Americans Fine With Paying More If Trading With Democracies, Not China
Sorry tariff hating Davos Man and Bloombergers, Americans are indeed fine with paying more for their gadgets and gear if it is made by countries that share their values.
In other words, we don’t need Disney shirts made from Uyghur prison labor in Xinjiang…just an example. Disney infamously took the heat for filming scenes from Mulan in Xinjiang, a western Chinese region that is both the source of most of China’s land-based fossil fuels, and home to detention facilities that are holding Muslim men in captivity.
For their part, China calls it re-education centers, and considers their Uyghur police as part of their version of a war on terrorism.
Here’s the evidence of people not as worried as the U.S. Chamber of Commerce over prices of goods rising because of tariffs, or higher labor costs: a study by the Carnegie Council for Ethics in International Affairs, published in December says some 71% of people surveyed think we should source important goods and services from other democracies.
Survey respondents said they want to avoid over-dependence on China for critical goods and services.
Nearly 7 in 10 agreed with the statement, “Would you as a consumer be willing to pay up to 20 percent more for a good or service that you consume if that was to purchase it from another democracy instead of a cheaper alternative from a non-democracy, particularly if it has human rights problems?”
I asked Nick Gvosdev, Senior Fellow at Carnegie Council for Ethics in International Affairs, what any of this might look like. I mean, are New Era caps going to be made in South Central Los Angeles? What would it take for that to happen?
“If there is a combination of both consumer and investor pressure to reduce dependence on China and other countries with questionable democratic credentials, shorten supply lines and bring jobs home, I could see firms marketing that more content is made at home – for instance,” he says.
MacBooks produced by Apple AAPL +0.2% at its facility in Texas, for example, will be more attractive to companies and individuals who want more local sourced goods, even if many of the components inside it are still manufactured in China.
It’s a start.
U.S. firms, especially the big multinationals, will likely continue to find alternate offshore providers elsewhere in Asia if public pressures on China build.
In the book, “The Epic Split: Why Made in China is Going Out of Style”, by Hong Kong based author Johan Nylander, decoupling from the China supply chain will continue. The trend began in earnest in the Trump years.
“The data is clear. Change is afoot,” he says.
There’s the retail consumer, which matters, and then there is the corporate buyer, which matters even more. They are the ones making the goods that consumers ultimately buy. It is their supply chain decisions that pigeon hole the choices consumers are left with.
If GM wants to import its Buick SUV (it tried, but failed) from China because it’s cheaper, then consumers either suck it up or don’t buy that Buick.
Bill Pollock, CEO of Optimation, an upstate New York company that designs and builds industrial machines, says he finds that big U.S. firms still actually prefer U.S. manufacturing, but mostly if that manufacturing is new and innovative. The other stuff ends up getting copied and commodified by the Chinese. Americans are forced to constantly innovate to compete.
“Most of our clients are not interested in using Chinese production machines, even if they are cheaper initially,” Pollack says. “The thing about Chinese technology is that they are very good at copying, but creating new technology for the very first time is what America is about. We have Yankee ingenuity and a huge creativity head start on China.”
If the Carnegie’s survey is right, then there should be a consumer and investor led renaissance in building things in the U.S.
As Wisconsin Democrat Tammy Baldwin noted during Pete Buttigieg’s job interview for the Transportation Secretary job in the Senate on Thursday, the U.S. doesn’t even make its own subway cars, or transoceanic cargo ships.
Harvard professors Gary Pisano and Willy Shih wrote in a Harvard Business Review at the turn of the decade that the U.S. would have to take the issue of reshoring seriously, regardless whether consumers wanted their KitchenAid pots and pans made here.
“Rebuilding a wealth-generation machine – that is restoring the ability of enterprises to develop and manufacture products in America – is the only way the country can hope to pay down its enormous deficits and maintain, let alone increase, its standard of living,” they wrote.
If consumers demanded more Made in the US, it would be a boon for small and mid-cap stocks in this country for one.
If major shareholders asked that Apple and Nike – if they want to be part of popular ESG portfolios, that is – make their U.S. marketed goods in the U.S., or at least in Mexico, then the trend on China making everything would end.
When China makes everything, it gets commodified. When China makes everything, other big countries, ours included, make less. The economy suffers, incomes stagnate, even if the market rises.
“The Epic Split” – Supply Chains Slowly Leave China
The Kearney China Diversification Index (CDI) tracks the shift in U.S. manufacturing imports away from China and – mostly – spread throughout southeast Asia. It concludes that while China remains the world’s go-to manufacturing hub (by design in Beijing, mostly) it has lost some of its lure.
Some of this can be explained by higher labor costs in China, and stricter environmental standards that came after the popular Chinese documentary Under the Dome, which catalogued what fossil fuels pollution was doing to people’s health in Beijing.
According to the CDI, China produced about 67% of all U.S. bound Asian-sourced manufactured goods in 2013. By 2019, its share fell to 56%.
Nylander notes that of the $31 billion in U.S. imports that left China, 46% moved to Vietnam. Vietnam now is a mini-China. In fact, our trade deficit with them is only trumped – in this order – by China, the European Union and Mexico, our next door neighbor. Tiny Vietnam, thanks to China moving there for the most part, is now the source of more U.S. goods than Japan, Germany and Ireland, or next biggest trade deficits.
Given President Biden’s call for increased economic integration with Mexico, and to promote new partnerships with Europe, India and Japanese firms for everything from pharmaceuticals to 5G, a Biden approach will pick up where Trump left off, only with a less Made in America stance, perhaps.
“He will try to shift supply chains away from unisource dependence on China to other states, particularly if this is done in concert with his desire to convene a Summit of Democracies – and to sell this as part of a way to rejuvenate alliance relationships,” Carnegie’s Gvosdev told me.
The Carnegie surveys were conducted by Carnegie Council in February and August of 2020.
The approximately 500 respondents comprise representatives from all over the country, from different professional and occupational spheres. The survey results largely confirm earlier findings of the study and focus groups held by Carnegie in 2018 and 2019.
Many U.S. companies, like Apple, are known for their peace and love, multicultural advertising. This is their branding. But China is the opposite of all that it puts forth as its global image.
“Much depends on whether those willing to pay more to avoid sourcing from China will act in their capacity to push for this,” says Gvosdev.
For Gvosdev, it might have more to do with major shareholder decisions rather than consumer decisions.
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