The U.S. and China are slated to resume trade negotiations in October. A deal will almost certainly cause stocks to soar, but it won’t cause U.S. companies to breathe a sigh of relief. The long standoff with China has convinced a growing number of businesses that sticking with China is riskier than walking away. And that’s not going to reverse, even if both sides call a truce.
While President Trump got flack for his tweet “ordering” U.S. companies to leave China, the truth is that’s already well underway. Rather than hope the trade relationship with China suddenly and permanently improves, American firms have been building ways to decrease their dependence on the volatile country. The result is that, even as the media and political pundits fret about the trade war pushing us into recession, getting a deal done with China is growing less consequential with each passing day.
U.S. companies are diverting more of their supply networks away from China and toward Vietnam, Thailand, Malaysia, Cambodia, and other countries in the Pacific Rim and around the globe.
For example, fashion brand Steve Madden has announced plans to move one-third of its production of handbags to Cambodia, and camera-maker GoPro has already moved some operations to Mexico. Most of these countries don’t have the capacity to immediately and fully replace China — yet. But they’re eager to get there, and with time and investment from U.S. companies, they will.
The shift away from China, driven by everyone from technology names such as Dell and HP to furniture and appliance manufacturers, will continue regardless of whether a trade deal with China emerges. These are not temporary workarounds meant to outlast the trade war, but structural changes designed to increasingly and permanently remove China from global supply chains. U.S. businesses aren’t merely interested in surviving the trade fight but steering clear of the next one.
The prospect of a trade deal with China will keep dominating headlines as investors and pundits try to predict the outcome. But the truth is, the verdict is already in: American companies don’t see trade disputes with China going away, and they’re not interested in living with the risk.
It’s not a cost-free process, to be sure. The disruption of relocating supply lines is reducing output and growth for U.S. manufacturers. We’ve seen signs of a slowdown in manufacturing activity and hiring over the past several months, and that will likely remain the case over the next several months as well. Even if we get a trade deal with China in the coming months, it won’t produce an immediate return to the kind of economic performance we were seeing in the United States before the tariffs took full effect.
Over the long term, a more diversified supply chain means U.S. companies will be less susceptible to pressure from China, and U.S. consumers will be less exposed to the costs of a trade war. In the end, China’s weakened hand could drive its leaders to concede to the trade reforms the Trump administration is demanding. But it’s not something U.S. businesses are willing to wait for.
The prospect of a trade deal with China will keep dominating headlines as investors and pundits try to predict the outcome. But the truth is, the verdict is already in: American companies don’t see trade disputes with China going away, and they’re not interested in living with the risk. Rather than hope for a truce, they’re finding ways to engineer China out of their supply chains. A trade agreement might bring down tariffs, but don’t expect it to send U.S. businesses running back to China.