What Entrepreneurs Can Expect From the Trade War With China
On July 10, the Trump Administration slapped a 10 percent tariff on $200 billion worth of Chinese imports. This is on top of the 25 percent tariffs on $50 billion worth of Chinese imports it announced in June.
Related: Trade Wars: Who Pays the Price?
Trump has said the tariffs are in response to a long-term, concerted effort on the part of Chinese authorities: Namely, forcing U.S. firms to transfer tech secrets to China's joint venture partners, as well as a multitude of other hostile commercial activities.
What really is technology transfer?
The Office of the U.S. Trade Representative (USTR) defines technology transfers as providing a trade partner, subsidiary or joint venture with "intellectual property (IP) protections ... [including] production processes, management techniques, expertise and the knowledge of personnel." Basically, in order to manufacture products or inputs at more competitive costs in China, U.S. corporations from Nike to Apple must share their know-how with Chinese manufacturers. Now, this is not necessarily a bad thing, because tech transfer promotes efficiencies in manufacturing and distribution.
So, what's the problem with technology transfers to China?
China offers U.S. corporations one of, if not the, most lucrative consumer markets in the world. In order to reach this consumer market, however, U.S. companies seeking to set up shop are allegedly often forced into joint ventures that they wouldn't seek otherwise. According to U.S. authorities, it has long been the case that U.S. corporations are sometimes forced to share trade secrets with their joint-venture partners in order to receive necessary commercial licenses. Although it's hard to pinpoint how many corporations have been subject to forced transfers of their IP, an American Chamber of Commerce in China survey conducted in 2013 found that 35 percent of corporate executives feared tech transfer requirements.
Discriminatory licensing and forced IP submission
Once a U.S. corporation receives the permit to initiate investment in China, a number of opaque licensing procedures are often required depending on the given industry. The requirements can involve everything from site regulations to anti-monopoly assurances and national security clearances.
U.S. corporations have complained that at each stage of the process officials connected to obscure licensing agencies frequently ask in-person that specific trade secrets or IP transfers be handed over; this exchange is a requirement to receive the license at hand.
Outbound investments and business acquisitions
Another aspect of China's trade practices involves government-led initiatives to acquire U.S. corporations in strategic industries. The goal is to acquire IP assets. While the U.S. would normally accept acquisitions by foreign corporations, the USTR concludes that a major cross-section of these deals are directed entirely by the state authorities versus private players. For instance, a 2016 study by the Rhodium Group found that the flurry of Chinese acquisition offers in the semiconductor industry beginning in 2014 stemmed chiefly from governmental strategic initiatives.
Cyber hacking and IP theft
When acquisition or tech transfers will not do the trick, according to U.S. authorities, China has since 2008 focused heavily on using cyber warfare tactics and hacking to steal IP and trade secrets from U.S. corporations. While China denies any state involvement in this activity, the U.S. cyber security firm Mandiant released a report in 2013 that directly linked industrial espionage to a unit inside the People's Liberation Army.
Trump to the rescue?
Section 301 of the U.S. Trade Act of 1974 gives President Trump the ability to retaliate for a perceived discriminatory trade practice or trade barrier by a foreign country. Similar measures against China were taken in 1991 and 2010.
A Section 301 investigation report in March by trade representative Robert Lighthizer found substantial evidence of forced technology transfer. As a result, the Trump administration has focused most of its tariffs on high-end, tech-focused goods, such as airplane parts, flatscreen televisions, electric vehicles and industrial lathes.
With Trump's current tariffs already going into effect, and China responding on July 6 with more than $34 billion in tariffs on primarily U.S. agricultural products like pork bellies and soybeans, there is no telling how the issue of IP theft will get solved in the near future..
Effects on U.S. small businesses, and your remedies and opportunities
What is the real impact on your business?
Let's begin with the obvious: Tariffs on goods imported from China are sparking retaliatory dollar-for-dollar Chinese tariffs on goods exported there. So, if you engage in manufacturing or exporting directly to China, you will be directly and adversely impacted. China recently announced 25 percent tariffs on 659 U.S. goods worth some $50 billion, many of them agricultural. Ouch!
However, what if you are not the exporter, nor the U.S. farmer who produces beef, pork or soybeans for Chinese export? In a complex world economy, it is not only consumers as end users who pay higher prices, but also businesses upstream in the supply chain.
Without exaggeration, all small-business owners are also consumers of raw materials, goods or services from vendors downstream in their supply chain -- inputs they process and deliver to their own upstream customers. The tariff increases costs not only for the direct exporters, but everyone in their supply chain. So, once again the impact on you would be adverse.
What if everyone in your supply chain is domestic, and 100 percent of sales are exclusively in the U.S.? Well, you are still likely to be adversely impacted by the trade war. That's because similar products from China affect the price of U.S.-manufactured or sourced products. When tariffs raise pricing of Chinese products for the sector, rival U.S. firms, downstream in your supply chain, will face less competition and are incentivized to raise their prices to you. The mechanism accordingly decreases your profits.
Are there any remedies or benefits?
First, aside from dialing your representative, collective action by lobbying firms and special interest groups in your sector may be advisable.
Second, it is universally understood that tariffs can benefit a small number of domestic industries. Consider the case where your business is in a traditional industry, like steel or furniture manufacturing, facing higher domestic wages and Chinese dumping. There is also a case to be made for protecting your business if you are in a nascent industry until the economies of scale in your market are balanced. For most businesses, though, the foregoing impacts on the supply chain are far more injurious.
There is, however, a silver lining: disruption. As an entrepreneur, I suspect you have survived and even thrived because where others saw problems, you saw opportunities. If you are a new entrant to an industry or barely established, an upset to the supply chain and higher pricing could gain you tremendous market share if exploited with ingenuity.
Industry leaders, entrenched competitors -- the ones you are looking to disrupt -- over the course of many years have fine-tuned their channels, projected their outcomes and are probably resting on their laurels where their supply chains and customers alike are concerned. You now have an opportunity to supplant the dazed old guard through new channels, relationship building with domestic and non-Chinese foreign suppliers, undercutting their recently tariff-hiked pricing and promoting your own advanced delivery technologies.
So "when in Rome" -- disrupt away!