Lines snaking through the parking lot, double-wide carts loaded with groceries and gizmos, shoppers jostling for samples, Kirkland sweatshirts galore—few scenes better capture the American consumer experience than the opening of a new Costco location. Yet the warehouse club’s most successful launch through the first half of 2024 was not in Sheboygan or Shreveport but in Shenzhen, an industrial boomtown in southern China.
Throwing open its doors in January, the Shenzhen location became Costco’s sixth in mainland China. On a March earnings call, Costco’s then–chief financial officer Richard Galanti reported that an estimated 10,000 people came to the opening and that 200,000 had already signed up as members. Costco’s Chinese hot offerings are a smash hit. Noodle dishes sell for 14, 28, and 70 yuan. Fried chicken goes for 55 yuan. The famous hot dog runs 10.9 yuan—or $1.50. From the capacious design to the quality goods, the store looks strikingly similar, inside and out, to an American location (though perhaps with more pallets of pickled chicken feet). At the Shenzhen opening, one item seen crammed into car backseats and strapped to motorbikes exiting the premises was an oversize pink teddy bear, a Toy Story 3 character called “Lots-o’-Huggin’.” During the Chinese New Year holiday—the country’s most festive—garish Kirkland sweaters celebrating the Year of the Dragon became a social-media sensation.
Had he lived another few months, Charlie Munger—Berkshire Hathaway vice chairman, China bull, and Costco superfan—might have declared victory. “All indicators,” one of the hosts of the Acquired investing podcast said last August, “are that [the Costco] concept performs just as well as, if not better than, it does in the U.S. They have a lot of running room. . . . And they’ve been very deliberate about the China strategy.” Munger, who died late last year, saw the company’s success taking shape well in advance. Having once called Costco a “perfect damn company,” he joined its board in 1997.
In his own telling, Munger spurred on Costco’s China entry. “The first store they tried to open in China,” he told Acquired in October 2023, “somebody wanted a $30,000 bribe . . . and that made such a bad impression on [Costco cofounder] Jim Sinegal [that] he wouldn’t even talk about going into China for about 30 years thereafter.” What changed ahead of the 2019 Shanghai opening? “Well, finally the board started making enough noises,” Munger replied. “You started agitating?” the hosts asked. “Yeah, yeah,” Munger replied.
Since its markets opened under Deng Xiaoping, China’s economic potential has had American firms and investors salivating. For any public company to ignore so large a pool of potential customers would seem to be a fiduciary dereliction. Costco’s Munger-inspired move also demonstrates the role that American China-boosters have played in promoting economic integration between the two countries.
Business titans like Munger have long maintained that the U.S. and China ought to knit ever closer to each other. “There’s been some tension in the economic relationship between the United States and China—I think that tension has been wrongly created on both sides,” he expressed to Berkshire Hathaway shareholders in 2023, at his final annual meeting. “I think we’re equally guilty of being stupid. If there’s one thing we should do, it’s get along with China. And we should have a lot of free trade with China, in our mutual interest.”
Munger even praised the ChineseCommunist Party’s system of elite governance. “I think the Chinese have behaved very shrewdly in managing their economy,” Munger told an audience in a lengthy 2021 appearance at the Daily Journal annual meeting, “and they’ve gotten better results than we have in managing our economy.” He continued: “What interests me is that the Communist Chinese behave the way I am talking in favor of. And our own wonderful free-enterprise economy is letting all these crazy people go to this gross excess. People who are avoiding it are the Communist Chinese. They step in preemptively to stop speculation.”
Munger’s Sino-enthusiasm, however, has decidedly fallen out of favor in the U.S., where integration is increasingly contested by Republicans and Democrats alike. Costco’s success may well survive the ongoing deterioration in U.S.–China relations. But some firms do more than sell hot dogs, furniture, and electronics, and it’s here that U.S. investment in the People’s Republic becomes particularly problematic. Those engaged in more strategic business with America’s chief geopolitical rival find themselves facing hard choices.
Already under way, a policy shift from engagement with China to competition was supercharged by the Covid pandemic, and it has continued apace, despite a change of presidential administrations.
In May, President Joe Biden announced new, wide-ranging, and harsh tariffs to ward Chinese imports away from the U.S. market. “Following an in-depth review by the United States Trade Representative, President Biden is taking action to protect American workers and American companies from China’s unfair trade practices,” the White House announced. The tariffs target Chinese steel and aluminum, semiconductors, batteries, critical minerals, solar cells, ship-to-shore cranes, medical products, and electric vehicles at the rate of 100 percent.
These taxes represent the culmination of a decade of bipartisan souring on trade with China. Though a Democrat sits currently in the Oval Office, Donald Trump argued for nearly the same policy toward Chinese electric cars just two months before the Biden announcement, warning of a “bloodbath” for domestic auto-manufacturing jobs if Chinese models are let in. In 2018, of course, Trump launched his own administration’s ferocious trade war with China. Underlining the effort in his 2019 State of the Union address, he said that “one priority is paramount—reversing decades of calamitous trade policies. We are now making it clear to China that after years of targeting our industries, and stealing our intellectual property, the theft of American jobs and wealth has come to an end.”
Trump’s policy, headed up by U.S. Trade Representative Robert Lighthizer, emphasized the harms of trade deficits and pushed the Chinese government to accept more American exports. Trump’s tariffs covered $300 billion worth of annual imports. The administration’s celebration of its Phase One Trade Agreement highlighted the manufacturing, commodities, and agricultural products that China would henceforth buy from the U.S.
A “decoupling,” strategic or otherwise, from China is quickly becoming a bipartisan theme. The Biden administration has spoken of a “small yard” with a “high fence” to protect domestic strategic and defense industries and to keep sensitive technologies away from Beijing. Yet that fence has crept outward over time. The Biden administration has initiated or supported new export controls on a host of technologies, introduced subsidies for American industry, pressured Chinese firms to sell to domestic competitors, and subjected inbound investment to greater scrutiny.
Successive presidential administrations hostile to the trade status quo, paired with China’s own “dual circulation” policy to boost its onshore supply chains, have broken the multi-decadal pattern of opening to China. As the Hoover Institution’s Elizabeth Economy documented for a Brookings symposium in early 2024, “China is no longer the United States’ top trading partner, and bilateral trade has fallen off significantly; while U.S. exports to China have remained largely flat, in the first 11 months of 2023, China’s exports to the United States fell by more than 20 percent from 2022.” By September 2023, American businesses operating in China had become more pessimistic than at any time since the turn of the millennium. According to an American Chamber of Commerce in Shanghai survey published that month, 40 percent of such businesses were seeking to redirect investment slated for China elsewhere.
The U.S. is not alone in its changing sentiments toward China. Brazil, India, and Mexico are among the large emerging markets that have now taken up policy arms against Chinese imports. According to The Economist, Mexico raised tariffs as high as 80 percent on 544 Chinese products in April.
In the second half of the 2020s, more American restrictions are likely, regardless of who is in the White House or which party has the upper hand in Congress. The Biden administration stacked its own policies atop Trump’s, and the Democratic Party’s presidential nominee Kamala Harris has signaled no change of course. The young Republican stars in the Senate wish to go further, with Missouri’s Josh Hawley, for example, introducing a bill to end normal trade relations with China. Trump, vying for a return to the White House, has floated the idea of a baseline 60 percent tariff on all Chinese goods.
Only the staunchest China hawks, however, object to Costco’s foray across the Pacific. The expansion clearly benefits Costco’s mostly American shareholders; and by strengthening the firm, it benefits its well-compensated domestic employees in the long run. Perhaps most crucially, Costco operates in a non-tradable sector: while the opportunity cost to the company of another store in China might be forgoing one in the U.S., opening a Costco store in China is not like an American business offshoring a factory—the Chinese unit neither competes with an American counterpart nor supplants its labor.
The Chinese market remains an enormous draw, for obvious reasons. Though China’s economy has deteriorated with each successive Xi Jinping term—annual growth has slowed to less than 5 percent, down from an average of 8 percent in the 2010s—the Middle Kingdom’s middle class is expanding. In 2019, McKinsey pegged half of urban Chinese households as middle class. Boston Consulting Group anticipates 80 million new Chinese crossing the middle-class threshold between 2022 and 2030, bringing the cumulative urban and rural figure to about 40 percent of China’s total population of 1.4 billion by decade’s close. With even greater optimism, Homi Kharas, a senior fellow at the Brookings Institution, projects that China’s middle class will surpass 1 billion individuals and constitute a quarter of the world’s middle class by 2027.
After years of suppressing consumption through monetary policy, some planners in Beijing now see boosting household spending as a crucial corrective for the country’s contemporary malaise. “The most urgent goal now is to stimulate household consumption,” said Cai Fang, a member of the monetary policy committee at the People’s Bank of China, last year.
Costco and some other U.S. businesses are set to benefit. “I think American retailers like Costco and Walmart can play an important role in raising private consumption in China,” Tianlei Huang, a researcher at the Peterson Institute for International Economics, told me. “They bring a different experience for Chinese consumers who love the American retailers for the quality and affordability of their products. That’s why both have been hugely successful in the Chinese market.” Tianlei thinks that, as Chinese consumer demand becomes more sophisticated, more multinationals will follow Costco and Walmart into the country. Gary Ng, a Hong Kong–based senior economist for Natixis, offered a similar perspective, suggesting that Costco’s legendary price-to-value ratio is driving its appeal now that the go-go era has petered out. Amid slower income growth, he explained, “the demand for basic goods tends to be more resilient than other segments.” Sensing that opportunity, Costco will continue to expand its Chinese footprint.
What is it about integration with China, then, that offends policymakers on both sides of the political spectrum? A different Charlie Munger investment provides some insight.
Munger also invested in BYD, the Chinese carmaker that earned Munger and his associates a fortune—but that, unlike Costco, directly threatens American and European competitors. Munger’s link to BYD came by way of Li Lu, a China-born protégé. Following its violent clearing of Tiananmen Square in June 1989, the Communist Party identified Li and 20 other students as protest leaders. Li fled to Hong Kong, and thereafter America, where he graduated from Columbia University with a B.A., M.B.A., and J.D. He launched an investing career in the late 1990s and met Munger in California in 2003. The two forged a bond and, the following year, Munger entrusted Li with $88 million of his personal wealth.
In an extraordinary break from his youthful dissidence, Li had parlayed his investing clout in America into a reopening of a door to China, establishing himself as a transpacific financial force. Li scored his first big win in his native country with Kweichow Maotai, a vaunted national liquor brand that is today among China’s most successful companies, with a higher market cap than Coca-Cola, Toyota, and Chevron. “We made unholy good returns for a long, long time,” Munger said of his Li seed investment. “That $88mn has become four or five times that.” In 2007, Li moved his fund, Himalaya Capital, to Munger’s adopted home of Pasadena, California.
“China’s economy has deteriorated with each Xi term—growth has slowed to less than 5 percent, down from 8 percent in the 2010s.”
The following year, Li persuaded Munger and Berkshire Hathaway to take a 10 percent stake in the upstart BYD, a firm in which Li had invested five years earlier. Shenzhen-based BYD was then just taking off, having been founded by Wang Chuanfu in 1995 as a battery company. BYD’s first self-designed car had hit the road in China in 2005. In 2008, the year Berkshire invested, BYD rolled out its first hybrid car. In 2009, it produced its first full electric car. That same year, Munger said of Wang, “This guy is like a combination of Thomas Edison and Jack Welch—something like Edison in solving technical problems, and something like Welch in getting done what he needs to do. I have never seen anything like it.”
BYD’s meteoric ascent over the next ten years would prove Li and Munger correct in their assessment of the business’s potential worth. In 2022, BYD’s affordable offerings made it the world’s largest electric and hybrid carmaker, surpassing Tesla in combined global sales. While naysayers may attribute BYD’s success to China’s industrial policy, which has backed the company, they would struggle to explain the firm’s technical excellence and its triumph over the hundreds of other Chinese car startups that also benefited from government help. As Financial Times Lex Asia editor June Yoon explained this spring, it would be “difficult to say state support alone is why their cars are so cheap.” Now BYD is surging into Europe, both with its own company cargo ships and a new factory in Hungary. BYD cars’ 5G connectivity, integrated systems, and low prices (the soon-to-be-released Seagull will start at €20,000) have the continent’s incumbent carmakers shaking.
Today, BYD’s market cap is close to $90 billion. “I didn’t like the auto business,” Munger told the Financial Times. “It’s difficult to make a fortune in the auto business.” But “it worked so well, the early investment in BYD was a minor miracle.” For American automakers and their political allies, though, Munger’s minor miracle is perceived as a major threat. BYD is knocking on the door of the American market with cheap cars that work well.
Mike Bird, Asia business and finance editor of The Economist, mused in April, “I think it’s fair to say that in American politics the two sides disagree on almost everything, except that the U.S. and China are still too connected, too reliant on each other, in their trading relations.” It is an observation that surely would have left Munger smarting, but it is undeniably true. Beyond the nonthreatening retail level of Costco, more Munger Mainland miracles are nigh impossible.
Not even 25 years ago, a bipartisan consensus cut in the opposite direction. Congress granted normal trade relations to China in 2000, supported by both then-President Clinton and the campaigning George W. Bush. In the House, two-thirds of Republicans voted in favor, joined by one-third of Democrats for a slim majority; in the Senate, trade mania carried the day, with 83 voting for (including Biden, then senior senator for Delaware), to just 15 voting against.
China acceded to the World Trade Organization the next year, and the contours of global industry have not looked the same since. By 2008, China was the world’s largest exporter—and U.S. manufacturing employment had cratered. In a process that researchers David H. Autor, David Dorn, and Gordon H. Hanson identified in 2016 as the China Shock, the downsides of trade—job losses due to competition from low-cost, often-subsidized factories—fell “heavily on trade-exposed local markets rather than being dispersed nationally.” Manufacturing jobs, which in the 1940s had constituted as much as 39 percent of U.S. nonfarm employment, had fallen below 9 percent by 2015. While that slide was long under way, the China Shock pushed it faster in what Autor and his coauthors described as “an epochal shift in patterns of world trade.”
Autor, Dorn, and Hanson found that, contrary to late-twentieth-century expectations, workers in certain parts of the United States, especially the Eastern and Midwestern industrial heartland, did not adjust well to the new conditions. Instead of shifting into other sectors or moving to other regions, multitudes of trade-exposed workers found themselves underemployed or left the labor force entirely. Aggregately, the researchers noted, “some relatively adversely affected regions may have suffered absolute welfare declines.”
The irony is that Munger was right on the market economics. Mutual gains accrued. The Chinese got a lot richer, but, on average, Americans overall got somewhat richer, too. Autor and his coauthors highlighted not only the job losses that China’s integration into the global market caused but also the broadly shared benefits that it delivered. They conclude that “U.S. aggregate welfare gains from China’s market opening” were positive, if modest. “Few economists,” Autor et al. suggest, anticipating the political salience of their findings, “would interpret our empirical results as justifying greater trade protection. As expected, quantitative models indicate that U.S. aggregate gains from trade with China are positive.”
What’s more, the decline in manufacturing jobs has not corresponded with any drop in U.S. manufacturing output, as measured by sector GDP. As the Federal Reserve Bank of St. Louis’s YiLi Chien and Paul Morris explained in 2017: “Manufacturing’s share of real GDP has been fairly constant since the 1940s, ranging from 11.3 percent to 13.6 percent. It sat at 11.7 percent in 2015.”
Munger was naive, however, about the politics. The distributional effects of integration with China, and of the globalization of manufacturing work generally, have proved politically explosive and have helped usher in a neo-populist ferment on the right and the left; they have unquestionably turned the tide against trade with China. Conservatives have effectively joined forces with the long-standing left-wing critics of globalization, such as Joseph Stiglitz. For such thinkers, the case against the trade status quo with China is based on the social consequences. Robert Lighthizer, in his book No Trade Is Free, inveighs against the “failed policies of hyper free trade.” Lighthizer concludes that policy should put less stress on growth. “Simply put, I believe that American trade policy should revolve around helping working class American families,” he writes.
Even onetime neoliberals like Treasury Secretary Janet Yellen have reconsidered their views on trade. “People like me grew up with the view: If people send you cheap goods, you should send a thank-you note. That’s what standard economics basically says,” Yellen said in an April interview with the Wall Street Journal. “I would never ever again say, ‘Send a thank-you note.’ ”
National security is, of course, the fallback justification for restrictions on trade with China. In the case of potential Chinese car imports from BYD and other companies, detractors gesture to a deleterious effect on domestic industrial capacity and the gaps that it could create in wartime. On occasion, the pure protectionist reality shines through. Among the more telling examples is when advocates for trade and investment barriers mention trusted security partners like Japan, South Korea, and Taiwan in the same hostile breath as China. The bipartisan furor over a proposed sale of U.S. steel to a Japanese company attests to this wider worry.
Ultimately, then, the new consensus against trade with China is rooted in social welfare. The purpose is to soothe the wounds of trade-exposed communities like Lighthizer’s hometown of Ashtabula, Ohio, and Stiglitz’s of Gary, Indiana. For economists who have not yet sided with the politicians, and for investors eyeing China’s rising middle class, the social argument will be tough to counter.
I asked Isaac Stone Fish, author of America Second: How America’s Elites Are Making China Stronger, about the Munger portfolio’s forward outlook. “Charlie Munger’s history of blithely positive comments on China and its ruling Communist Party raise questions about how well his investing philosophy would do in today’s China,” he told me. President Biden’s May tariffs answer those questions. Selling Kirkland sweatshirts in China is one thing; but a new political agreement has coalesced around the position that buying Chinese cars, steel, or semiconductors is at odds with the national interest. In the twenty-first century, James Carville’s refrain needs an update: it’s the political economy, stupid.
Top Photo: Berkshire Hathaway vice chairman Charlie Munger (right), shown here with Berkshire CEO Warren Buffett, argued that the U.S. and China would each benefit from closer trade ties. (Scott Morgan/Reuters/Redux)
