[Michael Schuman] In trade spat, China has secret weapon
Published : Apr 15, 2018 - 17:52
Updated : Apr 15, 2018 - 17:52
It’s true that duties on US imports would hurt -- hands are already wringing in farm country -- but there’s a limit to how much pain they can really inflict. The persistent worry that China will dump its mammoth holdings of Treasury bills is probably unfounded as well.
The risks for US firms already operating in China, however, could be significant. Here Beijing can stab at the soft underbelly of a wide range of American companies, from Apple to General Motors to Starbucks. Although these companies have well-established brands, sizable businesses, and strong connections to Chinese consumers, they could still face serious harm if Beijing wants to turn up the heat on Trump.
In some cases, such as automobiles, these companies have been effectively forced to produce locally by China’s trade policies. In others, the nature of the business makes it necessary to be close to Chinese consumers. Whatever the reason, tariffs will have a minimal impact on many of these US operations.
GM offers a good example. It has imported a mere 150 Camaros from the US into China this year; the rest of the cars it and its partners have sold -- more than 986,000 in the first quarter alone -- were manufactured on the ground. If China really wanted to pressure a company like GM, it would have to resort to methods other than import barriers.
What might that look like? For one thing, bureaucrats wield tremendous control over the life and death of companies in China. Holding up the dizzying array of permits and licenses required of businesses would be one way to slow the expansion of American competitors in the Chinese market.
A more powerful -- and potentially devastating -- weapon would be a boycott of US products. Beijing has used such campaigns in past disputes, sometimes with catastrophic consequences.
Six years ago, amid rising tensions with Japan over a batch of disputed islands, China used state media to rile up protesters, who attacked Japanese cars and businesses. Sales of Toyotas, Hondas and Nissans all plunged as a result.
More recently, China tried to pressure South Korea into ditching a US anti-missile system that Beijing perceived as a threat. It blocked K-pop stars from the mainland, Chinese firms boycotted Korean products, and Korean businesses withered under the strain. In 2015, Hyundai Motor was the third-most popular passenger vehicle brand in China, with 5 percent of the market; last year, its share had slipped to 3.1 percent, ranking Hyundai 11th, according to LMC Automotive.
You might argue that pressuring US companies in this manner could backfire. After all, those companies employ a ton of people: GM (including its joint ventures) has 58,000 workers in China. But Beijing has previously shown that it’s willing to absorb such costs to meet its strategic goals. Amid the anti-Korea campaign, Kia Motors reduced the working hours and pay of its Chinese employees as sales sunk.
In the current dispute, China has so far kept this sword in its scabbard, possibly because it wants to present its response to Trump’s tariffs as reciprocal. Because of the imbalance in US-China trade, however, there’s a limit to how much Beijing can match Trump’s tactics with tariffs alone. There are only so many American imports to tax. If (or when) the authorities choose to go after US companies in China, they can whip up protests and boycotts at the drop of a Nike cap.
The fallout could be significant, and should seriously concern American executives. Imagine what would happen to GM if its sales in China -- which represent more than 40 percent of its total -- fell in similar proportion to Toyota’s in 2012. Or if Starbucks, which is opening a new store in China every 15 hours, saw its coffee shops ransacked by protesters.
Hopefully, things won’t degenerate to that point. But in their apparent naivete, Trump and his advisers have stumbled into a wrestling match with an authoritarian state capable of rallying far more public support for its positions than Trump could in a divided, democratic America. That’s what investors should really worry about.
Michael Schuman is a journalist based in Beijing and author of “Confucius: And the World He Created.” -- Ed.
Apr 22, 2018