The Trump administration’s hawkish stance on trade policy has startled government officials around the world and caused deep anxieties for multinational businesses. While NAFTA renegotiations remain a contentious on-going story, this year saw a significant trade offensive on China added to the mix (see here for a recent China Center publication on US trade policy in China). At the time of this writing, US-China trade negotiations are tense and very much unresolved.
While most agree that trade wars hurt everyone – producers and consumers alike, on all sides of the dispute – the complex nature of global trade and value chains make it very difficult to ascertain where the impacts will be concentrated and felt the most. This is particularly true for tariffs – a very blunt trade instrument that does not distinguish nuances in supply chain activities, brand ownership, exporter types, or other factors. Simply put, tariffs on China, if they manifest, will hit everyone “under the specified category”, including US and foreign exporters in China, as well as their respective suppliers both in and outside of China. In this note we illuminate one part of what’s at stake in this regard.
Chart 1 shows us that Foreign Invested Enterprises (FIEs) still play a significant role in Chinese exports, albeit a lesser role today than they did in the past. FIEs in China were responsible for 58 percent of all Chinese exports in 2005, versus 43 percent in 2017. Furthermore, the overall value of exports coming from FIEs in China has dropped from a peak of USD 1,074 billion in 2014 to 979 billion in 2017 (a decline of nine percent). Of note, the FIE share loss of Chinese exports looks like it has stopped and settled in the 42-43 percent range for the time being. The reasons for this apparent stabilization could be many and are out of the scope of inquiry for this piece.
Additional data published by the NBS only in journal format, and synthesized by China Center researchers, show that the FIE share of Chinese exports differs significantly by manufacturing sector. For the 2006 to 2017 period, for example: FIE share of exports in the rubber in plastics sector fell from 70 to 49 percent; FIE share of furniture exports dropped from 73 to 48 percent; In petroleum, coke & nuclear fuel exports the FIE share dropped from 62 to 41 percent.
The decrease in FIE export share is necessarily a function of several factors including, for example, the increasing competitiveness of Chinese manufacturers, as well as the changing of product mixes and production locations for FIEs in response to cost differentials and other commercial and supply chain choices. But, even though the share of FIE-produced exports is decreasing across the board, FIEs clearly remain a very substantial part of China’s “export machine” per se.
Importantly, as shown in Chart 2, FIEs remain central to Chinese exports in the ICT sector. The FIE share of exports of ICT goods has fallen in recent years, but still commands a 79 percent share overall. The FIE share of the more sophisticated ICT subsectors – including computers, electronic components, and electronic devices – is even higher. Even in sectors where the international share gains of Chinese brands are notable – in televisions and mobile phones for example – the FIE share remains well above 50 percent.
And here’s where the looming tariff actions get complicated and worrisome. The core of Washington’s Section 301 investigation – and the proposed Chinese exports targeted for tariffs that are derived from it – are a direct response to Beijing’s increasing support for local businesses in the ICT sector and the other high-tech sectors as defined by China’s Made-in-China 2025 plan.
Yet while the Made-in-China 2025 policy is unarguably mercantilist and anticompetitive, and rightly warrants a stern trade and diplomatic response, the fact remains that, as of now, most of China’s ICT exports are produced by foreign companies in China. As such, the proposed tariffs will unquestionably hurt these foreign companies, many of which are American. By contrast, it is highly questionable whether the tariffs will undermine the Made-in-China 2025 plan or even help reduce the US-China trade deficit by any meaningful margin.
The Shifting US-China Trade Landscape