Global firms investing in China despite U.S. tariffs: U.S. economist

Despite U.S. tariffs on China's exports to the United States, it appears, at least so far, that multinational firms, including those based in the United States, continue to find China an "attractive environment for new investment," U.S. economist Nicholas Lardy said Tuesday.

The night view of the central business district in Beijing. [File Photo: VCG]

In an article titled "Are Foreign Companies Really Leaving China in Droves?," Lardy, a senior fellow at the Washington D.C.-based Peterson Institute for International Economics, refuted U.S. President Donald Trump's claim that the "exodus of foreign firms," along with other factors, is placing increasing economic pressure on China and thus making it anxious to reach a deal with the United States.

Trump, "in defending his trade war with China, has yet again let his Twitter fingers get ahead of reality," the veteran China watcher said, referring to a tweet in August in which the president said "China wants to make a deal so badly. Thousands of companies are leaving because of the tariffs, they must stem the flow."

Firstly, Lardy argued, the trade war has not dampened foreign direct investment (FDI) in China and "there is little support for the view that large numbers of foreign firms are fleeing China; the opposite seems to be the case."

Nonfinancial FDI in China is currently running at an annual rate of almost 140 billion U.S. dollars, which means that thousands of new foreign firms are established in China every month, Lardy said. Moreover, since the tariff war broke out in mid-2018, FDI has expanded about 3 percent annually, roughly the same pace as in the previous five years, he said.

Secondly, Lardy said, anecdotes of a handful of firms leaving China do not confirm a broad trend. Foreign firms have been moving out of China for decades, he said, with some entering with business strategies that fail and then exit, and others, especially those exporting the most labor-intensive consumer goods, moving production to other countries with much lower wages.

Thirdly, Lardy said, a large share of foreign firms in China, especially U.S. firms, are there primarily to produce goods to sell on China's "still rapidly growing domestic market," noting that these firms "have no incentive" to relocate within Asia, much less to the United States.

Fourthly, Lardy said, "relocating production out of China is easier said than done." The economist pointed out that foreign affiliates operating in China draw on an extensive local supply chain that has been built up over the decades and employ about 25 million Chinese workers, a significant share of which is skilled engineers and managers.

Vietnam is commonly mentioned as an alternative, but is "too small to absorb more than a tiny fraction of production" by foreign enterprises now operating in China, Lardy added.

Trump's claim that an "exodus of foreign firms" will force China to capitulate to U.S. demands to settle the trade war is "wishful thinking" at best, Lardy said, adding that the president's assertion that his tariffs on Chinese goods will reverse the decades-long decline in the share of U.S. employment in manufacturing will also very likely go "unfulfilled."