The effects of frayed goodwill with China will be rapid and intense – Community News
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The effects of frayed goodwill with China will be rapid and intense

Eamon McKinney will speak at the virtual portion of the IndustryWeek Manufacturing & Technology Conference. about the trade relationship between the US and China and how it is changing. The session will be live to virtual conference participants on December 8, 2021 at 12:30 PM and can be replayed afterwards.

Opinion/analysis

Undoubtedly, few in the United States need to be warned of the challenge of increased costs associated with supply shortages. It’s the old principle of supply and demand: when the availability of products falls, prices rise. This phenomenon is a driving force behind the inflation that our country is currently experiencing. It is not pleasant – but necessary – to point out that there will soon be an additional inflationary driver for goods and services that US companies source from China.

As COVID began to disrupt all aspects of business and industry, including the supply chain, US manufacturers began to rely heavily on the existing goodwill they had with their Chinese suppliers to resolve supply chain issues. This was possible because the Chinese traditionally believed in building relationships with their business partners. Goodwill is a critical factor of such a policy. In recent months, however, it has become clear that the goodwill reservoir is rapidly draining.

Inflation is just as big a problem in China as it is in the United States. Official inflation figures published by the government may or may not be accurate, but we can trust what we see with our own eyes. Inflation has taken a vengeance on China, and manufacturers there don’t believe it will be “transient” — and rightly so.

As in this country, inflation in China cannot be attributed to one single cause. Rising energy prices, raw material shortages leading to higher prices, rapidly rising shipping costs, etc. have all contributed to inflation levels not seen before in China. Understandably, there is a lot of anger in China about the United States, as they also see our country’s economic policies as a major contributor to their country’s inflation.

You can ask “How so?” Let me explain.

The US dollar is the world’s reserve currency and as such the medium of exchange for most international trade. A significant percentage of all dollars in circulation worldwide have been squeezed in recent years as tax revenues have fallen from the double whammy of the 2017 corporate tax cut and the impact of COVID on global trade. It is not necessary to be an economist to understand the impact this has had on governments holding US debt. For example, China currently owns more than a trillion dollars in US debt and sees its value eroding daily. Talk about a write-down of goodwill.

Consequently, inflation in the United States is driving inflation in all world markets. And because of our country’s reliance on selling its debt to foreign governments and investors, many countries see the United States in effect “exporting” its own inflation by decreasing the value of the dollars it holds.

Our country’s port fiasco is another source of frustration among Chinese manufacturers. The current situation is as follows: out of every four containers shipped from China to the US, only one is returned within a normal time frame while ships wait in ports. This shortage has severely limited China’s ability to serve its other international customers. Sentiment in China is now growing that shipments to other countries should be prioritized as containers used for those shipments are returned at short notice. There is no shipping shortage; there is a container shortage. And it will continue to do so until the US begins to return some of the containers currently piling up in its ports.

All this has led to pressure for Chinese manufacturers to raise their prices. And these price increases will be significant. There are projections here that in the next six months to a year, the prices of some export goods will rise by up to 20%. In the past, goodwill between Chinese suppliers and US customers could dampen this upward pressure. Today, that goodwill is much reduced and the Chinese are more pragmatic financially. Consequently, there can be little doubt that the product ordered in China for delivery next year will increase in price, further adding to the inflationary pressures of this country.

And the current thinking in China is that US manufacturers have little leverage to withstand these price increases as there is a global shortage of raw materials and parts, and as a result it will take a long time for current US-based manufacturing customers to recharge their batteries. to other suppliers. Regardless, the reduction in orders from the US is in line with the Chinese government’s industrial plan to become less dependent on trade with the United States.

Companies whose supply chain extends to China should be prepared to review their material acquisition budgets. The advice I would give to any company dealing with China is to focus on relationships. Get in touch, explain the issues and issues you are experiencing – and based on the remaining goodwill, they can try to come to some settlement.

Eamon McKinney, Ph.D., MBA, (Sinologist) is an expert on China-related business issues in the world. He has contributed numerous articles on the subject to publications including the Financial Times, The Economist and the Far Eastern Economic Review.