Paul Maidment Director of Analysis
Paul Maidment, Director of Analysis, analyses how consumer behaviour and tariff wars are changing Asian trade patterns
Strolling around central Shanghai, it is what I do not see that catches my attention. No one I can spot is wearing any US-branded clothing. Apparel branding is generally low-key compared to what you would see in many international cities. Yet there were Adidas t-shirts, even a Real Madrid football shirt, but not a baseball cap, Nike swoosh or University of Anywhere sweatshirt to be seen.
No one I can spot is wearing any US-branded clothing.
It took a weekend trip to a suburban mall to find the first piece of counter-evidence, two young women wearing CK t-shirts. However, the Major League Baseball store in the mall was devoid of customers, the only store to be so. Given so many foreign luxury brands have stores in the city, that might have been coincidence, but it was difficult to shake off the thought that someone somewhere had sent around a memo.
A visitor quickly gets a sense of quiet but patriotic pride that Chinese consumers take in their country’s brands and their quality. A preference for them goes hand in hand with a steely determination to outlast whatever tariffs and other sanctions the Trump administration throws at China in the current trade disputes between the two nations. This is as much defiance as stoicism. President Xi Jinping, in Shanghai to open China's first International Import Expo, described China as a sea, not a pond: storms can overturn a pond, he said, but never a sea.
Another speech, by US Vice-President Mike Pence last month, dispelled any lingering hopes Beijing might have had that it could either wait out Trump's trade antagonism or buy it off. Pence made it clear that the US strategy was a multifront constraint of China, which January's US National Security Strategy had bluntly identified as a US strategic adversary, along with Russia, Iran and North Korea.
In the hiding-in-plain-sight stakes, Xi, too, has laid out his vision of the future. 'The Great Rejuvenation of the Chinese Nation' involves Beijing assuming a leading role in international affairs and supplanting the United States as the world’s pre-eminent economic power and chief architect of global governance, with its ambitious Belt and Road Initiative a central element.
The economies of the US and China cannot readily be decoupled.
However, trade, investment, markets and supply chains tie the two economies closely together in ways that cannot readily be decoupled. (Should you break ranks and buy an NBA basketball jersey in Shanghai, for example, it will have been made by Anta, a Fujian firm whose 2017 annual sales of $2.4 billion rank it among the world's five largest sports-apparel companies behind Nike, Adidas, Puma and ASICS.)
Beijing views its efforts to acquire advanced technology, legally or illegally, as a matter of survival.
It is China’s dependence on US technology, however, that means there is unlikely to be any ready resolution to the trade dispute between the two countries in the near term beyond the most superficial bargain on merchandise trade. What the Trump administration is asking China will weaken the Communist Party's monopoly grip on power, which depends on providing a continually rising standard of living to offset any threat of social instability.
To do that China, like other newly industrialising countries before it, has to move its economy up the value chain from cheap exports to the next generation of technology and information-driven industries. Beijing will not easily compromise on its efforts to acquire advanced technology, legally or illegally. It views this as a matter of survival — the only way to cope with rising wages and looming demographic pressures, evade the middle-income trap and join the ranks of developed countries.
In that regard, time rather than Trump is holding a gun to China's head. Thus, Beijing will play a long game, to buy time and stability to make the economic transition it wants, after which it will be able to make deals, although equally by then it may feel it will not need to.
Talking to executives of both multinationals and local private companies in Shanghai yields two insights into the consequences of this standoff. For the local firms, US tariffs have been an inconvenience so far, they say, though there is recognition that should the rates rise to 25% from 10%, as threatened, the impact would be more severe. However, there are other markets to turn to, not just in Europe but Asia and the Middle East, now getting rich enough to afford the products China’s industries are making as they ascend the value chain.
For the multinationals mostly there to sell into the Chinese market, the current tensions between Washington and Beijing do nothing to level what they see, with varying degrees of resignation, an unlevel playing field of long-standing, though not as tilted as was once the case nor as is now often assumed elsewhere. An initial period in the current disputes, when they were treated uncommonly well in the hope they would act as a back-channel counterweight to the imposition of tariffs on China’s exports, has passed. The quotidian tribulations of selling into the local market have returned, with, perhaps, just a tad more, they say, by way of official inspections of their operations.
There is ready agreement with a view that the Trump tariffs will accelerate the growth of Asia’s intra-regional trade as both Chinese companies are compelled to seek new markets in the region and multinationals, primarily equipment and component makers, adjust their sourcing and adapt their supply chains. For other Asian nations, China starts to look like the ‘market of last resort’ that the United States has been since the Second World War.
Supply chains are already being reshaped by other drivers such as technological change, shifting relative labour costs, environmental concerns, reputational exposures and a worry that, as global supply chains have gotten longer and leaner, they have also grown more fragile. Where there is supply chain risk, credit risk is never far behind.
The current trade tensions offer companies an opportunity to shorten their supply chains, with more beginning and ending in China… This will not happen overnight
The current trade tensions offer companies an opportunity to shorten their supply chains, with more beginning and ending in China rather than beginning in China and ending in the United States. A pattern of multiple short, regional supply chains is emerging, especially as regional markets of growing numbers of middle-class consumers develop in countries such as India, Indonesia, Malaysia, the Philippines and Thailand, all of which are forecast to be among the 20-25 largest economies during the second quarter of this century.
This will not happen overnight. Supply chains cannot be reconfigured any more quickly than manufacturing plant can be rapidly rebuilt. But adding impetus will be the fact that doubling up supply chains provides insurance against disruption (political, regulatory and natural disaster) that seems to be becoming ever more frequent. Multinationals will consider the additional cost to be the equivalent of a dynamic hedge against uncertainty, of which the shoppers of Shanghai are just one symbolic example.
Paul Maidment Director of Analysis
An updated, expanded version of this article is available on HBR
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