Cummins CEO: U.S. should take incremental steps to resolve trade tensions

As the U.S. and China take a pause in their ongoing trade war, the top executive at Cummins Inc. believes the U.S. should be looking for incremental improvements in trade relations, rather than big wins.

“What can we, practically, get them [China] to stop doing that’s just unfair practices?” Cummins Chairman and CEO Tom Linebarger said Thursday during a Business Roundtable panel discussion in Washington, D.C. “As soon as we’re into negotiations and engagements, the more the chances of a win/win go up.”

The Business Roundtable is an association of American CEOs that advocates for public policies around job creation, U.S. competitiveness and the economy. Linebarger is chairman of the organization’s Committee on International Engagement.

On Saturday, the White House announced that President Donald Trump and China’s president, Xi Jinping, had agreed to a 90-day period of negotiations over a range of trade issues ranging from intellectual property protection to forced technology transfer, cyber intrusions and non-tariff barriers. 

Trump also agreed that U.S. tariffs on Chinese goods will remain at 10 percent during the 90-day period rather than increasing to 25 percent as of Jan. 1, as was previously planned.

Linebarger said the best approach is for U.S. officials to select their top-priority trade issues, figure out what would constitute a “win” on those fronts, and negotiate with the Chinese accordingly.

That method would produce better results than the “carpet-bombing” approach of imposing escalating rounds of tariffs, Linebarger said.

Cummins, which has done business in China since the 1970s, today counts the country among its largest markets. And the company is feeling the sting of the ongoing U.S./China trade war.

“We expect $80 million of tariffs and related costs in 2018, and we forecast in 2019 that the full impact will be something like $250 million,” Linebarger told IBJ in a phone interview following the panel discussion. That 2019 figure is up from the $200 million estimate Cummins provided in August.

Those figures include the tariffs themselves, associated higher materials costs and the cost of making supply-chain changes to mitigate tariff impact.

Among the trade issues of highest priority to Cummins, Linebarger said, are issues of market access. 

For instance, foreign companies that seek to operate in China must do so as part of a joint venture with a Chinese company. The U.S. imposes no such rules on foreign companies doing business here.

“We have to do them [joint ventures] in China, or we don’t get to participate. That’s not fair … it should be changed,” Linebarger said during the panel discussion. “What we have, essentially, is two completely different systems with different sets of rules.”

Another example: The electric vehicle market is huge in China, whose government currently offers subsidies to encourage the purchase of electric vehicles. But those subsidies are available only to Chinese companies.

Next year in the U.S., Cummins will roll out its first all-electric powertrain—a product suitable for short-range commercial vehicles such as municipal buses.

But, Linebarger told IBJ, Cummins doesn’t yet know when it will introduce electric powertrains in China. “We really just don’t have a way to compete as long as large subsidies are available to local companies and not to us.”

All things considered, Linebarger told the panel audience, Cummins believes it’s important to do business in China, even with the current restrictions.

In fact, he said, “China played a major role in Cummins’ innovation and growth into the size we are today.” 

In the 1990s, Linebarger said, Cummins was having trouble meeting new U.S. emissions standards. But money Cummins made from its China business helped fund the research and development the company needed to achieve those U.S. emissions standards.

“I don’t think we’d be here if [the U.S.] was our principal market, alone, today.”