October 5, 2018
Column | outbound

Throwing out the babies with the bathwater

President Trump is bent on strong-arming the Chinese on trade, even if it means breaking the arms of those he purports to help.

By Mitch Mac Donald

Any good commercial fisherman will tell you that casting a wide net may land you some prize catches but also some fish that don't belong there. Likewise, in its trade fight with China, which presents as wide a net as there can be, the Trump administration risks ensnaring species that don't belong there.

Take the American Lighting Association (ALA), whose 3,000 members—makers of residential lighting, ceiling fans, and controls—are facing 10- or 25-percent tariffs on what they import from China. Like virtually all U.S. business interests, ALA believes China should be held accountable for bad trade behavior. Yet the group doesn't have any issue with Beijing over intellectual property (IP) theft, which is purportedly the main reason behind the administration's tariff actions. "While the lighting industry takes the issue of IP protection very seriously, we do not have any severe cases of IP theft for which tariff protection is warranted," said Eric Jacobson, the group's president and CEO.

About 97 percent of residential lighting sold in the U.S. is made by U.S. producers, whom ALA said are providing more high-paying jobs than ever before. Large-scale tariffs will eliminate many of these jobs because manufacturers will be forced to cut spending on domestic R&D (research and development), the group said. ALA has asked the U.S. Trade Representative to review the appropriate harmonized tariff codes that would determine which of its products would be subject to the new levy. A ruling had not been made as of Sept. 12, the day this column was written.

ALA's situation underscores the unintended consequences that accompany a trade war on such a massive scale. According to Yu Miaojie, a vice dean at Peking University's National School of Development, about one-third of China's US$2 trillion in annual export value comes from a practice called "processing," where China imports raw materials and components from a dozen or so countries—including the U.S.—and turns them into finished goods for sale to the U.S. and European Union (EU). The imposition of tariffs on $200 billion in Chinese products may cut so deeply into Chinese firms' process profitability that they will be forced to shut down some assembly lines, Miaojie told "NewsChina" magazine in September. This, in turn, will reduce demand for raw materials, parts, and components from supplier nations, he said.

The academician makes one more point that should resonate in an election year: About 260,000 American jobs will be lost should the U.S. accompany the tariffs with restrictions on Chinese foreign investment.

These downside risks might have been mitigated, if not avoided, had Trump not withdrawn the U.S. from the 12-nation Trans-Pacific Partnership (TPP), which excluded China. In so doing, he reduced foreign market access to U.S. producers, ceded trans-Pacific trade leadership to China, engendered ill will from otherwise-staunch allies, and perhaps most importantly, weakened the U.S.'s negotiating posture by not having a coalition to confront China when it behaves badly. The other nations are not standing still, and they will negotiate their own trade pacts with or without America.

The administration has framed the China tussle as a great crusade that requires some degree of sacrifice. As the theory goes, U.S. businesses should accept pain today in the form of closed-off end markets, shrinking supply sources, and higher input costs, in return for greater gains tomorrow. Faced with punishing import levies, a humbled China would be forced to end 17 years of bad trade acting, which would finally create a level playing field for U.S. companies to prosper.

That may indeed come to pass. In the meantime, though, there will be some fish undeservedly caught in a very wide net.

About the Author

Mitch Mac Donald
Group Editorial Director
Mitch Mac Donald has more than 30 years of experience in both the newspaper and magazine businesses. He has covered the logistics and supply chain fields since 1988. Twice named one of the Top 10 Business Journalists in the U.S., he has served in a multitude of editorial and publishing roles. The leading force behind the launch of Supply Chain Management Review, he was that brand's founding publisher and editorial director from 1997 to 2000. Additionally, he has served as news editor, chief editor, publisher and editorial director of Logistics Management, as well as publisher of Modern Materials Handling. Mitch is also the president and CEO of Agile Business Media, LLC, the parent company of DC VELOCITY and CSCMP's Supply Chain Quarterly.

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