Don't Be Naive, China Holds Some Serious Trade Cards v. the U.S.

China’s state media launched a verbal assault on President Donald Trump’s administration this week.  “Washington is playing double-faced tactics in the ongoing trade war,” the People’s Daily, official newspaper of the Chinese Communist Party’s, asserted in an August 6 editorial blasting America’s “trade blackmail.”

“From $50 billion, to $200 billion and then the proposed $500 billion, from 10 percent to 25 percent, Washington’s tariff game has been seen through by China,” they wrote.  It’s quite clear that the Chinese are digging in.  A week prior, the Ministry of Commerce declared China must “retaliate to defend the nation’s dignity.”

Strong words for a country whose stock market benchmark has declined “nearly 25 percent from its late January high.”  Indeed, President Trump and his trade policy allies often point to China’s economic turmoil, coupled with the strength of the U.S. economy 4.1 percent GDP growth in the second quarter, record unemployment lows and consistently-strong corporate earnings that drive America’s stock indexes to near-record levels – as proof that exerting American “leverage” through tariffs will end well.  But China’s next move could damage prominent American brands – particularly Apple – for generations to come.

Tariff advocates note that, while the U.S. imported $505.6 billion in Chinese goods last year, the U.S. only exported $130.4 billion in goods to China, constraining the latter’s tariff capacity.  Given these factors, they contend, China can only sustain so much for so long before they must capitulate.

So far, China doesn’t seem to be budging.  In truth, this should come as no surprise. “[D]ealing with people in China is all about face – giving face, getting face, saving face and not letting that person lose face – then you’re all covered,” observed Christine Lu in a December 13, 2010 article by the International Herald Tribune.  What’s more – the concept of “saving face” in Chinese culture is especially pronounced in relations with the West.

[W]hen it comes to Westerners, there is a historic aspect to the Chinese concern about face, said Saul Gitlin of Kang & Lee Advertising.

“Because of China’s history of exploitation by foreign countries who colonized China or raided China for business purposes, particularly in the business sphere, Chinese do not want to be seen culturally as having been ‘had’ by Western businesspeople,” he said.

Who is President Trump, as we are reminded daily, but a “Western businessperson?”

But cultural ideas of “face” are not the only reasons China maintains its obstinance in the face of White House pressure.  Its dictator, Xi Jinping, effectively became “president-for-life” earlier this year.  Unlike our president, China’s holds a position and power that entitle him to implement policy without electoral interference or even any checks and balances.  In short, he is immune to the kind of political pressures Trump faces.  If he appears to be “had” by the Western businessman-turned-president Trump, his perception and unquestioned control are diminished.

Consequently, the Chinese government – whose ability to slap tariffs on U.S. goods is comparatively limited – is exploring numerous alternatives for retaliation.

A day after the Communist Party’s official newspaper released its editorial accusing the White House of “trade blackmail,” Hu Weijia took to the People’s Daily to label Apple a “bargaining chip” – suggesting that the multinational Silicon Valley giant may be subjected to special treatment by the Xi regime – and not a good kind of special.

Citing Apple’s milestone as the first $1 trillion American company by market cap, Hu asserts that “the company needs to do more to share the economic cake with local Chinese people” – particularly because “Apple’s contribution to job creation in China is notable, but the company enjoys most of the profits created from its Chinese business.”  While Hu is unclear as to what “sharing the economic cake” means, the implication is quite clear: “nationalist sentiment” will provoke anti-Apple social pressure and, ultimately, boycotts in China. 

While CNBC’s Jim Cramer insists that he “[doesn’t] think there’s a boycott” and the Chinese “would target some other companies first,” the suggestion in Chinese state media that its government may in fact target individual companies – namely, Apple – as a means of anti-tariff retaliation indicates that its chances of happening are higher than not.  It’s like a shot across the bow – a preview of China’s armament list.

Moreover, if the Chinese act against Apple, it will be in the form of a very-public or a more-subtle social pressure campaign.  Most certainly, in Asian cultures, peer pressure is widely understood to be far more pervasive and powerful than in the West.  The push for “nationalist sentiment” will certainly shame Chinese people into falling in line.  Furthermore, the Chinese government would likely deploy its “social credit system” with Apple.

As the Brookings Institution observes, “The system resembles an American credit score, but more than just low credit limits and high interest rates, a poor Chinese social credit score can lead to bans from travel, certain schools, luxury hotels, government positions, and even dating apps.”  This Orwellian nightmare – which tracks everything from jaywalking to in-store purchases and China anticipates all 1.35 billion citizens will be subject to in 2020 – is now “spread[ing] to more daily transactions.”

Imagine if buying an iPhone triggers a lower social credit score, but a smartphone by Chinese-owned Huawei boosts it.  Even if this pressure campaign lasted a short time – say, a year or two – it would have both short-term and long-term effects.  Immediately, it would likely cut into Apple’s bottom line.  But the long-run effects are more significant, impacting brand preference in dramatic ways.

I bought my first smartphone in 2008 at age 18.  It was a Samsung.  I bought my first new car in 2013.  It was a Hyundai.  I grew up drinking Coke – not Pepsi – at home.  Today, I still own a Samsung, I have my second Hyundai and I continue to prefer Coke.  That’s because we tend to prefer products we adopt early.

If the Chinese – especially Millennial and Gen Z Chinese – begin buying Huawei phones and snubbing Apple products, the chances they’ll make the “big switch” when it’s more socially acceptable – after adopting a new habit – will be slim.  Apple’s prevalence in China could be reduced for a long time.

While Trump thinks he’s playing the long game by taking some short-term tariff pain for long-term reforms, China has just introduced a possibility that could harm American companies for decades.  They’re playing an even longer game in part because Xi can afford it.

This is not to say that the U.S., or Apple, or anyone else should capitulate to Chinese threats.  Rather, it is to make clear that China does have formidable retaliatory alternatives to the “tariff-only” approach.  China’s cultural pressure to “save face,” its command-and-control economy and the absence of electoral accountability give Xi Jinping every reason to remain a trade warrior.  And assailing U.S. companies like Apple, scuttling corporate mergers like Qualcomm-NXP and instigating port delays are three non-tariff tools China may use.

They say all is fair in love and war.  The same goes for trade wars – and America must not subsume to the false sense of security that we will unquestionably outlast the Chinese.  It’s time to change strategies.