John Schmid

Milwaukee Journal Sentinel

According to President Donald Trump, his recent conversation with the chief executive of Foxconn Technology Group was meant to persuade the world's biggest manufacturer of made-in-China consumer electronics to keep its promise to build a mega-manufacturing complex in Wisconsin.

"Great news on Foxconn in Wisconsin after my conversation with Terry Gou!" Trump tweeted after the Feb. 1 call, which came only days after it was reported Foxconn was wavering in its commitment to the state.

Back in Asia, however, Foxconn CEO Terry Gou gave a different account.

Speaking to thousands of Foxconn employees at a Chinese New Year carnival in Taiwan, with Asian news outlets in attendance, Gou made clear that he and Trump spoke at length about the far bigger stakes of the U.S.-China trade war — even telling the throngs that he received an assurance from Trump.

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"U.S. President Trump shared with me yesterday on the phone that the negotiation progress between China and the U.S. is going well, and it is likely that they will come up with an agreement soon," Gou said, according to Nikkei Asian Review.

Gou's candor supports a view among trade analysts that Foxconn's promise to build a flat-screen manufacturing complex in Wisconsin amounts to a bargaining chip in an economic conflict waged between Washington and Beijing — a politically sensitive trade war with hundreds of thousands of American jobs at stake, far more than the 13,000 that Foxconn promised would be created in Racine County.

“If you think foreign investment is one of the moving pieces (in the trade talks), it absolutely is," said Mary Lovely, an economist who specializes in international trade and investment at the Peterson Institute for International Economics in Washington, D.C.

"It’s pawns on the chess board."

The implied bargain is clear: Foxconn will keep alive its Wisconsin investment as long as Trump ensures Foxconn continues to have wide-open access to American consumers for its Chinese-made imports — and as long as Wisconsin taxpayers subsidize the project with the most expensive package of subsidies ever from a U.S. state to a foreign company.

FULL COVERAGE:Foxconn in Wisconsin

Bare-knuckled negotiator

Gou, 68, who founded Foxconn in 1974 and built a global empire of export markets, is known as a bare-knuckled negotiator. From a manufacturing base in mainland China, Foxconn supplies the world with iPhones for Apple and freighters full of other consumer electronics for the likes of Sony, Dell, Hewlett-Packard and brands known mainly in Asia. Gou has close ties to the Chinese Politburo.

As far back as 2017, when Trump unveiled Foxconn's plans for Wisconsin, many analysts viewed the project as a hedge against the trade barriers Trump had threatened as a candidate.

As Trump rolled out his trade sanctions last year, triggering global trade wars in the process, "you’ll notice there have been no threatened tariffs on iPhones or other smartphones," observed Willy Shih, an economist at the Harvard Business School.

The Wisconsin facility was always driven by considerations other than pure business logic, analysts said. As Foxconn itself revealed last month, U.S. wages are too high to build TVs at a competitive price. No company ever attempted to build flat-screens outside Asia — much less in a part of the American Midwest better known for engine castings and Johnson Wax.

U.S.-China tensions over trade

Trade tensions between China and the United States are hardly new.

They've simmered throughout the 21st century as America's seemingly insatiable appetite for affordable made-in-China goods has set records almost every year. The U.S. trade deficit in goods and services with China represents the biggest trade imbalance between any two nations on the planet — with no signs of slowing down.

In 2017, the latest year available, the bilateral trade gap widened to $335.7 billion, a figure that has grown exponentially since the late 1990s, according to data from the U.S. Commerce Department. The groaning trade gap has become an unofficial index of America's manufacturing competitiveness even as a torrent of Chinese imports guarantee low prices for consumers at Walmart and other retailers.

The nation's export weakness is a chronic political headache in Washington. Populist politicians blame cheap Chinese labor and lax Chinese environmental practices for the legions of manufacturing jobs that have vanished in the United States.

But slipping competitiveness and erosion of manufacturing employment defy easy political fixes. American politicians often talk tough but the Chinese have leverage in trade talks that Washington lacks: China has become one of America's biggest lenders, effectively one of its biggest bankers.

America's debtor status stems from its chronic trade imbalance. Americans import more than they export and consume more than they produce, just like a household that lives beyond its means. That’s shriveled the national savings rate. Americans routinely live with so much debt, in fact, that their unsustainable borrowing to buy homes was a major trigger for the searing financial crisis of 2008-’10.

All the while, the federal government mirrors the debt-dependent society that elected it: Washington chronically spends more (on roads, schools, subsidies and national security) than it ever manages to collect in taxes from a debt-dependent electorate. With debt spread across all levels of society, Americans collectively borrow from foreign lenders such as China to pay for the goods and services they otherwise couldn't afford.

In that complicated world, Trump argues that American jobs will return if the U.S. erects trade barriers.

But the scope and abruptness of Trump's trade barriers are unprecedented in the global age. He singled out China but didn't stop there: The White House has imposed multiple rounds of tariffs, targeting all the world's biggest trading blocs and economies, including all of North America; the 28-nation European Union; Japan, Russia and India.

China, the E.U., Canada, Mexico, India, Turkey and Russia retaliated with trade barriers of their own, all squarely aimed at the U.S. The world looked on last year as one market after another began to shut out imports. Trade slowed and global economic uncertainty grew. American manufacturers from Harley-Davidson to General Motors cried out in protest, blaming the trade war for killing American jobs.

The trade war also set off alarms at Foxconn.

"The people in Wisconsin have a lot at stake," said Philip Levy, who served as senior foreign trade adviser to President George W. Bush and is now a senior fellow on the global economy at the Chicago Council on Global Affairs. "But the forces that are buffeting Foxconn are hitting a lot of American manufacturing right now with changing costs, changing markets and a lot of new uncertainty."

Trump hasn't backed down from his get-tough trade stance. "Nothing has been taken off the table," said Erica York, a trade analyst at the Tax Foundation, a conservative fiscal watchdog in Washington, D.C.

Foxconn finds itself smack in the middle of this fight — and by extension, so does Wisconsin.

Because it does most of its manufacturing on the Chinese mainland, both Beijing and now Washington are pressuring Foxconn to create jobs — or at least to not slash existing ones. The pressure on Foxconn is real. Apple, Foxconn's biggest customer, has been reporting a decline in demand for iPhones. Economic growth has slowed in China.

Just as worrisome, particularly for Wisconsin, is that new manufacturing facilities for flat-screen liquid-crystal display panels have proliferated in China and much of Asia, said Shih at Harvard. In southern China, Foxconn already is building a twin of the proposed Wisconsin plant, with identical or even greater research and production capacity. "There’s excess capacity that's building," he said.

"The situation is darkening," said Levy. Early last year, Trump's trade stance looked like rhetoric — "a lot of barking that would go away," he said. "Very quickly, Trump got himself into a position where this could be painful."

Trade war threatens jobs

According to the Tax Foundation, about 167,000 U.S. jobs will vanish under the existing raft of Trump administration trade restrictions, York said. That number would more than double if new tariffs, currently threatened, are enacted, the foundation said.

The trade fight, as a result of the current tariffs, will wipe out a quarter of the potential gains from the Tax Cuts and Jobs Act, the landmark tax reductions that Congress passed in December 2017, the Tax Foundation estimated last year.

Gou has been candid about the trade conflict. Speaking in December at a Chinese economic conference, Gou warned that the U.S.-China trade war may drag on for a decade. The once-regulated world of trade would shift "from globalization toward polarization," the CEO said.

With Asian journalists on hand Feb. 2, Gou described the U.S.-China trade conflict as a "major concern." The Foxconn chairman even disclosed to his workers that he flew to Washington in December for "an extensive discussion with the president about the outlook on the trade situation between the U.S. and China."

U.S.-China trade talks formally resume in March. They'll be bogged down by complex issues involving cyber-security and the alleged Chinese theft of intellectual property from the U.S., as well as market access issues. "If no deal is reached," said York at the Tax Foundation, "all indications are that the U.S. would increase tariffs and that China would do the same."

Amid the welter of U.S.-led trade barriers, tariffs, duties and quotas, Shih at Harvard called the bilateral talks a "big three-dimensional chess game."

And one piece on that chess board is an on-again, off-again, on again Foxconn project in Racine County, Wisconsin.