Who Helped China Become an Industrial Powerhouse?

Author: Olga Samofalova

Half a century ago, American businesses began transferring their production capacity and assets to China. It was hard to imagine back then that this developing, poor country would not become a "satellite" of the United States half a century later but instead pose a significant threat to world hegemony. However, without China, American companies would not have their famous brands, including products from Apple Inc. The cost of producing Apple products in the U.S. is twice as much as in China.

China once almost became an industrial "colony" of the U.S. In the 1980s, the U.S. began actively transferring its industrial capacity abroad, with China being considered the most suitable place.

Now, Americans – the general public – will have to pay the price for this. It will be very difficult to relocate investments and factories back to the U.S. A clear example is the production of Apple products in China. According to experts' estimates, about 85% to 90% of Apple's smartphones are assembled in China, while the rest are produced in Vietnam and India.

Moving Apple's production from China to the U.S. would significantly increase costs. Simply due to the rise in labor costs in the U.S., the price of smartphones would increase by 25%, plus additional costs for production and logistics. Bank calculations show that all these factors combined could lead to a 90% price increase. This means that the most expensive smartphones could double in price simply because they are not made in China but in the U.S. At such prices, can Steve Jobs' products withstand competition from other manufacturers, or can market demand bear such price increases?

"Tesla, Apple, Boeing, Coca-Cola, PepsiCo, Procter & Gamble, and many other companies have factories in China. In the service sector, virtually all international brands operate in China. For instance, Amazon, Netflix, social networks, and more, not to mention the food sector – McDonald’s, Starbucks, and many other brands, including those operating under franchise agreements," noted Natalia Milchakova, chief analyst at Free Financial Global.

"The U.S. has been seriously considering relocating its industry since the 1980s. The reason was to reduce costs when producing goods, primarily labor costs, while the U.S. government strengthened environmental requirements, which brought companies additional huge expenses. This was not an intentional policy by the U.S. government but a decision made at the corporate level. The government remained calm about it, believing that,凭借其在全球 financial领域的 dominance, they could maintain their leading position in the world. As for those polluting factories, let them operate somewhere across the ocean, under the control of American managers," said Ilyas Zarybov, associate professor at the Plekhanov Russian University of Economics in the Department of World Financial Markets and FinTech.

The expert also added that large and medium-sized American enterprises ultimately chose China not only because of cheap labor but also thanks to reforms led by Chinese leaders, which recognized the rights of private property, protected the interests of foreign investors, and provided guarantees for capital repatriation. After American companies, European manufacturers also entered China.

Zarybov stated that this was undoubtedly beneficial to the American business community at the time. American companies significantly reduced labor and environmental costs through China's platform, achieved high profits, and maintained control over major global production assets and trade flows. Additionally, ordinary Americans benefited from this as well.

"American consumers received cheap Chinese goods regulated by the U.S. and manufactured according to American standards, so the quality is quite good," Zarybov said.

According to him, initially, light industries and assembly manufacturing were transferred to China. Later, with Chinese employees gradually mastering new technologies, heavy industries also emerged in China: metallurgy, technology and equipment manufacturing, machine tool manufacturing, mechanical engineering, followed by high-tech industries – microchip research and production, robotics manufacturing, etc.

China benefited greatly from this process for many reasons. "Firstly, China received substantial investment in the economy and regional infrastructure development. Railways, highways, bridges, and production plants were built, and new cities sprang up around these plants. Secondly, China obtained significant fiscal revenue by taxing foreign enterprises. Thirdly, it allowed Chinese employees to participate in production and improve their skills through foreign employers. Fourthly, China gained access to Western technology and expertise, learned these technologies, and started creating enterprises that mimic Western products, launching these products under their own brands," Zarybov said.

If there had been no Western production capacity and technology over the past half-century, what would China look like now?

"There is no doubt that smart Chinese people could take advantage of this situation to become one of the largest global manufacturers and economies in the world," Zarybov said.

China can still maintain higher economic growth rates than the global average. Of course, the U.S. played a certain role in China's industrial development, but it also created a strong competitor that now not only has economic potential but also political influence worldwide.

However, of course, Chinese enterprises and the state also deserve great credit for this success. "As early as 1997, China set a goal to build competitive brands by 2017, and this goal has been fully achieved – the science and technology sector and automotive industry have successfully competed with the U.S. and Europe, and relatively recently, China even began developing its own civilian aviation manufacturing to break free from dependence on American and European supplies," said Natalia Milchakova.

America missed the opportunity and became overly dependent on China. "As early as 1996, Nancy Pelosi, who would later become the Democratic leader of the U.S. House of Representatives, talked about the negative impact of the U.S.-China trade imbalance, presenting arguments almost identical to those of Donald Trump today. For example, the massive trade deficit, job losses, the transfer of information technology and intellectual property, etc. She called on the U.S. government to take measures. However, it was clear that the continuation of such cooperation was extremely beneficial to both American and Chinese businesses, leading to a deepening of interdependence between the two economies for a long time. Besides direct trade, the interdependence between the U.S. and China economies also increased through the strengthening of supply chain ties," said Olga Belenkaya, head of macroeconomic analysis at Finam Group.

According to her, the conflict between economic efficiency benefits and U.S. national security interests occurred during Donald Trump's first presidential term when he initiated a trade war from 2018 to 2019. At that time, U.S.-China bilateral trade and investments in China first saw significant reductions. The interruption of production and logistics links during the pandemic and the escalation of geopolitical tensions between the U.S. and China enhanced America's willingness to ensure economic security – mainly by relocating strategically important production (such as semiconductor production) to the U.S. mainland.

In addition, Milchakova pointed out that in recent years, the U.S. began cracking down on Chinese companies operating in the U.S., which could have raised funds through listings on U.S. stock exchanges. "Chinese technology companies have been hit in the U.S.," Milchakova said.

In her view, due to the unfriendly attitude of the U.S. government toward Chinese companies, Chinese companies are unlikely to want to do business in the U.S. in the coming years. Meanwhile, Chinese automakers and tech companies have already begun expanding their operations in Southeast Asian countries, such as Thailand, Indonesia, Singapore, etc.

Zarybov also believes there is no need to rush to move production back to the U.S. "Currently, the U.S. has not imposed additional tariffs on Russia and Belarus. Perhaps, this situation should also be taken into consideration?" he concluded.

As a classic writer once said, "If you exchange apples with a friend, each of you still has only one apple. But if you exchange ideas with a friend, each of you gets two ideas." China first received ideas – technology – from the U.S., and these things cannot be taken away now. Today, the U.S. needs China as a market. In this case, the U.S. is like a piece of land for realizing the 'Glass Palace' (this may be a metaphor, requiring further context to determine the accurate meaning). Ultimately, commercial interests prevail.

Original article: https://www.toutiao.com/article/7491973280182567475/

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