It’s taken many decades for the United States, China and other countries to create a global trading order in which American companies and companies from many other countries either manufacture in China for export to the United States, engage in joint ventures that export back to the U.S., or operate purchasing offices that source China-made goods that are distributed through U.S. retail distribution chains.
To demand that the Chinese reduce their trade surplus by $200 billion over two years is to reveal a profound lack of understanding of the structure of U.S.-China trade. The numbers are elusive but it would not surprise me if more than 50 percent of China’s exports to the United States are in fact controlled by American companies. The Chinese cannot wave a magic wand overnight to change all this–they would need the active and willing participation of U.S. CEO’s to dismantle the supply chains and manufacturing patterns that have been painstakingly built up over decades.
The Chinese control very little of the distribution of China-made products. The Wal-Marts, Targets and Home Depots are the ones with purchasing offices in China that order specific goods to be made and then ship those goods to the United States. Unlike the Japanese and Koreans who control their auto retailing systems, the Chinese lack any substantial means of actually selling their goods at retail.
The Apple example is the most vivid illustration of why the Chinese–even if they wanted to–could not cut $200 billion from their exports. Apple depends on Japanese chip giant Toshiba for roughly a third of the value added in an iPhone, according to tear downs that were done on iPhones made in China. The Koreans provide memory chips; the Germans supply the cameras. Taiwan’s FoxConn manages the manufacturing. Replicating this structure on American soil would take many years and billions of dollars. Note that Terry Guo, head of Foxconn, made a splash by announcing he would start building this infrastructure in Wisconsin, but it has not happened and probably never will. It’s a classic case of vaporware, the old term used to describe something that consists only of vapors, but no substance.
For Trump and his negotiators to have any chance of engaging in meaningful trade negotiations with the Chinese, they need to understand the composition of China’s exports. So far, they clearly do not.
