‘Tariffied’ China seeks resolution

By Manik Mehta  / 

Tue, Jun 25, 2019 - Page 8

Who would have imagined that Chinese President Xi Jinping (習近平), the usually stern and glum-looking strongman who tolerates no dissent in his own country, would call US President Donald Trump a “friend”?

This is exactly what Xi said on June 7 at an economic forum in St Petersburg, Russia.

Xi is expecting to have a “friendly chat” with Trump in Osaka, Japan, where both are to attend the G20 summit this week.

Although he was reportedly enraged by Trump’s imposition of tariffs on Chinese exports to the US, which are badly hurting China’s economy, Xi’s overture to Trump is not surprising. The Chinese leader has apparently realized that it will not be easy to find another market as big and lucrative as the US for Chinese products. China faces a dismal scenario of rising unemployment, particularly in industries that depend heavily on exports.

Foreign companies, including thousands of Taiwanese firms that operate on the mainland, have already been looking for alternative sites because of rising production and labor costs.

The escalating US-China trade war has added to their woes, with one US observer describing China as a “ship on an uncharted course, with its occupants eager to jump overboard.”

The strategic-thinking corporate world makes long-term planning and needs assurances that China is a safe bet, not just today or tomorrow, but several years from now.

After fiercely criticizing the US tariffs — China also imposed retaliatory tariffs on US products — Xi’s “dear friend” approach to Trump is a sweetener, driven by the desire to find a quick resolution to the trade war.

However, it also betrays a fear that the US tariffs could create a major economic turbulence in China and further weaken the economy, which is already facing slower growth. China has over the years built up huge trade surpluses with the US, thanks largely to unimpeded access to the world’s largest and most lucrative market.

While China’s past rhetoric characterized by bluster is giving way to more pragmatic thinking, it is deeply concerned over the impact the trade war is having on foreign investors, whose migration from China can create economic disruptions.

Many Taiwanese companies operating on mainland China are known to consider migrating to other locations, such as Vietnam, Indonesia, Myanmar and Thailand.

“It’s the character of the modern supply chains, which are essentially global in nature. Many Taiwanese companies have maintained manufacturing operations in China because of its lower production and labor costs. However, these costs have risen dramatically in recent years,” Walter Yeh (葉明水), president of the Taiwan External Trade Development Council (TAITRA), told me in a recent interview in Taipei. “The US-China trade tensions have added to the worries of the Taiwanese companies, which are looking for alternative manufacturing sites in the region.”

There are about 80,000 Taiwanese companies, including many small units, operating in China, manufacturing the likes of machinery products, electronics, automation parts and components for the US and other markets.

China is aware that the continuing trade war can be a deterrent to the inflow of future investments, besides driving away investors already in China.

It is also closely monitoring Taiwan’s so-called New Southbound Policy, which essentially pursues closer economic, trade and business ties with Southeast Asia and South Asia, and is seen as encouraging Taiwanese companies to look for alternative markets and manufacturing sites.

The Southbound policy is designed to reduce dependence on China. Taiwan’s strategists believe that dependency on China is replete with long-term political risks for Taiwan’s sovereignty. Indeed, some Chinese Communist Party experts believe that Taiwan’s reunification with China could be achieved “without firing a single shot” by making it so dependent on trade and business that it would have no other option but to join the mainland.

This is precisely why Taiwan wants to diversify its international trade and tap the huge economic and trade potential inherent in other markets.

Yeh said that in the short term, Taiwan’s companies might have to relocate their production operations, “but they could also benefit from new orders for electronics and machinery, for example, as a result of the shifting market.”

“Taiwan exported in 2018 some US$4.565 billion worth of machine tools and components, an 8.28 percent increase over the earlier year. As the world’s fourth-largest exporter of machine tools and components, Taiwan has averaged US$4 billion in exports for each of the last few years, drawing on a network of over 1,000 precision machinery manufacturers and 10,000-plus downstream suppliers,” he said.

TAITRA’s president pointed out that following the rapid restructuring of the global supply chain, South and Southeast Asia have recorded incredible growth. Taiwan has been building up close economic ties with the regions. ASEAN, for instance, is today Taiwan’s second-largest export and investment destination.

Representatives of Taiwanese companies, alarmed by the “asymmetrical dependency” on China’s market, are looking for alternatives. There is also a revived interest in forging closer ties with the US. The number of roadshows organized by Taiwanese companies in the US has increased.

Alex Ko (柯拔希), chairman of the Taiwan Association of Machinery Industry (TAMI), told me in an interview that the US-China trade war would have a “short-term negative impact on Taiwan’s machine-building industry, but long-term impact, in our view, is expected to be good.”

US tariffs have hurt many Taiwanese companies specializing in exporting their products from China to the US. Many of these companies are considering leaving — or have already left — China. Already facing slower economic growth, China is losing valuable capital and that is the chief reason China urgently wants a deal with the US.

Beijing can ill afford rising unemployment. This can lead to social unrest, which could easily spiral out of control and even challenge China’s leadership. That is a nightmare for any clique that controls the reins of power.

Manik Mehta is a New York-based journalist with extensive writing experience on foreign affairs, diplomacy, global economics and international trade.