published Sep 16, 2018, 6:00:16 PM, by Christopher Balding
(Bloomberg Opinion) —

As the trade war between the U.S. and China drags on with new tariffs and no end in sight, we need to ask ourselves: What do they want? A fundamental objective for both is to become less reliant on the other.

The trade war should thus be reframed as a conscious uncoupling.

Behind the rhetoric from both sides lies a profound distrust. U.S. suspicion stems from two specific issues. China is increasingly seen as a national security threat that fails to play by the rules. The Trump administration’s stance has spurred debate over whether it was a mistake to allow admittance of a highly protectionist Communist country to the World Trade Organization. Democrats may dislike Trump’s methods, but few will disagree with his view of China as a dangerous rival.

For its part, the government of Xi Jinping is concerned about China’s dependence on U.S. technology and finished manufactured products. The focus of its Made In China 2025 plan is to shift Chinese consumption of high-tech products away from foreign, specifically American, manufacturers and toward domestic companies.

So how will they decouple? There’s little historical precedent to consider how this might look. Two major powers have never been so closely intertwined. However, there are some patterns emerging. First, alliances are slowly evolving into more cohesive forms. Just as the new U.S.-Mexico agreement (likely to include Canada) seeks to divert more trade into Nafta, other countries have started reconsidering their reliance on Chinese telecom-equipment makers for the rollout of 5G wireless networks.

Second, there’s a reassessment of where key products should be made. The second batch of Trump’s tariffs focuses on low-end intermediate exports with the intention of reducing China’s role in the global value chain and pushing reshoring to the U.S. and other locations, as a recent Natixis report noted.

Though it’s unlikely that Apple Inc. will start making iPhones in the U.S., shifting factories to allies is probable and builds upon existing trends. China is no longer a low-cost producer, and both foreign and locally owned firms there are actively considering plans to relocate operations. As Samsung Electronics Co. has shown in Vietnam, it isn’t necessary to make a final product in a country that manufactures the specific inputs. Chinese exports are dominated by electronics and basic machinery that rely on global supply chains, so it’s certain many companies are reevaluating their long-term sourcing plans.

If the Trump administration is intent on shifting supply chains away from what it considers a strategic adversary, it should accelerate plans to encourage this trend. Trade agreements that grant allied countries special access to U.S. markets with higher-quality governance and legal systems will increase the appeal for firms of moving out of China. That could mean revisiting the Trans-Pacific Partnership.

Washington must also actively open its domestic markets to Africa, Latin America and emerging Asian economies in lower-skilled products, where China dominates. The primary competitor for Chinese export market share isn’t North Carolina but Mexico, Vietnam and South Africa. For an administration seeking to reduce its dependence on Chinese garment and textile exports, raising tariffs on Rwandan garment exports is self-defeating.

The U.S. and China have talked officially of resolution, but realistically, the red lines laid out by both sides make a negotiated settlement difficult to envision. The Trump administration requires much broader market access and more changes to China’s socialist model than Beijing is willing to grant. The U.S. government, with bipartisan support, is likely to pass an updated foreign investment oversight bill that targets China in all but name.

If Washington really wants to reduce its dependence, it needs better planning to trade with allied countries and must allow other emerging-market economies to benefit from its tariffs on China. Garment manufacturing won’t be moving from Guangdong to Georgia, but many other countries would love that business. Such a shift would be a strategic win in a trade war that so far has shown little planning.

Christopher Balding is a former associate professor of business and economics at the HSBC Business School in Shenzhen and author of “Sovereign Wealth Funds: The New Intersection of Money and Power.”
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