Beyond Tariffs – What Are the Real Costs of Doing Business with China?
October 15, 2019
- The US and China agreed to phase one of a comprehensive trade deal
- Should American companies trade silence for access to China’s market?
- How the NBA sheds light on China’s government control
The US-China trade situation has been anything but rosy. With so much news and so many Presidential meetings, it can be hard to remember the underlying issues that got us here in the first place. It’s not just a matter of making China buy more agricultural products or stop stealing our trade secrets, which are important. It’s more about leveling the playing field on a much larger scale so all US companies, and citizens, can have a good economic relationship with the world’s second largest economy.
We have a free democracy built to make the American people thrive. China has a communist party built to make the government thrive. That stark difference underlies this entire trade war that we hear about every day, and it’s the reason why coming to an agreement will take a lot of time and strategic negotiating.
The latest in trade: soybean purchases rebound.
Wisconsin farmers are no stranger to the truth that soybeans have been one of the most affected industries in the US-China trade war. In 2018, soybean sales to China dropped 74 percent to a 16-year low.
But it seems like China couldn’t last without our soybeans for long, because they just increased soybean purchases to the highest level in a year and started buying more pork, too. Before the trade war began in 2018, China purchased about 57 percent of all US soybeans. Then, China started buying soybeans from South America and that 57 percent dropped to just two percent.
Maybe those South American soybeans weren’t as good, or maybe they just couldn’t keep up with demand, because as of August 2018, China represented 54 percent (just 3 percent shy of the all-time high) of all US soybean exports.
Are we inching closer to a trade deal?
In their latest meeting, President Trump and President Xi apparently agreed to a “substantial phase one” of a trade deal with China. The US agreed not to increase tariffs on $250 billion worth of Chinese imports, and China agreed to purchase $40 to $50 billion worth of US agricultural goods.
The first phase needs to be written and signed by both countries before we continue to phase two, which could happen in three to five weeks. The next round will include more complex issues like intellectual property theft and forced technology transfer, which may take longer to hammer out. But regardless of how complex the negotiations may be, President Trump and President XI are showing “warmer feelings” than in recent months.
The negotiations go beyond tariffs
Beyond tariffs on soybeans and concerns about our trade secrets, there is a fundamental flaw with how China’s government works.
From dictating how many children families can have, to having government agents in 95 percent of private businesses, China’s government wants to control nearly every aspect of what happens in the country.
The government’s power has led to increased tensions in Hong Kong, where pro-democracy protesters and state police have been at odds since June. Some luxury stores may even have to close because of the increased violence.
China and the NBA
To see just how much control China wants to have over their political affairs, just look at the recent controversy that ensued after NBA Houston Rockets General Manager, Daryl Morey, tweeted support of the Hong Kong protestors and told them to “fight for freedom.”
Since the tweet, all official Chinese sponsors of the NBA have suspended ties with the league and have even removed products from shelves. Tencent, the NBA’s exclusive digital media partner in China, will no longer stream pre-season games. On the streets, some fans are tearing down billboards promoting upcoming NBA games. The dispute could cause major financial pain for the NBA, because the Chinese market makes up at least 10% of the league’s current revenue.
Then there’s video game developer Blizzard Entertainment, who recently banned a professional player for making a comment in support of the Hong Kong protestors. Blizzard and the NBA have raised serious concerns about American companies doing business in China. The Chinese government is sending a strong message: stay quiet and access our markets, or speak your opinion and face the consequences.
China’s welding free speech to business relations adds a much more complicated layer to the trade war. Asking China to buy more agricultural products is one thing. Getting them to stop stealing trade secrets is a little more complicated. It’d be great if China was a democracy and we could see more eye to eye, but that’s likely not going to happen. The question is how do we navigate this complicated trade situation when China wants to control every aspect of how US-based companies behave in their market?
How does access to China impact your Paycheck?
US companies are walking a fine line of trading silence for access to China. China is home to more than 1.3 billion people, and that creates a lot of opportunities for the US economy. If we can sell more there, our companies can make more revenue. When our companies make more revenue they can expand, hire new workers and increase wages.
Our current negotiations with China are possibly some of the most complex negotiations our nation has ever had to face. From farmers to professional basketball players, nearly everyone in the economy is impacted in some way or another. Any deal that improves lives for American companies, workers and their Paychecks is no small feat.