For some time China has been intentionally suppressing its currency exchange rate, keeping the yuan undervalued in order to maintain the competitive advantage of its exports. This has caused problems for the US, including a burgeoning trade surplus with China, a besieged job market and a stubbornly high unemployment rate.
The US government is very unhappy with the situation as it stands and the US Senate has just passed the 2011 Currency Exchange Rate Oversight Reform Act, a piece of legislation that would allow the government to levy tariffs on Chinese products in retaliation for the exchange rate manipulation.
The legislation has yet to be passed in the US House of Representatives, but the ease with which it was passed in the Senate perhaps reflects the mood of the US public concerning Chinese imports. China’s reaction has been quite strong, too, and the indications are that a US-China trade war is now nigh on inevitable.
Taiwan’s reliance on China, with companies relocating there in droves, exposes us to serious risks. Many Taiwanese businesses believe they would be sacrificed should a trade war between the US and China actually flare up.
As one would have expected, China has retaliated with an attack on US companies, picking Apple and its supply chain as a target, ostensibly because of the environmental impact they are having. As a result, China-based Taiwanese companies involved with Apple have become the whipping boys for corporate America.
Should the US put a foot wrong, Taiwanese companies in the supply chains of certain US companies get roundly cuffed around the head. The Taiwanese press has referred to it as the “rotten Apple affair.”
So why does China not dare to take on the US directly, but instead pick on Apple’s supply chain? The main reason has to be that, despite its burgeoning economic clout, China still relies heavily on the US as its most important export market. It has no interest in starting a trade war with the US and wrecking overnight the economic advances it has made over the past three decades.
Beijing decided to levy nominal fines on China-based Taiwanese companies that had close ties with major US firms as a warning signal to the US.
The hope was that Beijing could use economics to force the hand of politics and obstruct the passage of the oversight reform act in the US House of Representatives.
Apple’s success with its iPod, iPhone and iPad means the company now has the highest market value in the US, and therefore it is a powerful symbol to go for.
That, together with the fact that Apple itself only deals with the research and development and innovation side of things and does not actually have any factories of its own — it relies on Taiwanese companies to supply the majority of its components and assembe its products — makes it an obvious target for China, for Beijing can also take the moral high ground on the environment. This, then, is the background to the rotten Apple affair.
Perhaps the most significant incident to date in the rotten Apple affair took place in Suzhou, where the city government forced the closure of a factory owned by a subsidiary of the Taiwanese company Catcher Technology because of a “strange odor” coming from the premises.
That factory happens to be the main supplier of the unibody aluminum cases for Apple laptops. The subsidiary has used the same paint and manufacturing process for many years and no health problems have been reported by its employees, who are numbered in the thousands. However, now it has been ordered to close production because of protests from local residents. Whether or not there is more to this than meets the eye is anybody’s guess, but Apple certainly has cause to harbor suspicions.
A news program on China Central Television quoted from a report published last month by the Institute of Public and Environmental Affairs (IPE) called The other side of Apple 2, chastising the US company for its place on the IPE’s China Air Pollution Map. The program listed as many as 27 Apple suppliers suspected of producing environmental pollution, the vast majority of which were Taiwanese companies.
CCTV reflects the direction in which central government policy moves, so as soon as this program was aired, Apple’s shares were hit on the TAIEX and Taiwanese businesspeople in China started getting concerned.
The global economy is currently in a state of imbalance. On the supply side, China is the main player. It provides low-cost labor for the world. The price it pays is to suppress domestic wages and have sweatshops crop up everywhere.
It also has to suppress the currency exchange rate so that its prodigious economic growth is not reflected in the purchasing power of the general population. Wages cannot keep pace with inflation creating a wealth disparity that threatens social discord.
Then, on the demand side, is the US, whose own manufacturing industry is shrinking daily, and which is over-reliant on financial wizardry while the real economy falters and unemployment creeps up.
It has reached the stage where it is borrowing to spend; a situation which is ultimately unsustainable. People are having to either declare bankruptcy or tighten their belts, and all of this has suppressed demand.
On the one side is oversupply, on the other is insufficient demand.
On one hand are people working their fingers to the bone, on the other are people borrowing money to consume the results of this labor. This imbalance is the real reason behind the recent financial crisis.
When economic imbalance manifests itself within a country, that country is faced with a sovereign debt crisis and potential bankruptcy.
When it happens between two countries, such as the US and China, it could lead to a trade war. If those two economic behemoths battle it out, Taiwan will be caught in the middle and, because the Taiwanese economy has become overly reliant on China, we will be forced to stand on its side, against the US.
The biggest tragedy is that Taiwan stands to gain very little from this potential conflagration. The most likely outcome is that it will be trampled underfoot by one rampaging behemoth or the other.
Translated by Paul Cooper
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