Our relationship with China: As American as Apple Computer
The Russian invasion of Ukraine and the world's reactions to it have rightfully overwhelmed the news in the past weeks. The sanctions imposed on Russia by the West are making news but have minor effects on America. The consequences of the sanctions are limited in the United States because of the narrow economic relationships between Russia and America. Russia is America's 40th largest goods export market and 20th largest supplier of goods imports. Trade in services is also relatively small by world standards, with the withdrawal of Western companies like McDonald's making headlines but purely symbolic. The United States is a special case because much of the world will be more severely impacted by the loss of Russian and Ukrainian grains and Russian energy. Russia was the world's largest exporter of grain in 2017.
While world attention is riveted on Eastern Europe, America's thoughts should be further focused on the real potential threat to America and the American economy: China. U.S.-China economic engagement dwarfs American-Russian exchanges, resulting in the fact that any attempt at economic sanctions by either side would be suicidal for both. As Ukraine vs. Russia captures the headlines, China sits on the sidelines, battling another COVID wave from which it will likely emerge scarred but not disfigured.
The extent of American interdependence with China remains virtually unacknowledged. A fracture in U.S. China trade caused by sanctions or other circumstances will have untold net negative effects on both countries. The facts are these. America is China's largest goods export market, and China is America's third-largest goods export market. American farmers depend on China and vice versa. In 2020, China is the largest single buyer of U.S. agricultural exports — explicitly soybeans and pork — purchasing approximately 6.4 percent of total exports or $21.4 billion's worth of these commodities from the U.S. In addition, China is a substantial purchaser of American aerospace products, motor vehicles, semiconductors, electronic components, and electronic instruments.
Looking from a corporate revenue perspective, certain American businesses rely heavily on China's market such as Wynn Resorts, Micron Technology, and Qorvo, each generating more than 50 percent of their revenues in China. Hardly a household name, Skyworks Solutions Inc., a semiconductor manufacturer, owes over 80 percent of its semiconductor sales of over $5 billion to China. Skyworks experienced 50 percent sales growth last year, with a net income of $1.5 billion. Qualcomm sells wireless technology to China, with over 65 percent of its revenues originating there. Other international players such as Broadband, Inc; Texas Instruments Inc.; Amphenol Corp; Intel Corp.; Western Digital; and Corning, respectively, have 54, 30, 30, 24, 22, and 22 percent of their revenues generated in China. Household names Starbucks and Apple each have substantial interests (20 percent) in the China market.
On the other side of the market, Apple produces about 40 percent of its products in China, and Nike produces about 20 percent of its products there. Other American firms relying heavily on China for their production are IBM, CISCO, and Walmart.
Moving one layer below the corporate shell, we look to the owners of these businesses. Who represents substantial shareholder investments in most of these companies? The clear answer is large mutual funds. For example, Vanguard owns over 8 percent each of the 18 largest China revenue–dependent firms, including 10.44 percent of Skyworks Solutions, Inc. It is impossible to summarize the corporate social responsibility gibberish produced by the communications department at Vanguard, but a reasonable summation is "the interests of our clients should always come first is foremost among our values. We recognize that good ethics are good business, and we adhere to a simple motto: do the right thing." If investments in companies substantially dependent on China for their revenues are the right thing one needs to think harder about what the right thing is.
State Street Global Advisors holds over 4 percent of each of the 16 largest China revenue–dependent companies. State Street, too, has an exhaustive Social Responsibility statement, which, until 2020, subscribed to the "Modern Slavery Act Statement," which might justifiably apply to China.
Another big hand dipping in China-dependent American companies is BlackRock, whose chairman and chief executive officer, Larry Fink, has written his (in)famous stakeholder letters dealing mostly with the Environmental aspects of ESG, with the "S" getting the short shift. In his most recent letter, "people" get three mentions if one generously counts the People's Bank of China from a footnote. BlackRock holds an average of over 5 percent of the largest 14 Chinese revenue–dependent stocks.
The Olympic diplomatic boycott was the easily visible virtue-signaling tip of the iceberg of opposing China's evil. Russia is not an easy target, but American trade with Russia is dwarfed by the United States' engagement with China. If Americans ever find it in our interest to do the right thing vis-à-vis China, the only way of disengaging will involve a great deal of pain to everyone — not just a few government officials and media moochers. Given the depth of American engagement with China, the Taiwanese and the 17 other countries in territorial disputes with China, including India, must be anxious about American support when the pinch comes.
Image via Pxhere.