McLARTY UPDATE: Navigating the Challenges of Deteriorating US-China Relations
April 1, 2020
- US-China relations are at risk of continuing to sour in the months ahead, creating an environment that companies will find challenging to navigate.
- China will continue to hold the door open for international businesses, recognizing the positive roles they can play as the country regains its economic footing.
- We offer four recommendations for businesses to consider as they evaluate their China portfolios in these challenging times.
Events over the last week have exposed frictions in US-China relations that will touch American companies, their customers, and their suppliers for months to come.
Even as President Trump and President Xi have maintained open channels of communication and trade officials continue to work together on aspects of the Phase One trade deal, for all intents and purposes the rest of the relationship has become frozen – or slipped into a ditch. Nearly all bilateral government channels from law enforcement to statistics, drug cases to drug approvals have stopped, and the two countries are struggling to coordinate common responses to shared challenges, including the spread of COVID-19 and the economic crash already felt in both countries.
There is a high likelihood that the US-China relationship will face intensifying downward pressure in the coming months, as an accumulation of problems generates bitterness on both sides of the Pacific. These mounting problems will weaken the floor that the Phase One trade deal was envisioned to place under the relationship, and will expose US firms in China to greater risk.
Among the challenges that both sides will confront are:
- A budding “narrative war” between Washington and Beijing over who bears greater responsibility for the outbreak of COVID-19 and its global spread. Leading figures in both capitals are invested in framing the other as the culprit.
- Some US officials are recycling with reporters stories linking the origin of the virus to a Wuhan bioweapons lab, at least raising the possibility that it may have originated there, then spread from an accidental release. Senator Tom Cotton already has made this unsubstantiated (and explosive) claim and others have joined in.
- Chinese officials and propagandists, including Ministry of Foreign Affairs spokesperson Zhao Lijian, have pushed fringe conspiracy theories that the virus may have been brought to Wuhan by the US Army. These claims have attracted attention within China, particularly on social media. Chinese official media also has been arguing that Beijing’s governance system is superior to Western liberal democratic governments in its response to the virus.
- A tit-for-tat cycle over journalist visas. Both countries have taken turns expelling journalists from the other’s news organizations.
- Tightening of US export control restrictions, particularly on items being sold to Huawei.
- Rising scrutiny over each side’s adherence to the terms of the Phase One trade deal, particularly as high-value Chinese purchases of American exports fail to materialize. There are zero expectations that a Phase Two process will begin ahead of the US presidential election.
- Rising American scrutiny of developments in Xinjiang. The US Congress likely will continue to prod the Trump administration to confront Beijing over its detention of more than one million ethnic Uighurs and other Muslims in its western frontier. This pressure could manifest, for example, in decisions to impose Magnitsky Act sanctions on named top Chinese officials around President Xi.
- Brewing tension over Taiwan. Washington and Beijing have been matching each other’s actions on Taiwan, with Washington providing more visible support and Beijing ratcheting up pressure on Taiwan.
- Possible limits on student exchanges. Although Chinese students in recent years have represented the largest percentage of foreign students in the United States by a wide margin and have contributed to the financial solvency of America’s higher education system, they also have emerged in both countries as a source of scrutiny. For the US law enforcement community, there have been growing concerns about Chinese students collecting industrial and state secrets for the benefit of China. And on the March 26 presidential phone call, Xi Jinping expressed concern about the safety of Chinese students in the United States amidst the COVID-19 outbreak, and presumably the uptick in anti-China xenophobia that has accompanied it.
This list is illustrative, not exhaustive. The key takeaways are (1) there are a range of issues across the bilateral relationship that are generating pressure and, (2) the channels for ameliorating frictions are weakening. An international pandemic and global economic crisis should have been a natural area of cooperation for the US and China. Instead, with the exception of US Secretary of Health and Human Services Alex Azar’s March 31 call with his Chinese counterpart Ma Xiaowei, US and Chinese action has been marked by finger-pointing, rancor, and very little interest in communication.
Another new feature of the relationship relative to previous downturns is that Beijing has grown more tolerant of friction. A tit-for-tat pattern has emerged across multiple domains of the relationship in recent years, whereby Beijing seeks to match Washington’s actions in a symmetrical manner. And as leaders in both countries approach key referendums on their hold on power, with the US presidential election this November and China’s leadership selection in 2022, both Trump and Xi likely will seek to avoid domestic criticisms of weakness in their dealings with each other.
Recommendations for Businesses
Recognizing that each company will need to navigate its own path for protecting its interests during this anticipated downturn in US-China relations, here are a few guiding thoughts for helping to organize your approach on how best to do so.
- Recognize your leverage. The Chinese government still sees value in having its economy engaged with American businesses. This reality will not change between now and November 2020, even if political relations deteriorate. The Chinese leadership remains interested in being seen as continuing to welcome American investment.
- Hold on to the big picture. While doing business with China has become more challenging, most companies that have built China businesses still see China’s growth potential as affording them considerable opportunity. Many companies will not — and cannot — cut themselves off from interaction with the Chinese market. Supply chains of non-sensitive products will not shift from efficient, cheap, and rapid suppliers of components from China, particularly as China’s main engines of economic activity gear back up toward full production ahead of competitors in South Asia and elsewhere.
- Serve as a bridge-builder. As coordination between national governments halts, there is expanding space for other actors to fill. This already has been seen through China’s outreach to American state and local leaders, and also through the fact that leading philanthropies in both countries have been the greatest sources of support for people in the other country. Particularly during this moment of vulnerability, there are many opportunities to acquire lasting goodwill at a discount. US corporations should stay close to state governors as Beijing looks for sub-national ties to offset the downturn in Federal-level relations. In the absence of presidential and cabinet-level meetings, US CEOs may be offered special audiences with senior Chinese leaders. Yet companies will still have to be careful to avoid getting caught in the crossfire between Washington and Beijing.
- Be exemplary. As the magnitude of layoffs in China comes into focus, there is growing scrutiny in Chinese social media of how employees are being treated. Companies that ensure non-discrimination between local and foreign employees will protect their reputations. Actions US companies take domestically and in other markets will be closely scrutinized for perceived slights to customers and workers in China.
The downturn in US-China relations will remain for 2020 and likely beyond, with important ramifications for your China business. The McLarty team stands ready to assist your firm to protect and enhance its interests in these uncertain times.
To schedule a private call to discuss how MA can help your company navigate these uncertain times, please contact John Holden at firstname.lastname@example.org.
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