itself as the main trade partner of several countries, including the USA after its transformation into a manufacturing nation. The revamping of the “Made in China” has become one of the main government’s goals for 2025, therefore, contributing to a new path of innovative industrialization.

China’s Internalization Process

Being a part of China’s internalization process, 3 American companies would source, manufacture, and trade with China. However, “America First” has become the main policy of the current government substantially affecting the trading relations as after assessing its current trading status with different regions, the United States adopted measures to reduce its deficit with its strategic partners, even with former allies like Canada. The trade war was initiated by the USA as a result of a) China’s large trade surplus that led to the creation of job depression in the USA, b) the use of unfair and illegitimate practices to acquire USA’s technology at an effectively discounted price and c) to incapacitate USA’s international standing and national security.

Therefore, the USA imposing tariffs on Chinese products and in retaliation, China’s response to the USA’s tariff action in a tic-for-tac manner has resulted in the slowing down of the global economic and trade growth, thereby increasing uncertainties in the global policies and shifting of the global supply chains. As a consequence of this, the USA’s consumers are bearing the heaviest brunt and China is facing a significant loss in terms of export causing trade diversion effects, meaning increased imports from countries that are not involved in the trade war. This resulted in the increase of import substitutions that have benefited other economies such as Canada, India, Europe, and other nations that are more competitive and have an economic capacity to replace Chinese and American goods. In 2018, there was a reduction of the Chinese FDI into the USA by 90% as it amounted to only $1.8bn which was the lowest in 7 years, and nearly $10bn money was being pulled out in the US asset divestiture by the Chinese investors. 

Aggressive Economic Nationalism

This aggressive economic nationalism has a reverberating impact on the capital markets with cross border investment flows looking vulnerable. In the first three quarters of 2019, the US and Chinese electronics import decreased by 6% and 12% respectively. Besides reducing access to the lucrative Chinese markets due to security reasons, the USA is also restricting the exports of technologies by barring sales to certain Chinese companies and hindering them to invest in the United States. Thus, both Apple, an American multinational technology company, and Huawei, a Chinese multinational technology company underwent a reduction in the total number of products it produced over time due to the ongoing conflict between the US and China.

Also Read : News Highlights From July 2020

Vasudha Kakrania

Can sell sand in the dessert and dreams when asleep, here’s introducing myself to you - I’m Vasudha Kakrania currently pursuing BSc Management with Marketing. My greatest talent is the persistence to achieve what I desire and to effectively manage the time between academics, internships, sports activities as well as social work. A true believer that nothing comes easy in life, it’s only hard work and determination that can get you achieve the impossible.

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