Tit-for-tat tariffs and other punishments threaten multinationals with a footprint on the mainland

Chinese President Xi Jinping visited a Boeing assembly line in Washington in 2015—but the current U.S.-China trade fight could prompt Beijing to favor rival aerospace giant Airbus.
Chinese President Xi Jinping visited a Boeing assembly line in Washington in 2015—but the current U.S.-China trade fight could prompt Beijing to favor rival aerospace giant Airbus. PHOTO: MARK RALSTON/AGENCE FRANCE-PRESSE/GETTY IMAGES

BEIJING—When a group of American executives and other global corporate chieftains met with Chinese Vice President Wang Qishan in late March, they received a stern message about the simmering U.S.-China trade conflict: If tensions escalate, buckle up.

“The message was pretty clear,” said a person who attended. “A lot of companies would become victims in a U.S.-China trade war.”

That is what American multinationals are now bracing for, after the Trump administration said it would move ahead with 25% tariffs on $50 billion in Chinese goods. Beijing said in response to the U.S. move Friday that it would retaliate in “equal scale and equal strength.”

While a battle between the world’s two largest economies would inflict pain on businesses and consumers in both countries, in the crosshairs, in particular, are multinationals with a footprint in the mainland.

China's Vice President Wang Qishan, shown last month, has warned multinationals with a footprint in China that they could be hurt in a trade war with the U.S.
China’s Vice President Wang Qishan, shown last month, has warned multinationals with a footprint in China that they could be hurt in a trade war with the U.S. PHOTO: THOMAS PETER/AGENCE FRANCE-PRESSE/GETTY IMAGES

A sophisticated global supply chain means many foreign companies nowadays assemble their products in China with parts bought elsewhere, and then sell to the U.S. and other markets. That leaves them vulnerable to any new U.S. sanctions as well as pressure and other retaliation from Beijing.

Foreign-invested companies, including firms from Hong Kong and Taiwan, produce 43% of China’s exports, according to an analysis by the Conference Board, a New York think tank. The manufacturers among them notably make up 77% of China’s exports of information and communications technology—a sector highlighted by the Trump administration for new tariffs.

At the March gathering, people who attended said, Mr. Wang told the business leaders—which included senior executives from International Business Machines Corp. , chip makerQualcomm Inc. and private-equity firm Blackstone Group —that they should try harder to lobby the Trump administration against launching a trade offensive.

The U.S. said on Friday the trade levies are designed to hit products linked to Chinese strategic plans to dominate new high-technology industries, and released a list that covers 1,102 categories of goods.

Shortly afterward, China’s State Council said it would levy penalties of the same rate on U.S. goods of the same value, expanding its list of U.S. products that would be subject to tariffs to 659 types of goods, from some 106 types it disclosed in April. Categories include farm products such as soybeans, pork and chicken, automobiles, chemicals, crude oil and coal.

President Donald Trump had said earlier Friday that the U.S. would respond with more tariffs if China retaliates.

While multinationals assess the potential impact from the escalation of trade tensions, makers of consumer electronics have been canvassing suppliers and, in the case of at least two personal-computer makers, inquiring about shifting some of production in China to the U.S.

Foxconn Technology Group of Taiwan, the world’s largest contract manufacturer of electronics and known for assembling Apple Inc.’s smartphones in China, conducted a review of its supply chain, said a person familiar with the matter. The review, which assessed the proficiency of Chinese suppliers, could be used to assess the impact of potential tariffs, the person said.

It isn’t clear if Foxconn is taking any action following the review; the company didn’t respond to a request for comment late Friday.

The new U.S. tariffs exempt commonly purchased consumer goods, according to the U.S. Trade Representative. Semiconductors—the guts of smartphones and many connected devices—were put on the target list, drawing protest from the Semiconductor Industry Association. The Washington-based trade group said that most semiconductors exported from China are designed and made in the U.S.

Boeing Co. is likely to feel the pain from both sides, though it stands to get hurt more by potential Chinese retaliation. Boeing, the largest U.S. exporter, delivered 202 aircraft to China last year—more than a quarter of its total global sales. Past rounds of political tensions with the U.S. have seen China switch its purchases to rival Airbus SE, and Chinese state media have warned to expect the same this time.

Boeing also buys some parts for its 737 and 787 jetliners from Chinese suppliers, mainly the state-run Aviation Industry Corp. of China. The latest U.S. tariffs include some China-made aerospace products, potentially jacking up the costs of those components for Boeing. But they constitute a small part of Boeing planes’ total value, according to aviation analysts.

Chip maker Foxconn’s industrial park in southwest China's Guizhou Province. The Taiwan company has conducted a supply-chain review that could be used to assess the impact of potential tariffs, according to a person familiar with the matter.
Chip maker Foxconn’s industrial park in southwest China’s Guizhou Province. The Taiwan company has conducted a supply-chain review that could be used to assess the impact of potential tariffs, according to a person familiar with the matter. PHOTO: LIU XU/XINHUA/ZUMA PRESS

Also hanging in the balance is Qualcomm’s planned $44 billion purchase of Dutch companyNXP Semiconductors NV, a deal widely seen as critical for the U.S. chip maker. Late last month, amid signs of progress in trade talks by Washington and Beijing, Chinese authorities indicated their intention to wrap up the review and clear the transaction.

Momentum, however, stalled following the White House decision to move ahead with tariffs and congressional pushback against Mr. Trump’s decision to save China’s ZTE Corp . from crippling punishment for violating U.S. sanctions.

“The anticipated escalation of trade tensions will complicate China’s ability to approve the Qualcomm-NXP transaction from a face-saving perspective,” said Stephen Myrow, a former Treasury official in the George W. Bush administration who is now managing partner of Beacon Policy Advisors LLC., a U.S. research firm.

The U.S. is stepping up its trade offensive over what the Trump administration alleges is Beijing’s pressure on U.S. firms to transfer technology to Chinese companies. In doing so, the U.S. is effectively ending a truce called late last month by U.S. Treasury Secretary Steven Mnuchin and China’s chief trade negotiator Liu He, following the second of three rounds of talks.

“Three rounds of negotiations with Beijing have failed to delay or prevent this outcome,” said Tai Hui, chief market strategist at J.P. Morgan Asset Management. “The threshold to come to a consensus or a compromise seems high.”

Some Chinese officials said they are feeling frustrated by the Trump administration’s shifting positions, which they say have hurt the credibility of the U.S. government. The U.S. is “provoking the trade war,” Chinese Foreign Ministry spokesman Lu Kang said Friday night.

Washington’s latest hard-line approach, Chinese officials said, isn’t going to wring concessions from China.

In particular, Beijing isn’t going to give up its plan to upgrade its manufacturing capabilities as laid out in the Made in China 2025 initiative—specifically targeted by the new U.S. tariffs to prevent “unfair transfers of American technology and intellectual property,” the Trump administration said.

“It’s wrong for the U.S. to think its pressure tactics are working,” said a Beijing official.

Already, some U.S. companies are facing increased regulatory scrutiny in China, according to Jacob Parker, vice president of China operations at the U.S.-China Business Council. For instance, he said, it takes longer for their products to clear Chinese customs; in other instances, Chinese regulators are putting advertisement slogans by U.S. firms under review. Some automobiles and farm products such as pork from the U.S. have piled up at ports.

“Maintaining a low profile in the China market and ensuring that you’re completely compliant are more important now than in the past,” Mr. Parker said.

Write to Lingling Wei at lingling.wei@wsj.com and Yoko Kubota at yoko.kubota@wsj.com

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