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China: Beyond the Trade War Hype

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Globalization has transformed the world into one big economy. Capitalist theory suggests that markets in an open and healthy economy promote widespread well-being by increasing competition and ensuring the availability of goods and services. Increased competition then drives production cost optimization, research and development, quality management, differentiation, innovation, and other positive externalities. Broadly speaking, competition generates wealth.

It has also contributed to a world in which manufactured goods and services are part of a broad ecosystem that depends on multiple countries and companies. For example, take a look at your smart phone. The components were probably made in more than a dozen countries, starting with the processors, minerals, display, storage, etc.

In an ideal world - one where everybody follows the rules -  globalized economies would generate equal well-being for all. In reality, however, humans are inherently flawed. Some tend to take competition in the wrong direction by looking at ways to abuse the system, take advantage of people, or leverage poor ethics to develop advantages. This is why each country in the global economy must set their own rules and barriers to regulate goods and services from countries known to employ unfair or unethical practices.

It is no secret that President Trump is interested in re-negotiating trade with China from a position of increased American economic strength. We can question his methods, but regardless of your political viewpoint, the fact is that China is a tough competitor with asymmetrical trading policies. If left unchecked, the United States is just one of many countries that could suffer.

 

Why China?

China is a trade powerhouse and the United States’ main trade competitor. They are the world’s number one country in exports, number two in imports. That’s not intended to underplay America’s importance. The U.S. is also a powerhouse. We hold the second place in exports (if you do not consider the EU a single entity) and the number one position in imports. The issue is that the U.S. is China’s number one customer. According to the U.S. Census Bureau, we purchased nearly $505 Billion in Chinese goods. Their number 3 supplier, we only sold them about $130 Billion worth of goods and services. This leaves us with an annual trade deficit of $375 Billion. In total, we had an annual trade deficit close to $796 Billion. China accounts for a whopping 47% of that figure.  

 

Are trade deficits really a bad thing?

The answer to this question will depend on the economist you ask. Someone like Milton Friedman would say no and others would say yes, but regardless of the pros and cons of trade deficits, two things are very clear. First, China is taking a critical leadership role in the world and, second, President Trump seems determined to stop them. Outside of political motivations, this dynamic creates an opportunity to address many other issues stemming from China’s place in the business world. The nation has developed a reputation for undermining international agreements, spearheading aggressive takeovers, and engaging in flagrant intellectual property theft. These, in my opinion, are each more critical than the trade deficit.

Over the last few decades, China has continually reaped the benefits of IP theft and infringement. This has unbalanced the playing field for organizations everywhere and affected their bottom line. As an example, look at their “Chery” cars.  They bear a resemblance to some Chevy models. There’s also the Lifan 320. The car is a hazy copy of the Mini-Cooper. Both are examples of intellectual property infringement in the automobile industry, and take a toll on car sales worldwide. If we take a closer look, we will surely find other cases across numerous industries. They’ve each given China an inexpensive (and unethical) edge.

This is a serious matter. China’s dominance is growing, and they know it. Their military defiance in the South China Sea and monopolistic role within some industries are evidence of this. Unfortunately, other nations are beginning to follow suit.

 

How do you negotiate something like this?

From a procurement perspective, I am particularly interested in the negotiation tactics used by President Trump and how effective they really are.

There are many critics of President Trump’s approach to negotiation. Some compare him to a feudal lord, threatening his vassals and peasants with punishment if they do not abide by his will and law. This comparison might be a little extreme, but we can definitely observe some similarities. President Trump does take a confrontational approach. He sees no problem in making threats to achieve his goals, and he clearly understands that there will be collateral damage in the process. Some might consider him a ruthless business man, but to be fair, his is a negotiation tactic like any other. The leverage of power and influence has paid dividends for him all his life, so why change now?

The President is not alone in his conviction or his approach. If we look beyond the controversy surrounding him these days, it’s clear some of these strategies have a foundation in business. It is no secret that large corporations use their power and influence to inspire favorable legislation. That is what lobbying is all about. They may be more discreet about it, but that’s hardly the point.  Some large businesses use their power to abuse smaller businesses by extending their payment terms and depriving them of much-needed cash flow. To add insult to injury, the same big business will then offer factoring services so the small business can get the cash faster in exchange for paying a less-than-convenient fee. 

It seems these types of negotiations are more popular than we would like to admit, but as we often discuss in procurement, the zero sum game is ineffective in the long run.  

If we want widespread, attainable well-being, businesses and nations need to establish partnerships and strategic alliances. These aren’t compatible with zero sum games. The point is to collaborate and help each other grow, but how do you make a giant like China collaborate? My impression is that we are going through a period of necessary evil. It might seem counterintuitive, but the approach of ‘being liked by everybody’ did not yield results.

It is unfortunate that leaders (whether in business or politics) engage in destructive negotiations, but I have to wonder if this aggressive stance will yield better results in the long run. I have the (perhaps naïve) thought that chaos might help us pave the way for a clean start with China and other countries. No one expected results in North Korea, but that developing situation looks promising.

Sometimes the law of unintended consequences surprises us. Pleasing results often arise from bad decision-making. We cannot, however, leave well-being and mutual benefit to chance. We must take actions in order to generate them. As procurement professionals, we often deal with relationships, negotiations, and agreements. It is critical that we hold ourselves and our peers to high standards when negotiating.

Quick wins can be tempting. Sometimes they push us to engage in destructive negotiations. These might have their benefit, but we must always remind ourselves about the unavoidable collateral damage and remember the general good. We can’t forget that by collaborating to work for those win-win situations, we can generate well-being for all. With more and more of these good practitioners, ethical practices will rub off on our leaders. History has shown us that the government and the state have always lagged behind the private sector.  Don’t expect this to change fast. It will take time and effort, but we must take the lead if we want a world of abundance for future generations. The choice is ours.

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Saturday, 22 September 2018

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