The dispute between the U.S. and China is more than a question of tariffs, says René Buck, CEO of BCI Global. It involves complex matters of intellectual property and re-sourcing.
SCB: How do you see the U.S.-China trade dispute evolving?
Buck: In the last two years, we’ve seen a continuous decline in the trade relationship between the U.S. and China. It started last year with some early warnings, and now we’re in a full trade dispute, meaning that nearly every products from China coming into the U.S. is influenced by import tariffs. The Chinese government tries to retaliate with non-tariff barriers, such as additional administrative controls, quotas, and new documents that are required. So life is becoming more difficult for American companies in China, as well as for Chinese companies here in the U.S.
SCB: Do you see an end to it all at any point?
Buck: Not that quickly. What we have to understand is that in addition to the trade relationship, there’s the question of technology leadership. The Chinese government, in a document called Made in China 2025, has made it clear that they want to have 10 industries with technology leadership, and will do everything possible to get that. There’s a lot of discussion about IP [intellectual property] infringement, technology transfer, and the need to set up joint ventures in China as opposed to a having 100% wholly owned foreign company. Those discussions and their influence on businesses aren’t going away. A promise by the Chinese to buy more American soy beans isn’t the end of this trade dispute.
SCB: How long do you think the dispute will go on?
Buck: Because of the technology war, I think it’s going to take another 10 to 15 years. For a supply-chain professional, it’s not a matter of saying, “Let’s wait for another quarter, or for another administration in Washington.” We have to acknowledge that trade isn’t that free anymore — and hasn’t been for 10 years already. The number of measures taken by countries or trade blocs to impose tariffs is increasing every year. At the same time, those actions intended to make trade easier are at a historic low.
SCB: In many cases, countries are moving away from multilateral trade agreements in favor of bilateral pacts. What’s the fallout from that? How will it affect our ability to influence China to change its attitude toward things like IP, joint ventures, and the like?
Buck: One of the things we see happening today is a shift of production capacity by American, European and Japanese companies away China and toward neighboring countries in Southeast Asia. Vietnam’s economy is doing great, and we also see companies going to Indonesia, Malaysia, Thailand and the Philippines, to circumvent import tariffs. So I’m not sure that the U.S. government will be as effective in dealing with China as it thinks it will be.
SCB: Another possible strategy is reshoring back to the Northern Hemisphere — Mexico or even the U.S. Is that a solution?
Buck: It’s for not a lot of companies. Some are doing it. Whirlpool came back to North America with a part of its production capacity. But a lot of companies in China are manufacturing for domestic consumption. China isn’t the low-cost powerhouse that it was 50 years ago. Companies producing in China are doing so because the market has grown there.
SCB: What are the implications of producing more stuff for the Chinese, as opposed to it coming back here? How does that change the dynamic?
Buck: China’s consumer market is growing. The middle class consists of 200-300 million people, the size of the U.S. and Europe’s put together. Companies doing business in China are in multiple industries, not just food and fast-moving consumer goods, but also medical instruments. The richer a country gets, the more it spends on health. So for medical devices and life-sciences companies, China is becoming a very interesting market.
SCB: How possible is it to reproduce the scale that Chinese manufacturers have been able to achieve, with factories employing tens of thousands of workers? A country like Vietnam or India might not be able to tap into an equivalent trained labor pool. Is that a challenge?
Buck: That’s one hundred percent true. Going to Southeast Asia sounds simple, but you already see tensions in the labor and real estate markets in Vietnam. India is the only country that comes close to matching the labor pool of China, but from an infrastructure and regulatory view, it’s not an easy market yet.
SCB: So you would expect companies to retain a good portion of their manufacturing base in China?
Buck: A lot of companies are now looking for what we call the “China Plus One” strategy. You have a plant in China to cover the Chinese market, but you don’t want to have all your eggs in one basket, so you set up also production in other parts of Southeast Asia. But the more companies do that, the more it will lead to overheated markets there as well.