Your firm designs, manufactures, and markets children’s toys for sale in the U.S

Question

Your firm designs, manufactures, and markets children’s toys for sale in the U.S. Almost 90% of your production is done in China. During the 1990s, U.S. relations with China improved. Even though there were many disagreements between the two countries, the United States granted normal trade status to China and supported China’s membership in the WTO in 2001. Your firm invested heavily in China during that time. You have developed close ties to Chinese suppliers and have come to depend greatly on inexpensive Chinese labor and the lower costs of doing business there.

You are now concerned about increasing political tension between China and the United States over a variety of issues: China’s s treatment of the Tibetan people, reports about the use of prison labor to manufacture goods for export, China’s population policies, and differences over relations with communist North Korea. The United States has also accused China of corporate and industrial espionage in the United States to obtain scientific, industrial, and trade secrets, and of hacking into corporate and government computer networks. There are also disagreements over China’s censorship of Internet search providers, and over the protection of U.S. intellectual property rights in China. The United States is also concerned with China’s tax policies, which are said to discriminate against imported goods, and also with China’s state subsidies to domestic industry. The U.S. accuses China of currency manipulations of the yuan, making Chinese goods unfairly cheap in foreign markets and imports into China artificially expensive. Most worrisome is the potential for conflict over Taiwan, with which the United States has had a mutual defense pact for 60 years. China claims Taiwan under its “One China” reunification policy, while accusing the United States of fostering “independence” there. Despite the issues, both countries recognize their deep economic reliance on each other. With that background, consider the following:

Describe the impact that a trade dispute between the U.S. and China would have on your firm.

Describe the impact on your firm if China were to lose its MFN trading status.

What strategic actions might you consider to reduce your firm’s exposure to political risk?

Explanation / Answer

As per the Bureau of Economic Analysis’s data, in 2017, the United States imported $506 billion in goods from China while exporting only $131 billion in goods to China

The US & China have the world's biggest trading relationship. According to the US-China Business Council, exports to China directly or indirectly supported 1.8 million new US jobs in 2015.In China, most of the world's smartphones, computers and consumer electronics are assembled. But China govt. wants to maximize more by becoming a creator of technology instead of a low-cost factory. They are spending heavily and pressing foreign companies for help in developing Chinese global competitors in telecoms, electric cars and other technologies. The US govt is trying to promote technology exports to offset its imports from China and support higher-paying jobs. American and other foreign companies have long complained about Chinese rules that require automakers and others to work through local partners, compelling them to share technology with local manufacturers. Thus, revealing there trade secrets and know how process.

The trade dispute blows up when US President Donald Trump says Beijing is violating its free-trade commitments by pressuring some foreign companies to hand over the technology to potential Chinese competitors in return of market access. He pledged to narrow the bridge by reducing the US trade deficit with China. He started with approval of increasing tariff on steel and aluminum imports.

China replied by raising duties on pork and aluminum scrap by 25 per cent and on apples, sparkling wine, steel pipes and other goods by 15 per cent. Later raised tariffs on American soybeans

If this happened then it may cause President Trump political problems in farm states, but it also affects China by raising food costs within country.

If trade wars begin then it disrupts global supply chains as investment is targeted. Any disruption to supply and distribution chains, which are a key part of world trade, could have a lasting impact. In the worst-case scenario, companies may have to relocate factories or distribution centers. Investment decisions affect employment and taxes raised, and are in some ways more disruptive than tariffs, which can be reversed more easily.

This would damage the US and Chinese economies since global companies, such as Apple, invest in both countries. This would affect not only US & Chinese businesses but also American & Chinese consumers. Retailers such as Walmart import goods from China, so prices would go up and living standards would be squeezed. And since US goods are sold worldwide, if they are reliant on parts from China, consumers here in the UK and in the rest of the world would also be affected. The same applies to Chinese consumers and producers, particularly since about half of Chinese exports are made by enterprises with foreign investors.

So, there are very less chances of trade war to go on higher extent and affects for long terms as it is not only US-China problem but it affects world-wide economies.

Now, if we consider worst part then US govt may put ban on several items which might include soft toys or other children toys. Also, China might close or discontinue US-China joint ventures running in China which might affect production of toys. So, in worst case yes it may affect your business.

Possible actions which can be taken: -

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