By Michael Wang, CGTN anchor
A recent staff research report from the Federal Reserve Bank of New York titled Geopolitical Risk and Decoupling: Evidence from U.S. Export Controls, illuminates a critical aspect of international economics. The choices economies make today will shape our future for years to come. The use of export controls by the United States in the context of China-U.S. relations is one of those critical choices. These measures reflect Washington’s intention to safeguard its national security and protect what it considers its strategic interests. However, tools such as export controls should be wielded with care in an interconnected world, considering not only their immediate impact but also their broader, long-term implications.
This paper from the New York Fed provides a thoughtful examination of these implications. The study reveals that U.S. export controls have introduced challenges for U.S. firms that warrant careful consideration. When American suppliers are required to end relationships with Chinese customers, the impact on their businesses can be significant.
For U.S. suppliers, the immediate impact of these controls is a shrinking customer base. American companies are forced to sever ties not only with the targeted Chinese businesses, but in many cases, U.S. companies sever ties with other Chinese customers out of precaution.
What happens when American firms subject to export controls lose a significant portion of their Chinese customer base? The study finds that affected firms experience negative abnormal returns. The New York Fed estimates a $130 billion market capitalization loss across U.S. suppliers affected by export controls. These are not mere paper losses; they reflect a real hit to American companies’ profitability.
Following export controls, the report documents that U.S. suppliers find it difficult to replace Chinese customers with alternative ones in the short term. There’s also no significant evidence of reshoring or friend-shoring and affected U.S. firms do not establish new customer relationships to compensate for the lost Chinese business. In contrast, Chinese firms can relatively quickly replace U.S. suppliers with domestic ones while also increasing purchases from non-U.S. suppliers. U.S. export controls also spur domestic Chinese innovation to reduce reliance on U.S. technologies, which offset the original intention of export controls to an extent.
While Chinese firms adapt quicker to the changing trade environment, U.S. suppliers encounter notable challenges. These difficulties are reflected not only in securing new customers but also in the financial pressures that follow. The study reveals that export controls on U.S. suppliers result in a cash flow and operating income decline of 20% and 25%, respectively, of their average pre-export control levels and an 8.6% drop in revenue. Affected suppliers also cut their workforces by 7.1%. Additionally, U.S. banks tighten lending conditions for these suppliers by reducing term loans, raising interest rates, and shortening loan maturities.
Economic weapons, like export controls, are double-edged swords. They may cut into the economies of other nations, but they can also inflict serious wounds on the very countries that use them. The study by the New York Fed says collateral damage to U.S. firms is significant.
The question I have now is to what extent does the short-term effects of denying China access to certain American technology, products, and services impact long-term U.S. economic dynamism and the global economy?
Protecting national security is important for any country, but so too is safeguarding the nation’s economic vitality. If the United States is to continue to be a leader in global innovation, can it do so without damaging the very firms that drive its success? The stakes are high, and the potential for unintended consequences may also be enormous.
