Trade War with China is a Strategic Opportunity for the US

Reno Gazette Journal May 20, 2019

The trade war with China continues as the U.S. has given formal notice to China of our intent to raise tariffs on $200 billion worth of Chinese goods. As I discussed in my column Surrender is not Success in Trade Wars in April 2018, China has been cheating on trade for a long time now. This has resulted in a significant disadvantage to American companies in terms of their access to the Chinese market and to the American people in terms millions of lost jobs. Meanwhile, the trade deficit with China has climbed up to $420 billion in 2018 from $315 billion in 2012. This imbalance slows the growth of U.S economy and accelerates the growth of Chinese economy. Stated differently, the growth in the Chinese economy has come at the expense of the U.S. economy.

While most of the focus on the trade war has been on the long-term economic benefits (more jobs) or the near-term economic disadvantages (higher prices for imports from China) for the U.S., the ripple effect of this trade war presents the U.S. with a strategic opportunity. A significant reduction in the trade balance will result in lower growth and higher unemployment for China, resulting in less money available for them to spend on defense. Given that China is our geo-political adversary, this would be a highly desirable outcome of this trade war.

Companies do not like supply chain disruptions and uncertainty, which this trade war has caused. Typically, companies that outsource to lower-wage countries have solid risk management plans. Part of the risk management strategy is to have secondary plants in another low-wage country (e.g. Malaysia, Vietnam, Philippines, etc.). For instance, the shoe industry manufactures 69% of its product in China and 31% in countries like Vietnam, Philippines and Thailand. These secondary plants have much smaller capacity than the primary plants. It is not easy to pick up equipment and move from China to Vietnam, but the increased tensions will likely result in many of these companies increasing capacity at these secondary plants. Companies may also use retooling as an opportunity to expand production at the secondary plant. For example, Apple may produce most of its iPhone X today in China, but the trade war may cause it to manufacture its rumored next version, the iPhone 11, in Malaysia. The longer this trade war drags on, the greater the uncertainty, and skittish companies will try to expand operations away from China (an adversary) to countries like Vietnam (an ally). U.S. can help accelerate this transition by signing trade deals with our allies in the region, which will shift outsourcing to those allied countries.

One final point: When the U.S. used regulations to prevent domestic oil drilling, we started importing oil from other countries. In addition to increasing the trade deficit, we ended up increasing the price of oil as supply was reduced. As I outlined in my column Trump’s energy policy makes America stronger in July 2017, countries like Russia and Iran greatly benefited from our actions which then allowed those countries to use the windfall to build up their military, financed at least in part with our money. The subsequent relaxing of regulations cut into the oil profits by Russia and Iran. In addition to lower oil prices, it also resulted in a geo-political strategic advantage. Done right, our trade war with China can have a similar outcome.