In today article we are going to discuss the dynamic relationships of the 3 biggest economic regional centres - the US, China and Europe. We look at Trump’s strategy and the world economic trends through the prism of Trump’s interview to Fox News.
In his exclusive interview with Fox, President Trump commented on China:
"We could cut off the whole relationship...By doing this it could help to save hundreds of billions of dollars."
Even some experts have classified those kinds of remarks as irresponsible and emotional, the whole interview is very remarkable. It reflects the consistent macroeconomic strategy aligned with the election slogan"Make America Great Again".
Trump’s administration is pushing the initiative to remove industrial supply chains from China and draws up plans to punish China over coronavirus outbreak.
"I'm very disappointed in China. I will tell you that right now.. We could do things in our country. We used to make our own product…. Probably is one of the main reasons I ran for president because I saw our that our car industry is leaving, going to Mexico. You know, Mexico makes 30% of our cars.”
So again, Trump emphasises on his intention to bring manufacturing back to the US.
What is the Trumps' strategy towards American companies? What’s about Apple?
“ We gave Apple a little bit of a break because they’re competing with a company that was a part of a trade deal that we made. So it was a little bit unfair to Apple, but we’re not allowing this anymore,” Trump said. “You know if we wanted to put up our own border like other countries do to us, Apple would build 100 per cent of its products in the United States. That’s the way it would work.”
Asked by Maria Bartiromo whether he would “consider giving companies tax breaks to return manufacturing operations to the US, Trump said he might tax them if they didn’t and suggested they had a duty to re-shore operations”. Trump said:
“One incentive, frankly, is to charge tax for them when they make product outside. We don’t have to do much for them. They have to do for us.”
Trump has clearly stated his intention to return the manufacturing back to the U.S.
To implement this initiative, of course, is not so simple task.
Statistics. What is the current state of the economy?
According to data published by the UN, China accounted for 28 percent of global manufacturing production in 2018. That puts the country by 11% ahead of the U.S., which used to have the global largest manufacturing output until 2010.
The U.S. economy is much less reliant on manufacturing these days: in 2018, the manufacturing sector accounted for just 11 percent of GDP in the world’s largest economy.
In 2018, the United States accounted for 15.2 percent of global gross domestic product (GDP) after adjusting for purchasing power parity (PPP). By 2024 his share was expected to drop to 13.86 percent, which is roughly a seventh of the worlds' total.
Let’s dive into the theory.
We would like to understand what is behind Trump's strategy.
The key framework within GVC methodology is to determine in-house versus outsourced production. The roots of such a decision -making process can be traced back to Adam Smith theory of division of labor (1776).
The value chain is a broader concept popularized by Michael Porter in 1985, his main thought was to apply the Ricardian principle of comparative advantage to the firm’s value chains. And the comparative advantage refers to the ability to produce goods and services at a lower opportunity cost.
The New Oxford American Dictionary defines it (the opportunity cost) as "the loss of potential gain from other alternatives when one alternative is chosen."
And to evaluate those alternatives is a pure risk management task with taking into account all strategic, political factors.
This theory is based on the assumption of the free-market without borders and national interests. There is a deep contradiction in the current economic model.
Donald Trums commented on the consideration of the cost labor:
"But see, the cheap labor turned out to be very expensive, because when you add what this has costing -- you just take a look at what’s happening. And when you add what’s costing by us with our drugs, our pharmaceutical products, so many different things"
Trump refers to that.“Cheap labour turned out to be very expensive.” It should be considered the cost of intra-regional deliveries, drop in demand and the need to protect their own markets and to create jobs internally.
And this is the trend of each of the big economic regions. The countries are forming big macroeconomic blocks, regions to pursue the economies and production within those blocks.
The cost of intra-regional deliveries declines.
Thus, the cost of labour is not a major factor in choosing those alternatives- to set up a production off-shore or outsource. It should be considered the cost of intra-regional deliveries, drop in demand and the need to protect their own markets and to create jobs internally.
Trump’s administration has already started implementing this strategy.
Which countries are the strategic partners for the U.S. global supply chain?
On 29th of April, US Secretary Michael Pompeo said that they discuss with a number of states ( Australia, India, Japan, New Zealand, Republic of Korea, and Vietnam) how they ".. restructure these supply chains to prevent something like this from ever happening again."
In May, TSMC is announced to build USD 12 billion a five-nanometer semiconductor plant in Arizona. TSMC is making up over 50% of the world's chip. It is intended that this powerful technology complex be vertically integrated.
In another part of the interview Donald Trump revealed that large parts of the F-35 fighter jet are produced in Turkey and noticed that such strategic sectors as pharma, defence sectors make those sectors politically sensitive and dependent on foreign relationships with those countries.
What is Trump's outlook for Europe?
Trump’s replied Maria Bartiromo in this interview:
“if you take Europe, European Union. It was formed for the benefit of themselves against us. It was formed to hurt us. If you take European Union, Maria, it’s so sad. They send cars over, no tax. If we want to send a car over there, it’s an impossibility.”
Currently, the US remains without a doubt the most important trade ally for all EU member states.
Here is the graph of the Exports and Imports of goods with China and the US, % of the total, 2018.
The only area in which EU´s economic links are significantly more substantial with China than with the US is the import of goods.
However, Germany’s relationship with the US has taken some particularly hard punches lately. There are talks for 3 years that Trump is planning to impose higher tariffs on German and other EU car producers.
German's new legislation for foreign private equity acquisition.
In Europe, there are growing fears that non-EU investors may take advantage of depressed valuations of strategically important European companies during the current coronavirus crisis. Just in late April Germany’s cabinet has approved draft legislation designed to tighten the foreign acquisition rules ( “FDI” regime) as a response to the foreign push for technology deals. Any non-European foreign company planning to buy more than 10% of a German firm operating a “critical infrastructure” (e.g. energy, water, defence, technology or media) are required to notify transactions and to obtain clearance for acquisitions of over 10% of the voting rights in German companies. This will be the third time Germany has tightened its FDI regime since 2017. The previous had been 25%.
In February 2020, Minister of Economy in Germany Peter Altmaier presented a "National Industry Strategy 2030" designed to dismiss powerful Chinese state-backed companies. Altmaier requested to set up a state fund that could outbid any pursues of foreign takeovers of German firms.
Statistic on Chinese investment in European countries.
All these measures have coincided with a steep decline in Chinese investment.
Chinese investment in Germany dropped over 70% ( from $2.5 billion in 2018 to just $0.7 billion) in 2019, and almost 95% in France, according to Baker McKenzie research.
According to MERICS (Mercator Institute of Chinese Studies), the Chinese foreign direct investment (FDI) in the European Union (EU) continued to decline in 2019. Chinese FDI transactions in the EU-28 plunged by 33 percent last year, from EUR 18 billion in 2018 to EUR 12 billion in 2019, bringing the total back to 2013 levels. The majority of investments went towards Northern Europe, overtaking the “Big 3” (UK, Germany and France). There is also a shift in the sectoral distribution of Chinese last year: from automotive to consumer products and services (40% of investment volume).
China and statistics on important regional ASEAN dynamics.
China is the biggest worldwide economy.
China as the USA are the biggest markets. The on-going trade war will be having a long-term effect not just on US imports but also on US manufacturers selling to the China market. It is a sizable share. China and regional integration. There is a power dynamic and the future of the Asia-Pacific. China’s gradualist approach to negotiating regional trade agreements. China shifted some of its sourcing towards the Asian region, and the imports in 2020 were up from ASEAN (163.5 percent), Taiwan (11.4 percent) and Japan (4.8 percent). In the same time, imports from China declined from the US (-12.6 percent), South Korea (-1.7 percent) and Australia (-1.6 percent).
Структура и тренды развития мировых рынков. (Structure and trend of world markets)
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