The business ties that bind the US and China are strong but fraying
IF YOU follow the news, you know that tensions between the United States and China are high and that the commercial relationship between the two biggest trading nations on the planet has been fraying.
Yet, amid the ominous headlines about a possible “decoupling” of the US and China, you might be surprised by how strong and binding their financial ties remain.
Many big US companies depend on China for a substantial part of their income and rely on Chinese suppliers and factories for their products. The two economies are closely linked, and, as an old China hand, I think that’s a good thing. It implies that even if relations deteriorate further, the countries have many incentives for pulling back from the brink of serious conflict.
Consider that while the publicly traded US companies in the S&P 500 obtain almost 60 per cent of their revenue domestically, the biggest source of their foreign sales is China. That’s according to estimates from the financial data company FactSet, which said that sales from China amounted to 7.1 per cent of S&P 500 revenues for the 12 months through December. The second-largest foreign source was Japan, with 2.6 per cent; followed by Germany and Britain, with 2.2 per cent each; and then Taiwan, with 1.8 per cent.
Numbers such as these are critical in assessing US-China relations, Professor Dale Copeland, a political scientist at the University of Virginia, said in an interview. “Expectations of future profits are a key and often neglected factor in international relations,” he said. Prof Copeland is the author of A World Safe for Commerce: American Foreign Policy From the Revolution to the Rise of China.
“History shows that when a major power cuts off business and resources abruptly – so that prospects for future commerce look dim – the possibility of war becomes much greater,” he added. “Fortunately, that hasn’t happened so far with the United States and China. Greater conflict, even war – aren’t inevitable. There are still plenty of opportunities for future business and, I think, that is, and should be, a deliberate part of current US policy.”
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The case against China
Corporate earnings provide only one perspective on a complex issue. But they are eye-opening because they seem to fly in the face of the drumroll of conflicts and restrictions between the US and China.
From tariffs to technology bans to concerns about TikTok, the Biden administration has been cracking down on China, which, it says, is abusing long-standing commercial relationships, subsidising local industries directly and indirectly, obtaining US intellectual property illicitly and fundamentally threatening US national security. US intelligence estimated that China had “the capability to directly compete with the United States and US allies” and, if unopposed, could “alter the rules-based global order” in its favour.
It’s an election year in the US and the country’s new China policies build on a shift that began during the Trump administration. Donald Trump’s advisers now say that if he is re-elected, he will aim for a full “decoupling” from China, though he has been inconsistent: He recently questioned the need to require the Chinese owners of TikTok to sell the app or shut it down in the US, but as president, he tried to force a sale.
China’s reaction to recent US measures has been muted. But some further response is more likely if the US keeps pushing for an allied commercial front that aims to prevent Chinese factories from exporting torrents of low-cost goods including electric vehicles, solar panels and steel that could hurt local industries and cause domestic dislocations in many countries.
Porous barriers
The steepest targeted tariffs – including the new 100 per cent tariff on Chinese electric vehicles – are on goods that aren’t being imported in large volumes into the US. That means that President Joe Biden’s new tariffs wouldn’t change the overall picture much, an analysis by Oxford Economics, an independent research firm, suggested.
The trade-weighted average US tariff on goods from all nations was just “1.6 per cent before the Trump trade wars and it rose to as much as 3.1 per cent”, Ryan Sweet, the chief US economist at the firm, said in an e-mail. Before Biden’s latest tariffs, the average US tariff was 2.7 per cent, he said, and the new tariffs would “permanently add 0.14 per cent to the effective tariff rate”.
But the effective tariff will drop below 2.3 per cent over the next decade, he projected, as businesses figure out ways of avoiding “the Trump/Biden tariff hikes”. That assumes the tariff wars don’t worsen.
To put that into perspective, the World Bank calculated that the worldwide average tariff was 2.6 per cent in 2017, before the US-China conflict began. So the US is still not a global outlier, even if it is no longer reducing trade barriers and lowering costs for consumers. At this point, as US corporate earnings reports show, there are still vast opportunities for profitable commerce between the two countries.
The chip wars
What I find striking is that even companies that design, manufacture and create tools for advanced silicon chips continue to receive substantial revenues from China.
Recall that in 2022, the US began to impose export controls on such companies from countries that used US technology, restricting their sales to China. At the same time, with the Chips Act, the US began subsidising construction of domestic semiconductor foundries, effectively replicating parallel efforts that China had begun earlier.
Chris Miller, a historian at the Fletcher School at Tufts University who wrote Chip War: The Fight for the World’s Most Critical Technology, said that US restrictions are calibrated so that even some advanced chips are being shipped to China. “It’s the chips that are critical for AI (artificial intelligence) that the US is really targeting. Others are getting through,” he said.
Nvidia, the foremost designer of the chips that make AI possible, is prohibited from shipping its most advanced products to China. That has dented its business there. Jensen Huang, the CEO of Nvidia, said in an earnings call in the past week that Nvidia’s business in China had declined “because of the limitations on our technology”. For 2023, FactSet estimated that China was Nvidia’s third-biggest market, with 16.6 per cent of its total sales, behind only the US, with 44.3 per cent, and Taiwan, with 22 per cent.
In fact, all of the semiconductor companies I looked at – Nvidia, Broadcom, AMD, Intel, Taiwan Semiconductor, Samsung, Lam Research, KLA and Tokyo Electronics – received substantial revenue from China in 2023. China was among the companies’ top three markets, and, in most cases, ranked No 1. Intel, for example, received 26.8 per cent of its revenue from China.
The case of ASML, a Dutch company, is instructive. The company makes lithography machines that are needed to etch circuits for the smallest and most cutting-edge chips. Roger Dassen, the company’s chief financial officer, said in an earnings call in April that the US ban could eliminate 10-15 per cent of its China sales.
Nonetheless, he said: “We’re still looking at a strong sales level for China for this year.” FactSet estimated that ASML received 25.8 per cent of its revenues from China in 2023. Revenue from the US was only 11.4 per cent.
Consider Apple. It’s not just that China accounted for 17.8 per cent of the company’s revenue in 2023, second only to the US. It’s that Apple routinely ships large quantities of tiny, advanced, state-of-the-art semiconductors in and out of China. “The regulations were written to allow this to happen,” Miller said.
The iPhone 15 in my pocket contains a 4-nanometre chip designed by Apple in California, made in Taiwan, shipped to China for assembly and then shipped back to consumers like me in New York. The iPhone 15 Pro already uses 3-nanometre chips, and Apple is preparing to incorporate even more advanced 2-nanometre chips from Taiwan Semiconductor. All this technology is beyond China’s commercial capability. Apple did not respond to a request for comment.
This past week, China conducted military exercises in the waters around Taiwan, issuing a “stern warning” against moves towards the island’s independence. China was also demonstrating that it could cut off access to the advanced silicon chips that have become the jet fuel for the world’s stock markets.
The peak of globalisation may have passed, but peaks come and go. Long-term trends are what matter.
It’s in everyone’s interest that the US and China coexist peacefully. In their search for profit, the world’s businesses are still finding ways to make that happen.
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