Despite the frequent ups and downs in the political relationship between Beijing and Washington, trade between the world’s two largest economies is booming. Away from Capitol Hill, officials at the US state level are forging deals to sell their goods to China and bring Chinese investment the other way to create jobs and power the domestic economic recovery, as well as build lasting ties to Asia, which has emerged from the financial crisis as the most important regional driver of global economic growth.
Behind the scenes are organizations like Shanghai-based consultancy The Center of American States (CAS), which since 1996 has been building ties between China and states across the US. Ning Shao, CAS chief executive, tells China Economic Review that US firms must adjust as China becomes a “normal” market and why we have to wait to see if re-shoring becomes a sustainable trend.
The relationship between the US and China has sometimes been tense. So how has that affected the bilateral trade relationship, in your view, and do you fear any kind of disruption in commercial ties between the US and China?
Duties and other measures are disruptive. For example, there was a Chinese company in Arizona that had to close because of such problems. The public policy uncertainty in US-China trade is mutual; US investments in China are also subject to public policy changes. I think you also have a view that a lot of Chinese companies are concerned when they enter the US market. But from a local view, we don’t set policy, typically all the policies are bilateral and federal policies, so we all have to face the challenges of maximizing the opportunity for Chinese investment to the United States and mitigate some of the risk by assisting them [Chinese firms] with the understanding of how the system works, and also sometimes hopefully avoid the policy constraints of foreign investment in each other.
Many people in the business community in the US are unhappy about what they see as restrictive policies from China, in terms of export subsidies for example, or trade barriers. What are your views on that – do you see any of that changing in the medium-to-short term?
In general, of course, we have to understand some of the changes are inevitable in terms of China becoming a normal market, because when you enjoyed the favorable policy when China opened the door and tried to attract investment, it really often put extremely favorable terms on the table just to attract foreign investment. You could presumably argue that some of the policy of course that was put on the table put Chinese companies at a disadvantage, because if the Chinese companies had to pay 30% tax, and the US firm had a 5% tax holiday.
So I think when we talk about a level field, we have to understand that the Chinese government is also being pushed on the other side by the Chinese companies, whether state-owned or private, to argue for a level field, which is called national treatment, so everybody should be treated fairly and freely, and instead of just treating international investment as a national policy.
So that’s sort of a general trend and some of the favorable incentive programs that China put in place as part of the reform are probably going to be gradually eased out, so China will be more normal, just like the United States. So I think some of the issues you mentioned are, probably as a macro adjustment of the policy, from a longer-term perspective that is inevitable. China will have to be a normal market.
I also like to think positive. If you look at the larger picture, the positive side of the US-China relationship – trade, investment, tourism, education all that – it far surpasses all the challenges that we have between the two. And therefore, we have to have a perspective. If you open a paper every day, of course you only see some of the trouble spots. But if you’re distracted with that then sometimes you’re not able to see the rest, because the mainstream overall relationship between the US and China has been very positive.
Several of the US states that you represent have seen huge increases in exports to China. What are the main sectors, and by how long and by how much can this growth continue?
It’s really hard sometimes to predict the future, but just look at Michigan. Governor Snyder has come to China every year since he was elected governor [in 2011]. That’s unprecedented, having one governor to come to one country every year. Michigan’s largest trade with China is still in the auto sector, chemicals and machinery sort of as a general category, and there are some also agricultural products… aerospace products and parts having some comfortable growth, as well as semiconductors and electronics.
With the US, I think there are three things. One is technical products and more advanced manufacturing products are still enjoying a favorable advantage in China. Agricultural products, products that are applied to natural resources and efficiency, I think the US has one of the most efficient agricultural production and supply chain systems in the world. And the third category would be service industry, which typically is not on the bilateral numbers that we quote, but on the ground we’ve seen a lot of service firms that are coming to China, whether CPA, legal, design, and advisories and education.
What are your views about re-shoring, the trend of US firms moving manufacturing operations back home from China?
The global supply chain is market-driven. It’s dictated by raw material supply, dictated by logistics, and some of course in the context of macro policy as well. The US is sort of beginning to gain its manufacturing advantage for several reasons. One is that, if you look at jobs that are coming back to the US market, they are being paid at a much lower rate than they have historically. The second one, a lot of the jobs that are coming to the US market are driven by the need for access to cheaper energy and raw materials. Of course historically China became an attraction for investment because of the cheaper labor or relatively affordable cheaper labor. As China is becoming a much more prosperous economy the cost of production rises and that consideration is no longer as important. I think we are seeing some manufacturing coming back, and also we’ve seen some Chinese manufacturing come to the US, so that’s a good sign. But how sustainable is that trend is really I think is for the future history to tell.
You’ve worked with partners in the government sector and private sector and the non-profit, so what kind of advice would you give to organizations in each of these different sectors about how to engage with China?
Really, the bottom line is that China is such a fast-changing environment for anyone to be in, and even for myself, who’s been doing this for a long time, so you have to be really adapting to the fast-changing environment, whether you’re operating on the government-to-government level, corporate level, not-for-profit or educational exchanges, understanding the changing landscape. Some of the changing priorities in the Chinese economy are opportunities.
We were just at a meeting and talking about the change in healthcare. The reform of China will create a lot of opportunity for the US market in the overall healthcare sector. And just understanding that trend and leveraging what are the priorities for China, [which] has a five-year plan and then has a longer plan, understanding what the priorities for the Chinese economy will help, not only business development but also help to align your resources with that of China’s. So that’s the smartest advice.
What are they doing wrong that you think they should change?
A lot of US organizations, they look at government relationships as compliance. In the US, that’s true. A lot of companies have offices in Washington DC. They just want to mak
e sure of course there’s a compliance function, that they don’t violate any federal laws. In China, compliance is important, but the most important function of government relationship, understanding where the government mandate is coming from or going towards, is not compliance, but rather strategically to be aligned with where the opportunities are and to avoid some of the challenges.
For instance, recently the pharmaceutical industry has gone through a major overhaul in the cleaning up of the industry. That is very consistent with the entire Chinese cleanup campaign, which has been overdue. It’s gone through a reform, added to that is the anti-corruption campaign, which has of course caught some of the major pharmaceutical companies by surprise. It shouldn’t have, because they need to understand not just public policy… Some of that could have been avoided.