06 APR 2018 CHRISTIAN CAMEROTA
On Tuesday, the Trump administration published a list of more than 1,000 Chinese exports it plans to target with 25 percent tariffs amounting to some $50 billion annually. The Chinese Ministry of Commerce responded a day later with a list of 106 US products on which it plans to impose similarly priced tariffs.
Is this just posturing or the sign of a tipping point in economic and political relations between the world’s two largest and most powerful markets?
Harvard Business School turned to two faculty experts on China, Bill Kirby and Willy Shih, to discuss the situation, including historical context and precedents, the impact on consumers, and suggestions for both countries in moving forward.
WILLY SHIH: I would take a slightly different view. I think the real issue is industrial policy on the Chinese side competing with a lack of industrial policy on the US side and the consequences of that. Going back to the mid-1980s, the Chinese government has been mapping a pathway for the country to become a modern country (just as the Koreans, Taiwanese, and the Japanese did before, except on a much larger scale). The Chinese have identified core capabilities that they want to see inside the country, and they’ve been methodically working on that over the last 30-plus years. I’d argue the positive trade balance with the US reflects the progress they’ve made. But the trade balance is a lagging indicator, not a leading one. So I think the Trump administration should be looking more broadly toward technological leadership. Where are the areas in the US where we’re going to maintain our position or further invest? We need to take a bigger-picture, longer-term view on it.
WS: I’d add that many of the complaints we hear about intellectual property and copying and protection of local markets—we see that with China today, but we saw that with Korea and Taiwan before them, and we saw that with Japan before that. In fact if you go back to the 19th century, we saw it in the US with, for example, the copying of textile machinery from the UK. I’d argue that post-WWII, when we saw the development of Japan and Taiwan and the so-called Asian tigers, we looked the other way for geopolitical reasons. The difference with China is that the geopolitical environment is different, and the size and economic muscle of China make it quite different from before. We can’t afford to look the other way now.
It’s also worth noting that the Trump administration is proposing tariffs on rocket launchers, flamethrowers, grenade launchers, torpedo tubes, and similar projectors. We import none of those from China; almost 40 percent of that list are from Germany. So, that does seem to indicate this is posturing in preparation for a larger negotiation.
WS: This is at the core of a lot of insecurity. Looking ahead, the size of the Chinese market and population will confer heavy advantages to local producers and local companies in China. We haven’t seen anything like that since the US in the 20th century, which had the world’s single largest market. China is the world’s largest market for automobiles today, for example—it’s 29 million vehicles versus not quite 18 million sold in the US (and China produces most of those 29 million, whereas in the US we only produce about 11 million and import the rest)—now you have a combination of the world’s largest market (for smartphones, automobiles, and in the future commercial aviation)—and the combination of that heft with the strength of the government’s industrial policy. That’s at the core of insecurity not just of the Trump administration but of many American companies, as well.
WS: What I tell a lot of people is that business is conducted on a playing field, much like a football pitch, and you have a set of rules. The rules that have been enforced for the last 20 years have favored free trade. In North America, we have NAFTA. Business has organized supply chains based on those sets of rules. We have a complex web of supply chains—really a global sequential production system—where we have products that will move in intermediate states of completion across borders as if they were almost not there. I think the real fear of starting a trade war is you’re going to put up all these new barriers to the movement of intermediate goods, not just the final products, and we’ll get unexpected consequences that nobody planned on.
“I THINK THE REAL ISSUE IS INDUSTRIAL POLICY ON THE CHINESE SIDE COMPETING WITH A LACK OF INDUSTRIAL POLICY ON THE US SIDE AND THE CONSEQUENCES OF THAT.”
WS: When I was younger, I used to laugh at the question of China’s five-year plans because they often led to epic disasters like the great famine caused by Mao Zedong’s agricultural policy. But I don’t laugh anymore, because what the Chinese have done very well is learned from their mistakes. They’re really trying to plan the future of their country. Industrial planning is anathema in the United States—I’m not necessarily advocating it explicitly. But we need to have a conversation about the future of our country and what kinds of investments we need to make to ensure the well-being of our people.
BK: That is our challenge. We’re faced with a China that is armed with the strong belief that it’s government’s responsibility to plan the long-term parameters of economic development and to assist the development of leading industries. Here in the US, we don’t do that. We don’t even talk about it.
Here we are in Boston. A train to New York takes the same amount of time it did 100 years ago. We’ve been talking for years about the need to build more and better infrastructure in the US. Nowhere in the world does better than China on that. Chinese built the first rail system in the US, the transcontinental railroad. Maybe we should invite them to build the second one, and this time we can pay them for it.