Downsides abound in any trade conflicts between the U.S. and China

Supply chain decoupling from China

The trade dispute between the U.S. and China is an escalating situation that began as early as 2017, according to panelists, and its risks impact companies and investors alike. Exacerbating the complexity of the standoff, both sides have much to gain and much to lose. There is no clear winner between the U.S. — which has the upper hand in semiconductor manufacturing — and China — which has the upper hand in relationships with global technology markets and accessing raw materials.

“There are a wide range of risks that need to be managed. We hope they don’t happen, but we take them seriously and we don’t rely on the status quo,” said nLIGHT’s Keeney, who added that those risks include everything from being shut out of markets to the U.S.’s travel advisory warning U.S. residents to avoid traveling to China.

Miller agreed that there is extreme risk in failing to diversify supply chains away from China — even though the road to diversification is challenging, both because China has such a strong foothold in global technology markets and because the country has mastered the refinement process of raw materials. The U.S. and other countries can get access to raw materials, which are abundantly available outside China, but Miller said, “[China] has built out the second step to dictate the flow of that raw material.” In fact, the refining process could be as much as three or four times more expensive if relocated to a country like Australia. 

Keeney’s firm recently moved manufacturing operations from Shanghai to Thailand to diversify away from China, but he admitted that so-called decoupling isn’t an easy task. “I can’t imagine a full decoupling in almost any industry, frankly, even in the defense industry,” he said. “I don’t see that happening at a complete level. So, I think it’s more about de-risking, and certainly that’s the way we do things. We have a presence in China, and we’re expanding our presence outside of China.”
 

Managing overall production costs

Ultimately, cost gives China a stronghold in the global supply chain. Today, some companies are willing to pay a premium to diversify away from the Chinese supply chain and mitigate some risk. However, premium payments are likely temporary, because as Integra’s Robinson noted, people tend to have short memories. “Even if you have a customer that is willing to pay a premium today, when you get further away from supply chain issues and memories fade, price becomes more important,” he says. 

Rather than expecting companies to pay a premium, Miller said the U.S. should work to catch up with China in terms of overall production costs. Although moving the refinement process could cost more, Miller sees raw materials access as an opportunity for the U.S. to gain some advantage. China imports raw materials and is exposed to fluctuations in costs. Last year, China paid eight-times more in feedstock than in 2021, and Chinese refiners must absorb that cost. “If we are talking about the refinement costs, China is incredibly competitive, but if you look at the all-in cost, when you factor in the feedstocks, then actually the rest of the world can become cost-competitive pretty quickly if they have those relationships in place,” says Miller.

Other markets could match China on labor costs as well. Malaysia, Thailand, and Vietnam are all good candidates, but they don’t yet have the infrastructure to refine materials at scale. Automation will also help drive down costs. Robinson said he has facilities in California that are producing on par with China today, but the process is much more heavily automated.
 

Capitalizing on U.S. government subsidies

Government subsidies are also helping to ease some of the U.S. cost burden. The Inflation Reduction Act and the Chips Act show that there is bipartisan support for the tech industry. However, there was mixed response about the laws’ effectiveness.

Miller said the IRA has a lot of good incentives, but he doesn’t think there is enough existing infrastructure in place to take advantage of the legislation. “The ability to actually execute on some of these projects in North America is still a massive challenge and the regulatory framework is very difficult,” he said, noting that to build mining infrastructure takes multiple decades. If the infrastructure was in place to maximize the legislation, he observed that the U.S. tax credits and production credits are potentially massive.  

Other panelists didn’t think that the subsidies, which amount to about 15% of total costs, were enough to move the needle on real innovation.

Further, the panel observed that the U.S. lags China in its incentives and subsidies, leaving the U.S. to play catch-up. “China has led the way in terms of policy incentives,” said Miller. “China has built up a dominant position, because they started working on this more than a decade ago.”
 

No winners in a trade war

In the end, Key’s Vinh asked the panelists to identify winners and losers in the U.S.-China trade battles. While some panelists identified certain beneficiaries — like the miners and the industrial defense base — most agreed that there were no winners. Miller said U.S. taxpayers would be the ultimate losers, and Robinson and Keeney agreed. “If you go back to the 1930s or pre-World War I, tiny things can cause big changes,” said Keeney. “We all need to be very concerned about that.”
 

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