Economics » US-China: Working harder to achieve less

Uncertainty in corporate decision-making has been the biggest casualty of the US-China trade war, and deserves more headlines than the international row itself. Businesses all over the world, and the US is certainly no exception, are pragmatic to a fault.

When faced with supply chain issues, price increases, or unexpected staffing changes, they are able to rejigger their business models, as conditions require. But most of those adjustments come in the wake of permanent changes. As this Sino-US dispute is indefinite in its duration, businesses are temporarily paralyzed in terms of their next steps.

I have been fortunate enough to be traveling to and doing business in China for over 25 years, making multiple trips annually. Along with our Boston University business students, we either visit companies to learn about their strategies or offer management consulting type services. Two weeks ago when I was in Beijing, the mood was equally dispirited as it is in the US.

This is because a market only works when there are active buyers and sellers, and unexpected, and essentially across-the-board tariffs, immediately halt commerce in its tracks. The timing for China is especially problematic as in light of a slowing export market, they’re aggressively moving to increase domestic consumption. Listed amongst the globe’s largest savers, price increases on staples don’t encourage citizens to happily part with their Renminbi.

In the US, classic strategic planning generally involves a 6 to 18 month timeframe. Time allows executives to adequately prepare plans of action, effectively implement them, and make tweaks based on customer feedback and ongoing market intelligence. China is quickly following suit with its own business practices. On both sides of the world, the current environment is dangerously close to the tail truly wagging the proverbial dog.

It’s one thing to call in a favor by temporarily locating an alternative supplier of goods. But the buyer will never receive the best price, as both parties know it’s a one shot deal. Alternatively, distributors are happy to absorb short-term price increases, to avoid upsetting the status quo or even worse, annoying their strongest customers.

However, we are now more than six months into what everyone thought was international sabre-rattling at its best, and with no end in sight. So where do we go from here? Here are some possible resolutions to improve conditions for both countries:

Create parallel supply chains:

Although inefficient, I recommend that businesses begin permanently establishing two sets of international supply chains. The lower volume will prevent optimal economies of scale but at least will enable better pricing in exchange for higher unit orders. It’s always good to have a backup plan, anyway, and it keeps suppliers honest knowing that they are not the only game in town. A fresh set of eyes might bring with it new ideas for existing or future products.

Introduce gradual price increases:

Businesses should begin advising their clients that gradual price increases should be expected during most of 2019. Such transparency will not only allow for better consumer planning but will also maintain existing relationships. Spin marketing might work for new relationships or truly force majeure type situations, but actions will always speak louder than words. Customers should respect that you’ve absorbed things up until now and likely won’t be surprised your prices will rise. While a business might be able to shoulder, say, an eventual 10-15% price increase, very few are designed to do so immediately.

Focus on quality, not location of origination:

Consumers these days focus on price more so than anything else. While everyone in theory wants to support the local corner store and/or patriotically support their country, idealism fades into reality when the gap between the two becomes meaningful. The good news is that most people still pay up for quality. Focus manufacturing efforts on delivering true value to customers, even if the final assembly occurs multiple time zones away.

Keep innovating and experimenting:

Entrepreneurs and executives sometimes make their best decisions when the chips are down. Use this unchartered territory to institute true out-of-the-box thinking. It would have been unfathomable several years ago for a company like Tesla to enter the Chinese market without a partner. Conversely, the US is catching up as consumer behaviors are beginning to mimic the nearly cashless e-commerce wave embraced by millions from Harbin to Shanghai, and everywhere in between.

I applaud what our government is trying to do in terms of making US companies more competitive and keeping American jobs secure. But most successful government legislation usually has a 2-3 year gestation period before business conditions are discernibly affected.

Perpetuating a trade war only adds noise to an already complicated situation and bilateral relationship, and causes people to work the same, or even harder, to make identical amounts of money. I would encourage the People’s Republic and the US to eliminate the tit-for-tat tariffs, and instead cooperate to establish a mutually beneficial trade policy.

While some industries on both sides of the Pacific might be respectively adversely (and perhaps permanently) affected by weakened sales, there’s more to be gained by increasing collective longer-term GDP growth prospects rather than perpetuating the current mood of belligerence.