Tariff Tracker: The Last of Many Straws

Tariff Tracker:  The Last of Many Straws

Chinese Business Practices & Their Discontents

While interest in relations with China has surged recently due the tariff fights, some US companies in China were feeling less than happy in recent years and had come to question their China strategies, including the sharing of technical expertise.

These issues may have not made recurring headline news, but problems were becoming apparent in the last few years, as evidenced by these news stories:

Initial reports from 2014 focused on US firms that were considering reshoring production to Mexico because producing in China was turning out to be more expensive than initially expected, especially as labor and other costs continued to grow.

However, concern soon shifted from labor costs to other issues. One in four of the US companies surveyed by the American Chamber of Commerce in China in 2016 said they had in the past three years considered moving some capacity outside of China because of regulatory and other challenges, such as:

  • protectionism
  • “inconsistent regulatory interpretation and unclear laws”
  • “difficulty obtaining required licenses”

Notably, the survey found that industrial and consumer companies were moving to other countries in Asia while “technology and other R&D intensive industries most frequently reported moving to the U.S. or NAFTA region”.

With each passing year, more and more Western businesses have recognized that protectionism works differently in China. Rather than simply blocking foreign participation or issuing crippling tariffs, Western expertise is allowed in, manufacturing companies are forced to transfer technology to joint ventures, and then their proprietary knowledge is neutralized by weak intellectual property protections and inefficient bureaucracy.

Experience of US Tech Companies Foreshadowed China Challenges

Here’s a piece of interesting trivia: a leather goods company in China uses Apple’s iPhone trademark without permission and a Chinese court says there’s nothing Apple can do about it. That wasn’t a recent court decision infused with trade retaliation subtext – it was more than two years ago.

Giants Google (Alphabet) and eBay have also found the Chinese business environment chafing.

Consumer-focused tech and service firms in China have developed much faster than their capital goods cousins. As a result, Western consumer-focused technology companies quickly felt their Chinese competitors were receiving preferential treatment. In manufacturing, the favorable environment for foreign participants lasted longer, as domestic firms needed years to accrue vital expertise, often secured from Western companies via joint ventures.

The need to understand and comply with Chinese regulations and meet the needs of Chinese consumers was also a challenge that presented itself early to consumer-focused technology companies, as they deal directly with consumer preferences. On the other hand, manufacturers, such as car makers, spend a few years setting up joint ventures, supply chains, and/or prioritizing production for export, before realizing that meeting the needs of Chinese consumers better than domestic firms isn’t always easy. For instance, Ford has had difficulty gaining traction in the Chinese market, in part because Chinese consumers demand lots of new technology in the cars they buy.

Conclusion

It was recently announced that a Chinese delegation is coming to the US later in August to discuss setting up future talks to solve the trade dispute. However, if technology transfer and China’s ambitions (e.g., Made in China 2025) to advance its capacity to manufacture technologically advanced products were an important consideration in the US imposition of tariffs against China (rather than just the US trade deficit alone), then a quick or easy deal to eliminate the tariffs may not be in the offing. It doesn’t appear realistic to expect China, now the world’s largest economy in terms of purchasing power parity, to curtail its ambitions to manufacture more technologically advanced products. Nevertheless, China has taken steps to eliminate the requirement for foreign transportation equipment manufacturers to participate in joint ventures by 2022, potentially creating a way to end the tariff dispute. Until this conflict is resolved, however, it may be US farmers that end up losing potentially lucrative opportunities.

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About the Author

Leon Mengri is a Senior Market Research Analyst with Freedonia Focus Reports. He conducts research and writes a variety of Focus Reports, which offer concise overviews of market size, product segmentation, business trends, and more.

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