In a post published on Alibaba’s blog Alizila Wednesday, CEO Jack Ma questioned the rationality of the emerging trade war between China and the United States. Entitled “Trade War Kills Jobs, Opportunity and Hope”, Ma’s piece is an unusually direct way, analogous to Trump’s tweets, of communicating a familiar argument: there are no winners in a trade war.
Ma argues that China’s trade surplus has allowed it to pour investment into the U.S. economy, keeping interest rates and unemployment low.
He also singled out Apple as an example of a company whose massive profits are not reflected in the balance of trade figures. The purchase of cheap components and assembly in China appears to be a net cost to the United States, he says, when it, in fact, allows Apple to make significantly higher profits on its sales worldwide.
(Apple’s sales in Mainland China, Hong Kong, and Taiwan reached US$17.9 billion in the last fiscal quarter, which does count towards the balance of trade. Mainland Chinese account for a third of all iPhone users globally.)
Ma argues that America is starting a fight with China right at the moment when it stands to gain the most from the relationship — as China will soon become the biggest consumer market in the world.
Why does Ma care about America’s access to the Chinese consumer market? Because Alibaba stands to gain too.
Taobao, launched in 2003, initially focused on “consumer-to-consumer” sales. As the world’s factory, China produced things cheaply that could be sold directly to domestic consumers without brand and retail markups. In 2008, as the economy matured, it launched business-to-consumer e-commerce site Tmall, which drew in mass market foreign brands. Now, Alibaba is moving even further up the value chain, selling luxury items from foreign brands to Chinese consumers on its invite-only platform Luxury Pavilion, launched in 2017.
A trade war would push up the prices of American brands in China, meaning they’d sell less to Chinese consumers, including through their favorite platform. Tmall currently holds 51 percent of the business to consumer e-commerce market in China.
The full text of Ma’s blog is included below.
Trade War Kills Jobs, Opportunity and Hope
As a businessman, I have been encouraged by the U.S. administration’s pro-business policies, like lowering corporate taxes. Now, like many in the business community, I am struggling to understand why a trade war with China would be good for the U.S. economy.
The U.S. has a structural trade deficit with China because of the market forces of comparative advantage: Economies produce what they are best at making and import other things. Dollars earned from trade surpluses in China have been recycled to finance American borrowing, keeping U.S. interest rates low with favorable economic conditions. American unemployment stood at 4.1 percent in March, a 17-year low. All these economic indicators suggest that the U.S. economy is doing well, regardless of the trade deficit.
American economic policy for the past 30 years encouraged U.S. companies to outsource labor-intensive manufacturing to China and other Asian countries while retaining the most valuable parts of American ingenuity: innovation, technology and brand.
China embraced this American-led globalization because it was also the best path for China’s development as an emerging economy. To raise living standards for 1.3 billion people, the Chinese government promoted foreign investment and built the economy on the strength of its large and increasingly skilled labor force. As a result, China became the world’s largest exporter, with a significant trade surplus. American consumers benefited from low prices and American corporations made giant profits.
There’s no better example of a beneficiary of this symbiotic relationship than Apple. The company designs the iPhone and develops proprietary chips and software in California. It makes the units through contractors that hire millions of workers in China, assembling components manufactured in South Korea. Through smart marketing, Apple products capture consumers’ hearts, making its brand more valuable.
While countries like South Korea and China collect revenue from selling components and assembling the final product, Americans make almost all of the profits. Apple’s $48 billion of profits in its 2017 fiscal year will not make it into the balance-of-trade calculation.
Under a symbiotic U.S.-China relationship, America became a preeminent technology leader, and its brands are today the envy of the world. China improved the standard of living of its citizens with a tenfold increase in per capita gross domestic product over the past 20 years.
But U.S.-China trade relations in the next 20 years will look very different from the past two decades. The benefits of globalization since joining the World Trade Organization in 2001 have opened China’s mind to the idea of open markets.
China is shifting its economy from the world’s largest exporter to the world’s largest consumer. Chinese citizens now have the wealth and income to pursue discretionary spending. They want to buy high-quality imported food, cosmetics, fashions and health and wellness products for themselves and their children.
With average urban income growing at almost double digits and an emerging middle class of 300 million, Chinese consumers are already driving massive demand for imports from all over the world. Last year, President Xi Jinping said at the World Economic Forum that over the coming five years, China will import $8 trillion of goods.
It is therefore ironic that the U.S. administration is waging a trade war at a time when the largest potential consumer market in the world is open for business. Is America going to forfeit this opportunity?
Instigating a trade war is the wrong solution because it will only provoke retaliation. The Chinese government responded to U.S. tariff threats with its own tariffs on American agricultural products, such as soybeans. China is the largest export market for American soybeans, worth $14 billion annually and accounting for 65 percent of all U.S. soybean exports.
The U.S. has been a consistent defender of free and open markets, but this time it is resorting to protectionism that will not improve American competitiveness. Any country seeking to increase exports would do better to focus on developing good products and channels to access foreign markets rather than putting up trade barriers.
At the heart of Alibaba’s mission—to make it easy to do business anywhere—is our support for small businesses. A vibrant small-business sector is good for any economy, because small businesses create jobs.
This trade war will hurt millions of American small businesses and farmers. I feel for these men and women, because I met many of them when I toured the U.S. last year to host our “Gateway” trade showcase in Detroit.
Small-business owners and farmers traveled from all over the country to learn how Alibaba could connect them to the massive Chinese consumer market. Those attending Gateway saw what the future could hold for their business. I saw the entrepreneurial gleam in their eyes.
Through our digital-commerce platforms, where more than 500 million Chinese consumers shop, Alibaba will continue to help American small businesses and farmers access the China market.
If we encounter trade barriers, we will have to work harder. While we may face setbacks in the current protectionist environment, I remain confident and look forward to the next 20 years.