The First Step to Shun China: Invest in Trade With Other Exporters

(Bloomberg Opinion) -- In a trade war, one country's strength is the other country's weakness. The U.S. imports far more from China than China imports from the U.S., which means that if the two countries were to sever all ties, China would need to find vast new markets in which to sell goods. The U.S. would have to find new places from which to import goods, which sounds easier but is no small feat.

There are lots of countries in the world that can offer cheap labor, but they don’t have the infrastructure to produce and move goods. And while the ability to produce infrastructure is a strength for China, it has not recently been so for the U.S. If the Trump administration truly wants the U.S. to become less dependent on trade with China, America may need to get into the infrastructure business in a serious way, perhaps with a program similar to China's Belt and Road Initiative.

Vietnam is frequently mentioned as a country to which multinational companies can shift production because its labor is cheaper than China's, it's in close proximity to China, and it's already a country from which the U.S. is increasingly importing goods. As recently as 20 years ago, the U.S. was importing less than a billion dollars a year of goods from Vietnam, whereas in the most recent 12 months the U.S. imported over $53 billion in goods from the country. The increase in tariffs on imported Chinese goods has had a noticeable impact on the growth in imports from China and Vietnam, as seen in the chart below.

But that shift in production to Vietnam is not without its challenges. Exporting countries need robust infrastructure to move goods around – roads, rail, power generation, ports. And countries like Vietnam are already struggling to keep up even at their current rates of output. To put things in perspective, over the past year the U.S. imported almost 10 times the dollar amount of goods from China as it did from Vietnam. Shifting that production from China to countries like Vietnam, Thailand, Indonesia or Mexico can't be done without significant investments in infrastructure.

China understands that. Part of its vast international project known as the Belt and Road Initiative has been intended to create more interconnected trading ties to China around the world. If we're really shifting to an era in which countries find themselves deciding between a China-centric economy and an America-centric one, then the U.S. may find itself needing to make infrastructure investments around the world as well to keep countries in its sphere of influence.

The main hurdle to do this is likely to be political rather than economic. Ever since the 2008 financial crisis, Washington has found itself increasingly unable to govern, with Congress brought to a halt by gridlock, divided government, and the legislative filibuster in the Senate. This inability to govern must show part of why China finds more to like in its own system of governance than America's.

If "winning" is a function of the size of a country's economy, trading ties to other countries, and technological prowess, then Congress needs to engineer some combination of faster economic growth, more immigration, infrastructure growth, trade deals with other countries, and faster technological progress, perhaps in part by spending more on government research.

An inability to do this would be damaging on multiple levels. First, without infrastructure spending and multilateral trade deals that account for China's rise, the U.S. will find itself isolated from allies and stuck in its reliance on imports from China. Second, it would mean slower economic growth and less technological innovation, allowing China to catch up with the U.S. in both departments. And third, if Washington continues to be unable to govern, why would any other country look to America as a national model worth emulating and a trading partner to rely on? If America wants to pursue a different course in its relationship with China, someone somehow is going to have to make America govern again.

To contact the editor responsible for this story: Philip Gray at philipgray@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Conor Sen is a Bloomberg Opinion columnist. He is a portfolio manager for New River Investments in Atlanta and has been a contributor to the Atlantic and Business Insider.

©2019 Bloomberg L.P.