Executive Courses

Why do we have trade wars?

“A trade war would be a disaster for the world”

– Jack Ma

A major trade war is currently underway between the two biggest economies of the World – USA and China. The imbalance of trade is said to be a reason for this trade war, which began in 2017, but it seems to be much more than what meets the eye.

Many businesses across the world which wish to do business or are currently doing business in China have been complaining of unfair treatment at the hands of the government. These companies cannot sell their products without tying up with a local Chinese partner.

Foreign companies are forced to transfer their proprietary technology to the local partner, in order to manufacture and sell their products. This has allowed the Chinese to gain access to superior manufacturing and other product technologies at practically no cost. It lets them use this knowledge to start other businesses and compete with the same companies globally.

MNCs are not in a position to fight these policies as they desperately need access to Chinese markets. Most MNCs are publicly traded and by not selling their products in Chinese markets they miss out on a large chunk of revenue which is huge, considering China is the 2nd largest economy of the world.

This has had many consequences globally:

  1. Chinese companies are now market leaders in a host of industries. Due to economies of scales and superior technology, many companies are now facing stiff competition from China.
  2. Chinese giants are acquiring many leading American and European companies. Many industrial giants across the globe are now being acquired by Chinese companies. This is providing more technology and economies of scale to Chinese companies. Many countries are afraid that all the jobs will be shipped back to China.
  3. Chinese companies depend heavily on government subsidies. This is why, many Chinese companies are able to sell products at rates that are much lower than other MNCs. This is looked upon as unfair competition (meddling by the Chinese government) by governments across the world.

These have given rise to Chinese industrial giants, which are dominating their respective industries and leave little scope for other competitors to grow. Huawei is a clear example of this.

With a global revenue of $108 billion, and a year on year growth of 20%, Huawei is one company every western government is wary of. Huawei is today angling to revamp the 5G telecom infrastructure on every continent. 5G is said to be the technology that will support the next generation of mobile and smart devices.

Huawei is also in the business of laying undersea cables, which carry over 95% of all global internet traffic.

The best example is United Kingdom (UK). It started by laying undersea cables between UK and France and proceeded to lay cables and telegraphs in all the countries it ruled. This allowed UK to be a hub for all important communications and finance industry. The UK is still an important node for all global finance and telecom infrastructure.

With companies like Huawei, China threatens to dethrone western countries from their dominant position and be the most important economy of the world. This would have been fair game if all the technology was built on its own, but with accusations of spying and technology theft – governments are unwilling to let Huawei operate on its shores.

This is believed to be the real reason behind the current trade wars. Western countries believe that China is using the wrong means to get ahead and be the largest economy. In order to stymie their progress, governments are fining Chinese companies with tariffs – in the hope of preventing another global giant like Huawei.

This is turning out to be difficult as Huawei has today developed technology that is far superior than most of its competitors. Ex: Nokia- Siemens, which is said to be the next leader in telecom equipment and networks, is said to be years behind Huawei. Without this technology, countries can expect their businesses to fall far behind other countries which have Huawei’s technology. It has put many countries in a tough spot as they are worried about security and do not wish to let Huawei go scot-free.

Our guess? The well prepared always win! Countries like USA and Germany invest heavily in research and innovation and are quite well prepared to take on the Chinese threat. They continue to have well established MNCs which can take on the Chinese threat head on. Before taking on an adversary, they seem to have planned about the repercussions well in advance.

However, not all countries are prepared to take this threat head on and hence are unable to take any concrete steps.

Effective risk management is one of the most important task which many leaders have to carry out. Without proper planning and contingencies in place, a company can face heavy losses and may lose its dominant position in the industry.

BSE Institute offers an executive program on Risk Management, which helps professionals prepare themselves for a competitive global market. It is offers executives a chance to learn under senior industry professionals. In a world where the rules of trade can change rapidly, being prepared is a basic thing to do. Let’s be prepared, to stay on top! Cheers!

 

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