The Sino-American trade war has been simmering since March 2018 and shows no sign of subsiding. What's the origin of this conflict and how does it impact one of China's most iconic businesses, writes Ritvik Arora.
Washington won’t relent unless the Chinese government changes what it claims are unfair trade policies that violate WTO rules. Beijing denies these charges and is incensed by what it views as America’s wariness over China’s emergence as a potential superpower/rival - and sees the tariffs as a way for America to keep China behind.
In the midst of all this are American and Chinese companies, and consumers (along with the rest of the world’s). Many businesses have been negatively affected by the tariffs, and opponents of Trump’s policies point to these losers and sermonise that there are no winners in a trade war. At the same time, some businesses have managed to elude the tariffs’ wrath.
In this article, we will look back at how Sino-American relations deteriorated, the dynamics of the trade war, and how China’s largest company was able to escape injury in this conflict.
China's ambitions are no secret and its desire to overtake the US to become the world's largest economy are clear. But to achieve this goal the Chinese government has allegedly adopted dubious and protectionist policies that many decry as being in violation of WTO rules.
For example, China had made it compulsory for any foreign company that wants to do business in China to enter into joint ventures with local companies. Many accuse the Chinese of leveraging its market attractiveness to gain access to foreign companies’ technology, much to the chagrin of intellectual property rights proponents.
Moreover, regulating foreign investment (the investments itself are allowed in some sectors, not all) is just one way in which China has been understood to have engaged in selective globalisation. Accusations of (and some evidence for) currency manipulation, dumping, subsidising exports, non-tariff barriers, and foreign equity restrictions abound.
This perception has only accentuated since the accession of Xi Jinping, who is reversing years of tepid decentralisation and has doused any hope of political reform. Furthermore, Beijing's fattening wallet has been accompanied with an increasing global footprint, be in in the South China Sea or through the Belt & Road Initiative.
However, the Communist Party remains conscious that its autocratic one-party system can sustain only if there is no mass movement demanding democracy and freedom - and that such a movement can be kept at bay only by ensuring the economic prosperity of the masses.
Therefore, economics remains central in Beijing's politics, which is why the trade war is a cause of major concern for its government. The Chinese economy is already slowing, the nation is already ageing - and tariff wars will only worsen the situation and darken the economic outlook, thereby festering mass discontent and demand for change, which is the last thing the Communist Party wants.
The seeds of the China-US trade war lie in Donald Trump’s election as US President in 2016. One of the central themes of Trump’s election campaign was his country’s massive trade deficit with China. Trump accused Beijing of unfair trade practices and of theft of US intellectual property and military technology. The trade war, his administration argued, was both a punitive measure and a way to bridge the trade deficit.
Therefore, as a retaliation for the protectionist and expansionist stances of the Chinese government, President Trump sparked the trade war by imposing tariffs on $50-60bn worth of Chinese goods and also questioned China’s WTO membership. China responded by imposing tariffs on 128 American products. The US hit back by imposing another round of tariffs to which China retaliated in turn and this has pretty much been the story since March 2018.
Alibaba, the Chinese Dragon
Alibaba is probably the most popular paragon of China’s economic success. It is one of the most highly valued companies in the world, one of the most admired, an investment behemoth, a giant when it comes to AI, e-commerce and venture capital, and its online sales and profits routinely surpass those of American firms.
The Alibaba Group’s subsidiaries are multiple and diverse. They include Alibaba, Taobao, Tmall, AliExpress (which connects consumers worldwide to Chinese suppliers), Alimama, 1688 (a wholesale marketplace), Alibaba Cloud (cloud computing services), Ant Financial (an online payment platform), Cainiao (a logistics company) and many more.
Alibaba provides C2C (consumer-to-consumer), B2B (business-to-business) and B2C (business-to-consumer) services and is the largest e-commerce company in China with a plethora of other initiatives in 200+ countries around the world. 80% of China’s online marketplace is controlled by Alibaba and it connects hundreds of millions of customers and merchants worldwide. At $25bn, its IPO was the highest in history.
In more ways than one, Alibaba’s successes parallel those of China’s, and its ambitions to become an international business giant mirror those of China’s to become a global giant.
How is Alibaba so Successful?
Alibaba may be providing the same goods or services as many other well-established companies but its unique business model is what really sets it apart.
Unlike Amazon, Alibaba doesn’t have inventories and focuses on acting as a medium that connects buyers and sellers. The main players among the subsidiaries are Alibaba.com, Taobao, and Tmall; the others mainly aid these three.
Alibaba.com is an intermediary for global trade whose main sources of revenue are the commissions it charges sellers and the membership fees sellers pay to be certified as verified gold suppliers and to enjoy other benefits.
Taobao.com was initially launched to attract small, local vendors and act as a C2C portal. It is now the biggest website of the company and earns its revenue through advertisements since the sellers have to stand out from the crowd using innovative and eye-catching marketing strategies.
Tmall.com mainly targets the middle-class audience and takes care of branded products. It earns its revenue through marketing services, commissions and service fees paid by the sellers.
The key things to note here are the setting up of a strong domestic base and extensive diversification of the business model.
Alibaba & the Trade War
A strange thing to notice is that although Alibaba’s stock prices have been going down as a result of the trade war, the company still made huge profits last quarter and seemed unaffected by the war and the 10% tariffs it had to face. How did this happen?
As mentioned before, trade wars are all about sustainability and everything boils down to one major factor - dependence. Alibaba’s strength is its domestic market, which ensured them similar profits as from before the war began. The company’s dependence on the United States is limited because of its diverse revenue models and its worldwide network that connects 200+ countries, among which the US is only one competitor. Significantly, Alibaba's chief source of revenue is from its home country. To put it in numbers, only about 11% of its revenue comes from outside China.
Furthermore, Alibaba’s subsidiaries together form a sort of ‘ecosystem’ in which they complement and help each other sustain profitability even during adverse, uncertain times (like a trade war).
The recent drop in the company’s stock prices can be attributed to volatile market sentiment because of the trade war. But a number of investors worldwide believe that once there is a negotiation and the US and China strike a deal, Alibaba’s stock will rebound and rise again. Besides, to counter the issue of their falling stock prices, the company has expressed interest in a Hong Kong IPO.
Currently, Alibaba plans to further strengthen its hold over the Chinese market by focusing on smaller cities and the middle-class. The company believes in its long-term ambitions and trusts its strong consumer base to get them through this ongoing slump. Unless the trade war hits closer home, Alibaba with its diversified business model may continue to stay hedged.
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