The US President Donald Trump appears set on having a trade war with China. With initial tariffs exchanged, White House rhetoric has made clear the goal is to rebalance trade relations and establish better “reciprocity”. Everyone involved is going to get hurt but wherein lies conflict, there also awaits opportunity.
Let’s put aside the fact that Trump has demonstrated a serious misunderstanding about how economies work. His statements on trade deficits being indicative of lost national wealth is simply wrong. The same goes for many of the ideas of his commerce secretary, Wilbur Ross. Both appear to view economies like businesses. They are CEOs, after all, but wrong is wrong. Instead, let’s focus on the opportunities a trade war may afford other countries in the region.
Only a few decades ago, one of the most profitable businesses in the East Pacific was the relabeling and repackaging of manufactured goods. Items made in the US and Europe would be repackaged and relabeled in places like Hong Kong and sold as Hong Kong products for sale in China. This was back when China had strict regulations against importing from most countries and Hong Kong functioned as the primary gateway into the middle kingdom.
By the late 1980s, Hong Kong repackaging started to take place in the opposite direction as well, with Chinese goods being repackaged and relabeled in Hong Kong for sale in the US and Europe. One of the shipping companies to benefit the most from this was Hutchinson Whampoa. As luck would have it, an important stop on Hutchinson’s shipping circuit from China to the US was Busan. In many respects, the berths Hutchinson owned in Busan were pivotal in allowing Busan to develop into a hub for Pacific shipping.
The rising prominence of Busan allowed manufactured goods from northern China, most notably Qingdao, to be repackaged and relabeled in Korea instead of Hong Kong, lowering costs. Those old enough to remember will know this was no small business for many Korean companies in their infancy.
As trade relations between the US and China normalized and restrictions relaxed in the 1990s, the need for repackaging steadily disappeared. The timing was impeccable, as Busan continued churning along anyway, shipping growing numbers of homegrown Korean products instead of relabeled goods. For the next few decades, the idea of repackaging was relegated to a footnote in history.
With tariffs now making the trade of many goods between the US and China expensive, American and Chinese companies are scrambling to find ways to buffer the cost. One path already implemented is the old idea of repackaging. Vietnamese companies, in particular, have been quick to jump in as middlemen for Chinese companies wishing to sell steel to American buyers. Vietnamese companies buy the Chinese steel and then sell it to Americans, circumventing the high cost of tariffs.
In many ways, the power of repackaging lies in the ambiguity of the process. If a Vietnamese company buys steel bars from a Chinese company and then cuts them into shorter bars before selling them, are those now Vietnamese products or Chinese? Most international trade laws leave more than enough leeway for altered products to be defined as Vietnamese manufactured goods, albeit manufactured using Chinese “parts.” Even when such leeway does not exist, it often becomes difficult for foreign governments to really find out where parts are coming from, disguising the identity of what is being bought and sold. Such is the speed with which businesses can react to changing global circumstances.
Although it is still possible a trade war between China and the US will be short-lived with both sides coming to a swift understanding, a long and protracted confrontation will likely be most profitable for those quick to stand in as middlemen between the contestants. The Chinese and US governments may be at odds, but many of their companies just want business to continue.
Justin Fendos Justin Fendos is a professor at Dongseo University in South Korea and associate director of the Tan School at Fudan University in Shanghai. -- Ed.
