The country that builds Mars rovers cannot manufacture an all-terrain vehicle for American landscapes. That’s according to Sen. John Thune, the South Dakota Republican.
"We have companies in my state of South Dakota," he told U.S. Trade Representative Robert Lighthizer at a June 18 Senate Finance Committee hearing. "I think you’re probably familiar with Polaris that is just getting hammered, that don’t have opportunities to shift supply chains."
Polaris Industries, of course, is the maker of ATVs, and its senator was arguing that the company should be given an exemption from tariffs imposed pursuant to Section 301 of the Trade Act of 1974.
President Trump, starting last year, has tariffed $250 billion of Chinese goods. He has also threatened to impose Section 301 tariffs on another $300 billion, which would just about cover all of the remaining China-made products sold in the U.S.
Companies, despite what they may tell their senators, are moving factories out of China. It can be done.
To talk about the most consequential issue he faces — China’s decades-long attack on the American economy — Trump will sit down with Chinese ruler Xi Jinping at the Osaka G-20 this week. The get together could be the last off ramp to years of what is now called the "trade war" between the world’s two largest economies.
Maybe we should say it a "tech war" instead.
Trump’s Section 301 tariffs are a remedy for China’s persistent theft of American intellectual property. Each year, China wrongfully takes hundreds of billions of dollars of U.S. IP, as detailed in the U.S. Trade Representative’s investigative report, issued March 2018 and updated this April, and the report of the Commission on the Theft of American Intellectual Property, released in 2013 and updated in 2017 and this February.
Unfortunately, Xi Jinping seems even more determined than his predecessors to grab American technology. His Made in China 2025 initiative, a plan to dominate 11 tech sectors, is a warning that American innovation is at risk. There is growing evidence that recent Chinese theft is related to the sectors named in CM2025, as the plan is known in China.
America increasingly has an innovation-based economy. About 35 percent of the value of the S&P 500 is attributable to tech companies, and that figure will increase about five percentage points in the next five year. If the U.S. cannot protect and commercialize intellectual property, it will not have an economy — or a society — of the future.
Beijing, by massive subsidies and theft of research and development, has been able to underprice products. These predatory policies — many of which are violative of China’s WTO commitments and others are criminal — have driven manufacturers out of business in America and elsewhere.
As a technical matter, Trump’s Section 301 tariffs adjust pricing, by making China’s goods in America’s market more expensive. Without the tariffs, China will continue to erode the U.S. manufacturing base, and that will lead to dislocations throughout the American economy and society. Those dislocations will ultimately make it harder for America to, among other things, create tech.
As Jonathan Bass of Los Angeles-based PTM Images told me on Sunday, referring to the Chinese, "If you don’t get pricing right, they will undermine our ability to develop technology."
There is another concern about China’s mispricing. "There’s a dirty secret behind many American industries’ pleas to President Trump to exempt them from China tariffs and lift those already imposed: They’ve become addicted to using artificially cheap Chinese inputs, ranging from workers to electronic components, to maintain and grow profits, rather than dealing with the prices set by free markets and becoming more productive," Alan Tonelson, a Washington, D.C.-area trade analyst, told me.
Tonelson added, "Increasing productivity is the U.S. economy’s key to sustainable growth and prosperity, and it’s disturbing that as Washington opened American markets almost indiscriminately to Chinese imports, our industry’s productivity growth has slowed to a crawl."
There are, of course, costs to the steps America should take to increase productivity, protect technology, and compensate for Chinese subsidies. Mitch Modell, the CEO of Modell’s Sporting Goods, told Fox Business Network’s Stuart Varney last Wednesday that Trump’s next round of tariffs on China will have a “devastating” effect on the American consumer-led economy.
Modell is not the only one suggesting dire consequences. Take NEMO Equipment. At the June 18 Senate Finance Committee hearing, Senator Maggie Hassan, the New Hampshire Democrat, raised the plight of that maker of tents and sleeping bags. "For NEMO Equipment to reinvent their supply lines will take two years," she told Ambassador Lighthizer.
Bass, who has actually brought back production from China to Los Angeles, suggested NEMO’s estimate is exaggerated. "How much time can it take to move sewing machines?" he asked me after the hearing. “You can buy 1,000 sewing machines in Los Angeles in a day."
Simple manufacturing can move on a dime. Companies sewing fabric, like NEMO, have jumped from country to country — and in and out of China — to chase quota and other benefits. And when I practiced law, I helped one of my clients, a publicly listed personal care products company, move production out of China in 1989 and back again, all within a half year. The business moved out of China after the Tiananmen massacre, and it returned when it became clear that Chinese political turmoil was not affecting the country’s manufacturing belt in southern Guangdong province.
Some businesses are moving far more complex supply chains than Polaris’s or NEMO’s. Google, for instance, is shifting production of Nest thermostats and servers from China to Taiwan and Malaysia. Before that, the company transferred production of motherboards from China to Taiwan. Nintendo, it is reported, is planning to move production of its Switch console from China to Southeast Asia.
And then there is Apple, reportedly making preparations to move as much as 30 percent of its Chinese production out of the country. As the Nikkei Asian Review reported last week, "protracted trade tensions" pushed the company to consider relocation, but the move will occur even if there is a settlement of the dispute between Washington and Beijing.
Companies, despite what they may tell their senators, are moving factories out of China. It can be done. And in any event, it is wrong for businesses to undercut President Trump at a crucial moment for their country, just days before the G-20.