The Silk Road
Trading guides, webinars and stories
Trading guides, webinars and stories
US corporations played a key role in the development of the global economy. They were some of the first to expand their production facilities to countries with cheap labor or favorable tax rates. This was often achieved through acquisitions and mergers, while pushing local competitors out of the market. As these companies expanded their influence across the globe they also brought their own along currency with them, which laid the foundation for the hegemony the US dollar enjoys today.
It should be no surprise that entering China was an excellent opportunity for these companies. Its near endless supply of labor has made the country an attractive destination for US capital ever since the 90s. Although China’s political system posed a great risk at the time, the prospects of significantly reducing labor costs along with an immense domestic market were incentive enough for companies to invest the capital and technology it was previously lacking. The savings and potential profits were such that whoever wasn’t willing to move their production to China would suffer a severe competitive disadvantage.
Investors weren’t deterred by the considerable uncertainty inherent in these projects. They were confident because they had the backing of the US government when dealing with China’s impoverished populace and increasingly dollar-dependent economy. Their extended dealings with the USA have made China realize its own strengths as well as the general role it grew to play in the global economy. This new self-aware China eventually began to leverage it’s accumulated economic clout to further its national agenda.
The nature of their relationship made it almost inevitable for the United States & China to eventually develop conflicting interests. It only took a trade oriented US President and an unmovable Chinese strongman for the two to finally butt heads. Although the game of tit-for-tat being played with tariffs definitely contributed to the erosion of mutual trust, it’s the measures taken against Huawei that could foreshadow an actual rift. A number of Nobel-prize winning economists have called the current administration’s attention to the risky precedent set by an international company losing its US suppliers for political or national security reasons. It could increase the potential risks of doing business with the US, leading to a mark up in prices. If confidence is shaken in the legal framework of international trade, there’s a possibility that it could undermine the reliability of global supply chains.
While it’s worth paying attention to these voices, there’s also merit to pointing out that their concerns could simply remain unrealized theories in the minds of said economists. Recently published research by Chambers of Commerce in Shanghai & Beijing shows that 40% of US companies operating in China are planning to leave the country. There are two key considerations behind this decision. The first is how the unpredictability of the tariff situation makes it difficult for companies to do long term planning and that doesn’t appear to be changing anytime soon. The other concern is a fear of China potentially cracking down on companies in retaliation to US sanctions against Huawei. These worries have driven companies to search for new production sites or consider how they can train a new workforce while also restructuring their existing supply chains.
The flight of US companies could definitely hurt China. They’re already struggling with a slowing GDP growth and losing jobs undeniably makes matters worse. This turns the threat of impairing trade relations into a weapon that can used as in negotiations. Companies often don’t consciously realize the pressure their reaction to these economic events places on politicians.
Looking back at the Chamber of Commerce reports mentioned earlier, they suggest that only 6% of the companies leaving China intend to relocate to the US. It seems they’re less concerned about global trade in general and are instead more worried about China specifically. Overall they’re still interested in the region, since 24.7% of them view Southeast Asia as their preferred destination. In a sense Vietnam, Cambodia and Myanmar all have the potential to take over China’s role in the global economy, except without the massive scale. That also means they don’t pose the same level of risk to the USA’s global lead. Meanwhile 10.5% of these companies gravitate towards Mexico and 8.5% have expressed interest in moving to India, Bangladesh, Pakistan or Sri Lanka.