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JOHN RANSOM: Why China fears a trade war
China wants to be viewed as the worldwide leader in everything. But their problem is that to keep their economy moving and claim the mantle of leadership, they need the rest of the world’s consumers to keep buying what China’s selling — cheap, commodity-priced products.
And as we know from basic economics: When you deal with commodities, the low-priced dealer always wins.
2018 was the year that China was supposed to overtake the United States in GDP according to estimates by the Conference Board in 2016. Previously, in 2010, the Conference Board predicted that China’s GDP would surpass that of the United States in 2012.
And while some say that if you account for differing exchange rates and purchasing power then China has already surpassed the U.S. in GDP, it ignores the reality of the marketplace: People value American products more highly than they value products from China.
Noah Smith, an assistant professor for finance at Stony Brook University, writes: “If the same phone costs $400 in the U.S. but only $200 in China, China’s GDP is getting undercounted by 50 percent when we measure at market exchange rates.”
The problem with this argument is that phones sold in the U.S. (even ones manufactured in China) sell for huge premiums when re-sold in China because they offer features that are not available in China. Chinese manufacturers Huawei and Oppo are big steps down from international brands like Samsung, especially for brand-conscious Asian consumers.
The purchasing power argument has little weight for me. All things being equal, would you rather have an apartment in Hangzhou or in Houston?
In short, this is why the Chinese have so much to lose from a trade war with the United States. The United States is a better manufacturer than China, a better business partner than China, a better investor than China and certainly far better at accounting than China.
All China can offer is cheap labor and a diminished brand.
China relies on about $2 trillion worth (or 20 percent of their GDP) of inexpensive goods that they ship to customers worldwide. About 40 percent of their exports are electrical machines, including computers. In our lifetimes the United States and Japan each had moments when they dominated that market worldwide, but both countries somehow found the strength to produce GDP without dominating that market.
But without those markets, China would be sunk.
Take “Chinese” company Lenovo for example. Before Lenovo made the acquisition of the IBM personal computer division, they had about 2 percent of the worldwide PC market. Since then they have listed on the Hong Kong market and in the U.S. with American Depository receipts, therefore accepting the higher accounting standards in those two markets versus in China; they have adopted English as the official language; added American board members and opened headquarters offices in the U.S., China, Hong Kong and Japan, with no true “head office.”
Now they own about 20 percent of the worldwide market for PCs.
Without those changes, they’d still be considered just a manufacturer of cut-rate computers, made possible because Chinese labor is cheap. In some respects, that’s still really all they are.
But if history is any guide, as Chinese labor becomes more expensive, it’s likely another manufacturer will provide a lower cost alternative. And Chinese labor is becoming more expensive.
In 2010, for example, Intel opened a billion-dollar chip manufacturing plant in Vietnam that now accounts for 80 percent of the chips Intel manufactures worldwide for PCs. A company can move from one country to another that quickly.
In short, there is nothing really special that China makes that can’t be sourced elsewhere. But there is no replacement for the standards that Western countries demand. It’s the demands of Western standards that China fears most. Because China has no interest in what it can’t produce.
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