China can purchase grains, produce and animal products from places other than the U.S., but can they find a market for their manufactured goods comparable to America? The answer to that question will influence whether or not a tariff war escalates between the two nations in the coming year.
Export revenue has quintupled for China since 2001 when they joined the World Trade Organization (WTO) and the United States has become their biggest market for electronics, machinery, equipment, toys, games and fast fashion. The U.S. purchases upwards of $300 billion worth of these goods in a year's time. While American farmers worry increasing tariffs will mean lost export markets for soy and corn crops, Chinese laborers fear losing American consumers.
Trade as We Like to Think About it Doesn’t Exist
I teach my economic students that exported goods generate money for countries to purchase commodities they couldn’t produce, or produce enough of, themselves. International trade allows each country to specialize in production and export the surplus to other countries. In theory, everyone gets what they need by trading the excess of what they have. Petroleum from Saudi Arabia, fish from Greenland, coffee from Ethiopia, sugar from Belize, or corn from America; each nation has something to offer.
The reality is much more dynamic and nuanced. Countries can subsidize the production of goods, giving them a competitive advantage. Low cost loans, tax reduction incentives, discounted land and energy use rates are examples of policy following a subsidiary strategy. Demand is no longer a question of what one country lacks that another country can provide, but rather, who can build policy to support cheap production and influence global trade?
And if we dissect the dynamic a little more, we are well beyond trading fish for wheat. Today we trade in consumer goods like circuit boards, electric vehicles and recycled plastic parts; things not farmed in a field or extracted from a mountain, but manufactured in factories. Countries like China have made it their mission to be the most efficient manufacturers of consumer goods- a combination of skilled labor, low cost production, and government subsidies. Without a deep dive into how they have done it, China has succeeded in over-producing goods and selling them at the lowest price point to consumerist cultures like the U.S.
In fact, subsidizing manufacturing businesses for the sake of selling cheap products is China’s economic strategy, which begs the question; exactly how willing will they be to engage in a tariff war with a country that currently consumes more than it produces?
American Consumers are More Engaged in Trade Discussions
It looks as though China is not just dealing with a certain political party or incoming administration, but the actual American consumer who is now taking a closer look at where their beloved products are coming from. As U.S. consumers grapple with purchasing decisions any retaliatory moves made by China threaten to further dismantle American trust in Chinese goods.
Holiday polls revealed that 77% of American shoppers wanted to purchase gifts that were made in the U.S. However, when the time comes to fork over the cash, consumers tend to be attracted to the best deal. Identifying where products are manufactured can be confusing; proof that our trade and supply chains are much more interconnected than we assume. And that is a fact that those wary of a tariff strategy urge us to remember. American consumerism has played a part in building policy that strongly supports subsidizing state run manufacturing businesses.
The fact remains, Chinese consumer demand does not match their output of goods which is a risky situation in light of a tariff war and growing distrust from American shoppers. How much more do they want to rock the trade boat?
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