Manufacturing in China and the role of American businesses
For several years now there has been a lot of talk arguing that China’s trade practices with the United States are unfair. That is, that the U.S. trade imbalance with China is in China’s favor. When I first read about this issue more than twenty years ago I became somewhat annoyed with China but I didn’t seek more in-depth information. Yet something about it seemed odd. As time passed it occurred to me that China never forced the US to trade with it. What had actually happened was that American businesses had decided to take advantage of the lower cost of living in China and to move American manufacturing there. By doing this, the American firms could avoid the constraints and costs due to American environmental and safety laws and the higher cost of American labor.
Over the years, new Chinese businesses were created to compete with the American factories in China. Many of these did well and displaced some American factories. (But there are still several major American manufacturers in China such as Tesla, Apple, Nike, Levi Strauss, New Balance, etc.) And now China has become the main supplier of many materials and products to the US, which results in a substantial imbalance of trade between the two countries in China’s favor.
What do we import from China?
According to “Comtrade, International Trade Center”, the top products imported by the US from China in 2023 are:
- smartphones (76%)
- portable computers (78%)
- lithium-ion batteries (70%)
- toys (77%)
- video game consoles (78%)
But in fact there are many, many additional materials and components of products that are imported by the US from China. They include electrical and electronic components, machinery, plastics, furniture, medical apparatus, footware, clothing, and much much more. Details for 2023 can be found at: https://tradingeconomics.com/united-states/imports/china
Tariffs as a weapon
The reaction by the Trump administration to this imbalance of trade is to impose tariffs. How might China respond to new tariffs? One thing they can do is to side-step the tariffs. This can be done by shipping nearly completed products to another country not affected by US tariffs, like Cambodia, Thailand, or Vietnam to complete the final manufacturing step. Then the products can be exported from there to the US, so that it won’t appear as trade with China. (In order for this to be legal, the intermediary countries are supposed to provide added value to the products.) Using this approach, the Chinese companies would only incur a small additional cost due to the transport and possibly the final manufacturing process. These intermediary countries needn’t be in Asia. They could be in Africa or Central America where the cost of living is below that of China. Furthermore, China could simply move some of its factories to third world countries to do the entire production there (but profits would go back to China).
Will Tariffs reduce the US trade deficit with China?
For the sake of argument let’s assume China doesn’t skirt the tariffs. What will setting tariffs on items imported from China really accomplish? Certainly the biggest initial effect would be higher prices in the US for materials and products imported from China. But will it encourage US businesses to begin manufacturing these items in the US again? American businesses will only manufacture products in the US if the cost of doing so is less than the cost of importing the products from China. Similarly, US businesses will only return to buying components manufactured in the US if the cost of doing so is less than the cost of buying components from China.
Bringing manufacturing back to America
If the tariffs become permanent, then maybe some manufacturing might return to the US. But that would mean permanent high prices for those materials or products. This may make many items too expensive for the lower and middle classes. Would they find that acceptable? I think not.
Now let’s assume the tariffs are removed. Any American company that wants to begin manufacturing products or components in the US has to find a way to keep the costs comparable to or below those imported from China. There are only three ways this can be done:
- Keep wages and salaries very low (not much higher than wages and salaries in China) and convince the local, state, and federal governments to rescind environmental and safety laws. (But this would mean reducing minimum wage and subjecting employees to possibly less than safe working conditions. It would also subject the public to the unhealthy effects of much greater air, water, and land pollution.)
- Invent a spectacular revolutionary inexpensive way to do the manufacturing. (Good luck with this one. Improvements in technology are typically gradual. Revolutionary discoveries do occur, but not frequently enough. And they certainly don’t occur on demand.)
- Substantially reduce taxes for the manufacturers so that their overall cost is approximately equal to or below the cost of goods imported from China. (But this is tantamount to the public subsidizing the manufacturers. Why should tax payers have to bear the burden, especially when executive compensation remains so high?)
Which brings up another way. Executives and management could take huge cuts in compensation. For example, an executive compensation of $15,000,000 could be reduced to $500,000. If this reduction is rippled down through management it would result in huge savings and likely make local manufacturing competitive with China. But is this viable? No. American businesses would never accept this.
Painful process
If manufacturing doesn’t return to the US, then as long as the tariffs are in place we will have to contend with high prices. If we give up and rescind the tariffs, then not only would we be back to where we started, but we would be nursing substantial economic bruises.
This whole approach to trade imbalance should have been thought through completely and all the details and possibilities worked out. Instead it has been treated the way a street punk would treat incursions into his neighborhood. Purely visceral rather than cerebral.