Seventy-threepercentofsurveyedU.S.businessespostedprofitsinChinain2017,with74percentofthemplanningtoincreasetheirinvestmentinChina,thehighestproportioninrecentyears
TheauthorisvicepresidentofChina/AsiaPacificstrategyandglobaldigitalpracticesatconsultingfirmTompkinsInternationalWhatdoalltheseproductshaveincommon:phones,healthyjuices,lipsticks,soybeans,vitamins,kingcrabs,vintagesneakersandBMWs?
TheyareallproducedintheUnitedStatesandarebeingconsumedonamassivescaleinChina.Buttheirpopularity,salesandconsumptionareallnowbeingthreatenedbytheever-increasingnumberoftariffsplacedonU.S.goodsbyChinainresponsetotariffsplacedonChineseexportstotheUnitedStates.
TherearelikelytobetwomajorunintendedconsequencesofaU.S.tradewaronChina.First,companies鈥檒ossofaccessandsalestoChineseconsumersatatimewhentheyareconsumingmoreWesterngoods(andeverythingelse)thaneverbefore.Andsecond,theeffectonetariffononeproductcanhaveonarangeofU.S.industries.
Itisnocoincidencethatasglobaltradehasexpandedoverthelastoneandhalfcenturies,especiallyinthelast50years,prosperityhasrisenandpovertyhasrecededinalmosteverypartoftheworld.
TheideabeingpropagatedbysomeinWashingtonthesedays鈥攖hattradeisazero-sumgamewithwinnersandlosersandthatfreetradehurtstheU.S.economy鈥攊sdemonstrablyfalse.
Inatradewarwithnowinners,Chinawillalsofeelitsfairshareofpainandsufferingintheshortterm.TheeffectonsomeChineseworkers,farmers,businessesandexportersisrealandbottomlineswillbehurt.
ButwearenotgoingtoexaminethebiggerglobalimplicationsoftariffsandthetradewarorthepotentialdownsidesinChina,butratherwearegoingtoanalyzethepotentiallostopportunitiesforU.SpaniesinChinaandtheeffectsthatthetariffwarisalreadyhavingonU.S.workersandfarmers.
TherehasneverbeenabettertimeforU.SpaniesandbrandstobeengagingChineseconsumersandbusinesses.Thecurrenttradewarcouldnotcomeataworsetime.ThesituationthreatenstoderaildecadesofincreasingsalesofU.S.goodstoChinaandmaypermanentlydamagethefutureappealof鈥淢adeinUSA鈥漣nthemarket.
China鈥檚consumereconomy
Tradewarshavenowinners.TheU.S.-Chinadisputeisaproblemuntoitself,butthetradewarisnowgrowingintoaglobalissuethatcouldportendacompleterealignmentofglobaltradeandtheinstitutionsthatsupportit.AnditwillnotbeforthebetterfortheUnitedStates.
Thenumbersarestaggeringtothosenotfamiliar(andstilltothoseofusfamiliar)withChina鈥檚evolutionfromfactoryoftheworldtoconsumermarketoftheworld.
China鈥檚middleclassisnowmorethan350-millionstrongandexpectedtobe550millioninlessthan10years.Therearemorethan650milliononlineshoppers鈥攎orethandoubletheU.S.population鈥攁ndmorethan700millionChinesewiththedisposableincometosupportaconsumereconomy.
Urbanizationandcontinuedeconomicprogressmeanthatitislikelytherewillbe1billionconsumerswithsignificantdisposableincomeandcloseto900milliondigitalshoppersin10yearsorless.
Drivenbytheevolutionofdigitalcommerce,smartmobiledeviceubiquityandarapidlydevelopingNewRetaillandscape,China鈥檚superconsumersarepushinggrowthandprofitsforU.S.andotherforeignbrandsandareresettingthewaytheworldthinksaboutselling,buyingandexperiencingretail.
NewRetailwasborninChinaandisnowgoingglobal.Theintegrationofonlineofflinelogisticsandtechnologyascreatedbythetitans,Alibaba,JD,Tencent,Baidu,NetEaseandSuning,tonameafew,hasmadeiteasierthaneverforbrandstoselltoallofChina鈥檚citizens,andforconsumerstobuyproductsfromaroundtheworldinawaynotpossibleevenfiveyearsago.ThetitansofChineseretail,technologyandlogisticshavemadethedreamof1billioncustomersarealityforbothdomesticandforeigncompanies.
Workersexaminenew-energyvehiclesrollingofftheproductionlineatanSAIC-GM-WulingfactoryinLiuzhou,GuangxiZhuangAutonomousRegion,onJanuary23,2017XINHUAProfitdriver
TheannualreportreleasedbytheU.S.ChamberofCommerceinChinashowedthat73percentofsurveyedU.S.business-espostedprofitsinChinain2017,with74percentofthemplanningtoincreasetheirinvestmentinChina,thehighestproportioninrecentyears.
Forcompanieswhosesalesareflatordippingathomeandinotheroverseasmarkets,Chinahasbeenabrightspotandagrowthdriver.
Forexample,GeneralMotorsnowsellsmorecarsinChinathanintheUnitedStates.StarbucksisgrowingexponentiallyinChina,whichisnowitssecondlargestmarket,with500storesopeningin2018andanewpartnershipwithAlibaba.
Intherealmofcross-borderecommerce,makersofU.S.vitaminsandsupplements,cosmeticsandbodycare,foodandbeverages,motherandbabyproducts,andapparelandfootweararedoingwell.Cross-bordere-commercewillbea$1-trillionindustryinfouryears鈥檛ime.Priortothetradewarescalating,estimateswerethattradebetweenChinaandtheUnitedStateswouldmakeupbetween40-50percentofthattotal.
DuringlastNovember鈥檚Singles鈥橠ayshoppingfestival,morethan30percentofAlibaba鈥檚totalsalesof$25billionwereforeignproducts,withtheUnitedStates,JapanandGermanythetopthree.
AffordableluxurybrandslikeApple,Nikeandothersaredoingwell.ButthenagainsoaremanyEuropean,JapaneseandKoreanbrands.
Choosingalternatives
Chineseconsumersarenowamongthemostsophisticatedanddiscerningintheworld.Itisthisverysavvinessthathasledthemtodiscover,enjoyandbeloyalcustomersofU.S.productsandbrands.
China鈥檚digitalcommercegiantshavededicatedthemselvesinparttothe鈥渕adeintheWest,boughtintheEast鈥漨odelofbusiness.AtthisverymomentitisbecomingeasierandeasiernotjustformultinationalsandbigcompaniestoengageChineseconsumers,butfarmers,entrepreneursandsmallandmediumsizedenterprisesaswell.Atthesametime,itiseasierforfarmers,entrepreneurs,andcompaniesofallsizes,fromanywhereintheworldtoselltheirgoodsinChina.WhenU.S.goodsarepricedout,lockedoutorsufferfromnationalinterestbrandandpurchasedecisions,it鈥檚notjustabrandthatishurt,butentireU.S.businessecosystems.
AccordingtotheDistilledSpiritsCouncil,aU.S.industrytradegroup,U.S.exportsofdistilledspiritstoChinagrew1,200percentbetween2001and2017.Thatgrowthratewasoncoursetoincreasesignificantlyinthenextfiveyears.
InamovetocounterU.S.tariffsonhundredsofChinese-madegoods,anew25-percenttariffwasplacedonU.S.whiskeyandbourbonenteringChina.
Thisisacasestudyintwoways.Chineseconsumerswillnotstopdrinkingwhiskey,theymaysimplybuylessexpensivewhiskeyproducedinothercountriessuchasCanada,JapanorScotland,andasfarasbourbongoes,theymayshifttoalternativespirits.
Moreimportantly,thelonger-termandhigherimpactnegativeconsequencesgofarbeyondalossofsalesforafewquartersorevenyears.Thebiggerissueishowthissingleproductcategory,caughtupinatradewar,willdamagesupportindustries,workers,farmers,alongwiththeUSAbrandandtheU.S.economy.
Thegeneraloutlineofthesituationisasfollows:Duetothetariffs,U.S.whiskeybrandsarenowbeingforcedtoraisetheirpricesinChina,aswellasintheEuropeanUnion,CanadaandMexico.Evenwiththepriceincreases,theycannotmakeupthefullamountofthetariffs,whichmeanstheyabsorbthesecosts.Thisinturnmeansthefollowing:
Thewhiskeycompanylosesmarginandprofitabilityalmostimmediately.
ConsumersinChinawilllookfordifferentproductsinthesamequalityrangewithbetterprices,whichmeansdecreaseddemand.
Decreaseddemandmeansthattheproductproducedforthemarketandglobalmarketswillsitinwarehousesandwillcostthebrandmoremoneytohouseandstoretheproductthanwasearmarkedforsale.Thenatureofthewhiskybusinessisthattheproductneedstoage,requiringlongerterm,non-seasonalplanning.Thiscanmeanlargeamountsofunsoldand/orunsellableinventory.
Decreaseddemandalsomeansthewhiskycompanymayhavetolayoffworkersandwillnothirenewworkers.
Thiswilldepressthelocaleconomy,decreasethetaxbase,increasethesocialwelfareburdenonthestateandfederalgovernmentsandcauseworkersandtheirfamily鈥檚hardship.
Thewhiskeycompany,havingtoadjusttolowerdemandandsittinginventory,willorderlessgrainfromthefarmerswhogrowitbecausetheyaresellinglessandmustforecasttoproducelessbecausedemandislower,anduncertaintymeanstheycannotforecastsalestwoto10yearsout.
Thefarmerswillfaceadoubledisaster.Lessdemandfromthewhiskeycompanymeanstheycan鈥檛sellasmuchoftheircropandpricesforthecropwilldecrease.Whentheylooktosellgrainoverseastocompensate,theymostlikelywon鈥檛beabletobecauseChinaandothercountriesimposedtariffsonthegrain.
Thefarmerswillloseprofits,theymayhavetofold,ortheU.S.governmentwillneedtosubsidizethemtokeepthemafloat,thusputtingafurtherburdenonlocal,stateandfederalgovernmentsandthesesubsidieswillbepaidbyU.S.taxpayers.
Theoveralllossofbusinessandneedtoculltheworkforceresultsindepressioninthelocaleconomywherethewhiskeybrandislocatedandtheareaswherethefarmersproduce.Inaddition,therewillbepotentialfarmclosings,newtaxburdens,layoffsand,becausemostalcoholcompaniesareunderholdingcompanieswithawidearrayofwine,spiritsandbeers,theytoowillsufferfromdecreaseddemand,spreadingtheeconomicpainfurtherafield.
Thus,theconsequencesarethelossofapotentialofa$1-billioncustomerbase,isolationinaglobalcross-borderretailworldandatrailofdamagestolocaleconomies.
Wheredoesthisleadus?U.Spa-niesarenowstartingtopushback.Theyareraisingtheirvoicesandlettingitbeknownthattariffsandtradewarsarebadforeverybody,butperhaps,intheend,especiallyforthem.
TheU.S.-Chinabilateraltrade,culturalandpoliticalrelationshipisnowandwillbeforsometimethemostimportantonearth.Thebilateraltraderelationshiphasbeenanetpositiveforbothcountries.Ithasneverbeenperfectandneverwillbe,butthenagain,thesethingsneverare.
It鈥檚timethatU.S.businesses,financialinstitutions,politicians,workersandfarmersbegintheprocessofdialingbackthetradewarandfindingnewsolutionstooldproblems,beforeit鈥檚toolate.
AcustomerinHongKong(center)showsofftheAlaskanKingCrabsheboughtfor1yuan($0.15)atapromotionaleventorganizedbyAlipay,thethird-partypaymentserviceproviderofferedbyAlibaba,onDecember12,2017XINHUACopyeditedbyRebecaToledoCommentsto