The China Price – Part Two

Redwood Comment
Published:  11 April, 2018
Dr Mike Redwood

When the leather industry met for the World Leather Congress in Shanghai last year, it was made very clear by Stephen Sothmann, the President of the U.S. Hide, Skin and Leather Association (USHSLA), that no one in the U.S. leather industry value chain, from cattle to retail, wanted to get involved in tariffs.

The U.S. has built its economic place in the world over the last seven decades based on free trade and the elimination of tariffs, and an associated restructuring of global supply chains. It has been far and away the world leader in these developments.

The tsunami towards China was emphasised by an article called “The China Price” in Business Week, December 6, 2004. This was the moment when it became public that companies such as Walmart had recognised what good value sourcing items from China would be for their customers and their shareholders. The Business Week article paraphrased what Walmart was saying to suppliers: “Cut your price at least 30% or lose your customers. Nearly every manufacturer is vulnerable -- from furniture to networking gear. The result: a massive shift in economic power is underway.”

Yet America has continued to do well, with a growing economy and growing employment. More recently, the excitement has been watching the outcome of China becoming middle class which has meant a re-examination of these supply chains. For some items such as American meat and soya (to feed Chinese pigs), the Chinese market is growing. For other items, China’s workforce is less keen; for example, it is harder for China to make inexpensive footwear for the U.S. market, so the production is both changing in nature and location.

Tariffs on meat, hides, footwear and automobiles

The current tariff arguments have come up quickly. Meat, hides, footwear and automobiles are all being talked about, among a host of other items. President Trump is known to be hard to predict and Xi Jinping has just been proclaimed as a lifetime President which releases him from a lot of normal constraints. The consequence is that the outcome is unpredictable.

Running in the background is the relentless advancement of China’s global influence largely lead by the ‘Belt and Road’ initiative, but now accelerating as the U.S. steps back and leaves a vacuum at the very moment China is looking to push forward.

Now is a good moment to remind ourselves that the concept of Europe (and especially “The West”) is a recent one, and the domination of the last three centuries provided by military and manufacturing engineering has been only a brief period in the history of world trade. The global economy’s centre of gravity sat somewhere in the mid-Atlantic from 1945-75 but has been moving East since then, and now we see both the economic and political focal point shifting to Asia, to eventually end somewhere between India and China. Very close to where it was for most of world history.

It also means that we are looking at a world that will not be functioning on the platform of democracy as we have come to know it, but with a variety of different systems managing capitalism. We should also anticipate a diminution in the role of international bodies such as the IMF, the World Bank and the UN.

If we think our industry is merely being temporarily pushed around, awaiting the moment when everything will return to normal we are making a mistake. Much of what is going on has no reverse gear and requires scenario planning for future change.

Dr Mike Redwood

April 11, 2017

mike@internationalleathermaker.com

Follow Dr Mike Redwood on twitter: @michaelredwood

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