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How US-China Trade Deal Can Transform America's Businesses

How US-China Trade Deal Can Transform America's Businesses
(Sunyaluk Boonmas/Dreamstime)

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Thursday, 30 January 2020 05:34 PM Current | Bio | Archive

The trade deal between the United States and China has been “top of mind” for U.S. businesses since last year. The first phase of the deal was signed on January 15, 2020. It will come into effect from beginning February 14, 2020 and provides a positive way forward to end a trade war that was bad for businesses worldwide.

Some of the important highlights of the deal are:

Chinese commitment to import more from the U.S - China has committed to additional imports from the U.S to the tune of USD 200 billion in the next two years. The commitments are specific to certain sectors and are split between manufactured goods, agricultural goods, energy products (oil and gas) and services. Amongst these commitments, the significant ones that will affect most businesses are for manufactured goods (about $78 billion over two years) and services (about $38 billion over two years). This is a significant demand rise from China, considering that the current exports (goods and services) to China from the U.S is close to $200 billion.

Discontinuation of predatory tariffs – excessive tariffs that were levied by both countries during this trade war will stop for at least some of the products, once the deal is effective. Thus, certain Chinese origin imports that were taxed at punitive rates will be taxed at normal rates (e.g. reduction from 15% to 7.5%). However, it is important to note that the higher tariff will remain on many goods and may be withdrawn in a staggered manner post signing of next phases of the deal. The products that will have lower tariffs now include certain electronics, chemicals, tools, metal products, clothing and food items.

Increased intellectual property protection – the Chinese government has agreed to increased IP protection and will discontinue forced technology transfers for U.S entities accessing Chinese markets. The specifics of the changes will clarify over time but the deal suggests stricter regulations to prevent theft of trade secrets and infringement of trademarks and counterfeits, which in very common in China.

Increase in possible U.S investments in financial service companies in China– the deal abolishes / reduces the equity investment caps for foreign investors in Chinese financial services companies (e.g. insurance services or credit rating agencies). The deal also allows easier entry for U.S companies willing to provide electronic payment services to the China market.

Manipulation of currencies – both countries have agreed to avoid currency manipulations for trade benefits. The details will become clearer over time. It is important to note that the total Chinese demand is not going up by $200 billion but only the demand from the U.S. U.S companies supplying to China from operations in other countries may lose business from those countries as a direct result of the trade deal.

The impact on U.S. business can be mixed to positive. Many U.S businesses will have much better opportunities now to start exports to China or increase exports to China. U.S businesses should look at this as an opportunity to expand the U.S operations. However, China may reduce imports from other countries in order to accommodate the additional U.S imports. Thus, any U.S business having operations in low cost countries and exporting to China from there may face a possibility of reduction in exports from such countries.

Moreover, U.S businesses with global operations that are also supplying to China, may need to re-align their businesses. As Chinese demand will now shift to U.S imports, some companies may look to shift the delivery of the final product and services to be from the U.S with support from operations in other countries or may have to move their entire base to the U.S. There could also be some negative impact for U.S owned businesses that are manufacturing in China and exporting to the U.S and other countries. Their sales may get affected, owing to the yuan being stronger in the future.

The positives for the US business are an increase in sales / exports for U.S businesses to China - A certain and quantified additional demand of $200 billion of goods and services can help many businesses to plan and invest in U.S operations. They will need to increase capacity to fulfill the additional Chinese demand. The punitive tariff will disappear for some imports / exports - This will benefit many U.S businesses that either import goods or export goods that were affected by these increased tariff rates. Entering the Chinese market with a reduced concern about possible IP theft IP thefts, trademark violations and counterfeiting have been a significant worry for many U.S businesses accessing the Chinese market

The drawbacks for the U.S business are the possible decline in global operations – As mentioned above, the U.S businesses having manufacturing and service delivery set ups in low cost countries (such as Malaysia or Philippines) may face a decline in sales to China from such operations. This may affect many businesses with significant capital investments in these countries, especially if such operations wholly or in the main focus on the Chinese market. Such U.S multinational businesses may also have to face cost increases from moving such operations (at least in part) to the U.S and incurring the overall higher costs of operating in the U.S.

Operational and recruitment bottlenecks – suddenly increasing the U.S production / service delivery might be a challenge for most U.S businesses in the short run. Especially in the current scenario of virtually zero unemployment and strict immigration rules in the US, the cost of employment may significantly increase for many U.S businesses. This could erode corporate profit margins on their sales to China.

Some of the points that U.S businesses can keep in mind for taking this opportunity includes: Start an office in China and quickly! – Any business that looks at this opportunity positively should look at setting up an operation in China. Such operations need not be a full-scale subsidiary company but can be a representative office to explore the possible opportunities. Set ups in China can take time and there are many compliance requirements, so planning and starting early is important. Remember, China is a tough market – the regulatory and cultural environment there is unique and having the right advisors is critical to success in China. Any U.S business that does not have experience in China needs to appoint experienced consultants with the right local contacts to enable it to enter and operate optimally in the Chinese market.

Look at the Global business model and realign – any business that has a manufacturing facility outside the U.S and is suppling mainly to China will need to revisit the delivery model. This could result in a slim down or change of focus of the local country operations.

In summary, the trade deal does look positive for many U.S businesses. However, on a closer look, the benefits may accrue more too small and medium sized businesses that may benefit owing to sudden additional Chinese demand. Large U.S businesses that have operations globally selling to China may suffer mainly owing to decrease in demand and may face a dilemma of incurring higher costs and consequentially lower profit margins if they shift this lost business to U.S. There would also be some costs associated with the realignment of product manufacturing and service delivery if these U.S businesses have significant investments in other countries. Note that the total Chinese demand is not going up by $200 billion but only the demand from the U.S, effectively this can simply mean more supply from the U.S and less from other countries.

There also remains a large uncertainty regarding the continuation of the policy given 2020 is a U.S presidential election year.

Shan Nair is the president of Nucleus, a one-stop global expansion solution for businesses and a consultant on international expansion.

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DrShanNair
The impact on U.S. business can be mixed to positive. Many U.S businesses will have much better opportunities now to start exports to China or increase exports to China. U.S businesses should look at this as an opportunity to expand the U.S operations.
china, trade, deal, us, businesses
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Thursday, 30 January 2020 05:34 PM
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