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Trump May Get Much of the World’s Manufacturing Out of China, but It Won’t Be Coming Back to the U.S.

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Via Naked Capitalism

By Marshall Auerback, a market analyst and commentator. Produced by Economy for All, a project of the Independent Media Institute

“Chimerica” is a term originally coined by the historian Niall Ferguson and economist Moritz Schularick to describe the growing economic relationship between the U.S. and China since the latter’s entry into the World Trade Organization (WTO) in 2001. In the words of Ferguson: “The Chinese did the saving, the Americans the spending. The Chinese did the exporting, the Americans the importing. The Chinese did the lending, the Americans the borrowing.” Much of the pre-crisis boom in global trade was driven by this economic symbiosis, which is why successive American presidents tolerated this marriage of convenience despite the increasing costs to the U.S. economy. The net benefits calculation, however, began to change after 2008, and the conflict has intensified further after the 2016 presidential election result. Today, the cumulative stress of Donald Trump’s escalating trade war is leading to if not an irreparable breach between the two countries, then certainly a significant fraying. The imminent resumption of trade talks notwithstanding, the rising cost of the tariffs is already inducing some U.S. manufacturers to exit China. But in most instances, they are not returning to home shores.

It may have taken Trump to point out the pitfalls of the Chimerica link, but coming up with a coherent strategy to replace it is clearly beyond the president’s abilities. America is likely to remain a relative manufacturing wasteland, as barren as Trump’s own ill-conceived ideas on trade. At the same time, it’s not going to be an unmitigated victory for China either, as Beijing is increasingly suffering from a large confluence of internal and external pressures.

Chimerica helped to launch China as a global trade power. To the extent that this marriage helped the U.S. economy, it skewed toward the largely blue state coastal regions. Wall Street banks located on the East Coast happily collected lucrative commissions and investment banking fees, as China’s export proceeds were recycled into U.S. treasuries, stocks, and high-end real estate while the capital markets boomed; on the West Coast, “new economy” companies thrived, their growth and profitability unhindered by the onslaught of Chinese manufactured exports. By contrast, facilitated by technological advances that permitted large-scale outsourcing by U.S. manufacturers, Chimerica laid waste to much of what was left of America’s Rust Belt, and the politics of many of the displaced workers mutated to the extent that Donald Trump became an appealing alternative to the establishment in 2016.

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The major legacy of Chimerica, then, is that too many American workers have been semi-permanently replaced by low-cost offshored labor. Prior to great advances in technology, along with globalization, displacement of the current labor force could only have occurred through immigration of workers into the country. Historically, displacement by immigrants generally began at the menial level of the labor force, and became more restrictive as when it became correlated with significant unemployment. Given the rise of globalization and the corresponding liberalization of immigration in the past few decades, however, policy no longer arrests the displacement of American workers. The policy backlash has consequently manifested itself more via trade protectionism. Trump has sought to consolidate his Rust Belt base of supporters by launching a trade war, especially versus Beijing, the ultimate effects of which he hoped would be to re-domicile supply chains that had earlier migrated to China.

Early on in his presidency, there was some hope that Trump’s protectionism was at best a bluff or, at worst, an aberration, and that the return of a Democrat to the White House in 2020 would eventually reestablish the status quo ante. But the president still can’t get a wall, and his protectionism has become more pronounced almost as if to compensate. The problem today is that even if Trump is voted out of office in 2020, corporate America is becoming less inclined to wait out the end of his presidency to return to the pre-Trump status quo of parking the bulk of their manufacturing in China. There is too much risk in putting all of one’s eggs in the China basket, especially given growing national security concerns. Hence, U.S. companies are taking action. In spite of decades of investment in these China-domiciled supply chains, a number of American companies are pulling out: toy manufacturer Hasbro, Illinois-based phone accessories manufacturer Xentris Wireless, and lifestyle clothing company PacSunare a few of the operators who are exiting the country.

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But they are not coming back to the U.S., relocating instead to places like Vietnam, Bangladesh, Mexico, the Philippines and Taiwan. The chief financial officer of Xentris, Ben Buttolph, saysthat the company will never return to China: “We are trying to have multiple locations certified for all of our products, so that if all of a sudden there’s an issue with one of the locations, we just flip the switch.” Likewise, the CEO of Hasbro, Brian Goldner,recently spoke of“great opportunities in Vietnam, India and other territories like Mexico.”

All is not lost for the U.S., however, as Goldner did celebrate the success of Hasbro’s facility in East Longmeadow, Massachusetts, which has resumed production of Play-Doh in the U.S. for the first time since 2004. It is doubtful, however, that this represents the recapturing of the high value-added supply chains that Trump envisaged when he first launched his trade assault on Beijing.

In general, as Julius Krein, editor of American Affairs, writes: “United States industry is losing ground to foreign competitors on price, quality and technology. In many areas, our manufacturing capacity cannot compete with what exists in Asia.”

These are not isolated examples. Defense One also notes the following development:

It came without a breaking news alert or presidential tweet, but the technological competition with China entered a new phase last month. Several developments quietly heralded this shift: Cross-border investments between the United States and China plunged to their lowest levels since 2014, with the tech sector suffering the most precipitous drop. U.S. chip giants Intel and AMD abruptly ended or declined to extend important partnerships with Chinese entities. The Department of Commerce halved the number of licenses that let U.S. companies assign Chinese nationals to sensitive technology and engineering projects.

This development consequently makes it hard to proclaim Beijing a winner in this dispute either. The country still needs access to U.S. high tech. The government announced yet another fiscal stimulus to the economyearlier this month in response to a cluster of weakening economic data, much of which is related to the trade shock. It is also the case that China is being buffeted politically, both externally and internally: externally, in addition to the escalating trade war, China’s own efforts to counter the effects of rising protectionism by creating a “reverse Marshall Plan” via the Belt and Road Initiative is floundering. China’s “iron brother,”Pakistan, is increasingly being victimized by India’s aggressive Hindu-centric nationalism. It is hard to imagine the Modi government opportunistically taking the step of annexing Kashmir and undermining Pakistan, had it not sensed Beijing’s increasing vulnerability.

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Internally, Beijing is finding it increasingly challenging as it seeks to enforce its “One China” policy in Hong Kong and Taiwan. The withdrawal of the controversial extradition lawthat first precipitated widespread demonstrations in Hong Kong has not alleviated the political pressures in the territory, but simply allowed an even bigger protest culture to take root and strengthen an independent political mindset. Similarly, Taiwan has also openly supported the Hong Kong protesters, pledging help to those seeking asylum. Both regions now constitute both a huge humiliation and challenge to the primacy of China’s ruling Communist Party. And now on top of that, foreign manufacturers are leaving the country, weakening a totally leveraged manufacturing complex.

The implications of this divorce go well beyond the U.S. and China. They constitute another step toward regionalization, another step away from a quaint ideological “post-history” construct that saw Washington, D.C., as the head office and the rest of the world as a bunch of branch plants for “America, Inc.” It’s hardly comforting to contemplate that the last time we reached this historic juncture was the early 1900s, when a similarly globalized economy broke down, followed by the Great War. As Niall Ferguson points out, “a high level of economic integration does not necessarily prevent the growth of strategic rivalry and, ultimately, conflict.” There’s no doubt that both Washington and Beijing will likely making soothing noises to the markets in order to create favorable conditions for the trade talks in October, but their actions suggest that they are both digging in for a longer struggle. Today’s trade wars, therefore, are likely to morph into something more destructive, which is a lose-lose in an era where human advancement depends on greater integration between economic powers.

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