US-China trade war: Opportunities for investors and founders

Unless you’ve been living under a rock in recent years, you’ve heard of the US-China trade war.

My last piece focused on the investment war between the two countries, so now it’s time to dive into trade and what opportunities there are for founders and investors in this arena.

How we got here

China joined the World Trade Organization (WTO) in 2001 and committed to sweeping economic reforms that included tariff cuts for imported goods and intellectual property protections.

Since then, China’s economy has grown fivefold and is now the world’s second-largest by gross domestic product. The annual trade volume between the US and China has grown from a few billion dollars to hundreds of billions of dollars.

However, things took a turn when the Trump administration imposed tariffs on US$360 billion worth of Chinese imported goods (about 67% of total US imports from the country) between 2018 and 2020.

China responded by imposing tariffs on about US$60 billion worth of US imports. The Biden administration has continued by implementing anti-China industrial policies, including the CHIPS and Science Act, the Inflation Reduction Act, and the Infrastructure Investment and Jobs Act.

Despite all this, as we approach the fifth year of the trade war, trade in goods between the US and China climbed to a record high of  US$690.6 billion in 2022.

Where this is going

It’s clear that attempts to separate the US and China in global trade have been less effective than anticipated. Media headlines have also recently switched from calling it a “decoupling” to a “derisking” when describing the US approach to China.

Some think “derisking” is just decoupling in disguise, while others see it as a more practical approach for what the two sides hope to achieve. I fall into the latter category.

I see three key challenges that will make it difficult for the US and many other regions to decouple from China fully in global trade. Ultimately, the US and China must balance preserving national security and maintaining a healthy economic relationship, and derisking can accomplish that.

Nowhere else can manufacture like China

It will take decades to build highly efficient manufacturing clusters that have self-sufficient supplier ecosystems like those in China.

Recently, terms such as reshoring, friend-shoring, and multishoring have been trending in the media, all of which point toward reducing reliance on China’s supply chain. While it is valuable to invest in a more diversified and therefore more resilient supply chain strategy, I think it is equally important to acknowledge the strength of China’s supply chain.

One case in point is electronics. Ninety percent of the world’s electronics are produced in Shenzhen, where almost any electronic component supplier and manufacturing equipment can be found.

Apple has tried to move its supply chain away from China but with limited success. Bloomberg estimated that by 2030, the company would shift just 10% of iPhone production outside the country.

Apple has established factories in India and Vietnam, but most operations in these countries today are classified as final assembly, test, and pack (FATP). This requires Apple to produce components in China and then send them to these countries for assembly.

Still, the FATP process is often supervised by experts from China with deep manufacturing know-how. Hardly decoupling when the parts needed for assembly are made in China and the expertise needed is imported from there as well.

Apparel is another example. Fast-fashion giant Shein’s supply chain is concentrated in Guangzhou, which contains the most comprehensive apparel supplier and manufacturer ecosystem in the world – most suppliers are within a five-hour drive of each other.

Similar to Shenzhen’s role in electronics, Guangzhou’s self-sufficient supplier ecosystem enables Shein to have a shorter time to get its products to market, a higher capacity utilization that reduces unit costs, and better economies of scale. This is why the company adds an average of 6,000 new items daily.

Competing with Guangzhou or Shenzhen is not just about having cheap labor but about rebuilding an entirely vertically integrated supply chain and having the know-how to turn it into a highly efficient manufacturing cluster. Semiconductor firm TSMC is a recent example that shows how challenging it is to shift supply chains.

State-run China has a manufacturing advantage

A combination of in-state planning at the macro level (socialism) and market mechanisms at the micro level (capitalism) makes China very effective at coordinating national resources in the industries it wants to grow. The electric vehicle (EV) industry is a prime example.

The Chinese government acknowledged the importance of electrifying mobility over a decade ago. From 2009 to 2022, the government provided over US$29 billion in subsidies and tax breaks for the EV sector. Last year, it also spent US$546 billion in clean energy investments.

To help domestic EV companies stay in business in the 2010s – before widespread consumer adoption of the tech – China handed out procurement contracts with public transportation systems. Today, state-owned installers have built more than 1.8 million public chargers to accelerate domestic adoption.

Government support has given a head start not only to domestic EV companies but also to battery makers. China has achieved technical breakthroughs in battery manufacturing, leading the way in both lithium-ion and sodium-ion batteries and controlling the majority of the refinery capacity.

Solar photovoltaic panels (PV) are another example of how government influence has accelerated both the development and the adoption of tech in China and globally. The country today controls over 75% of every key stage of solar PV manufacturing and processing globally – from polysilicon production to soldering finished solar cells and modules onto panels.

The same pattern will likely recur in other strategically critical sectors in China. The Chinese government’s power to plan and allocate national resources reinforces the country as a manufacturing superpower, making it even harder for other regions to catch up and for the rest of the world to abandon the country in global trade.

China is a major consumer for Western companies

China is one of the largest markets – if not the largest – for many US corporations. Starbucks founder Howard Schultz visited his Chinese employees and stores in April in Beijing as the company plans to open one store nearly every nine hours in China for the next three years. This will push China past the US to become the coffee chain’s biggest market by 2025.

Over the past few months, top US corporate CEOs, including Tim Cook, Elon Musk, and Jamie Dimon, visited China to show their eagerness to stay in the market. For Musk’s Tesla, the high stakes are obvious, with China accounting for 60% of global EV sales last year.

It is hard to isolate China to keep its potential economic dominance in check. But for those who want that, there may be no reason to, not when domestic consumption in China is weak right now and the government is eager to keep cross-border trade flows open.

In the long term, participating in global trade is the most effective way for China to circulate more yuan into the world currency system, thus improving its stature as a currency.

Suggestions for entrepreneurs and investors

Despite hiccups and restrictions along the way, I’m optimistic that trade between the US, China, and the rest of the world will continue to expand. For entrepreneurs and investors seeking to capitalize on global trade during these turbulent times, below are three areas you should consider.

In cross-border, B2B will take share from B2C

Geopolitical tensions, and their focus on data privacy issues and other sensitive information, will keep the B2C sector in the hands of conglomerates. After all, it’s a big-money, big-legal-department game.

For founders, the play may be in the next generation of B2B platforms instead. In a cross-border context, B2B refers to merchants – in this case, merchants in the West – sourcing from overseas suppliers in the East or the regions with supply chain advantages and then reselling to distributors in the West or direct to consumers.

Though still at the risk of trade tariffs, the fact that overseas suppliers do not have a direct relationship with local consumers protects the suppliers from data privacy and ownership regulations. At the same time, local wholesalers and merchants can benefit from buying in bulk at factory prices and generating high margins via reselling.

Diversification and flexibility are key to supply chain strategy

More than 40% of global trade today is concentrated in small circles of relationships among countries, meaning importing economies rely on three or fewer nations for their share of global trade.

While I don’t think moving a supply chain away from China is easy, I do believe in lowering exposure risk by exploring a “China plus others” strategy to avoid sudden disruptions.

Services that can help businesses source more cost-effectively from different regions while assembling a resilient and diversified supplier pool will be in high demand.

New alliances will emerge, creating new growth drivers

The changing world order is creating new alliances. For example, China’s growing role in the Middle East can hardly be ignored.

I anticipate this will give rise to new economic blocs. There may be less trade among the blocs, especially in politically sensitive sectors.

However, there is likely to be a deepening of trade within each bloc. Companies that either support this new alliance formation or ride the growth in trade volume within new economic blocs will enjoy tailwinds.