View: Derisking China business

At a closed-door business meeting in Singapore in March attended by representatives of large US firms, much conversation was about China. Is the purported ‘de-coupling’ of the world’s two biggest economies working? Is it the correct direction to take? Will the politics in Washington ahead of next year’s presidential elections, and naming of China as the ‘prime enemy’ help global business?

The consensus view that emerged was that while politics around China was dangerous, US policy around Beijing was largely unchanged and was likely to remain so. So, while American politicians beat drums over Taiwan and travel around Asia to push their anti-China agenda, Washington policymakers seem to be downgrading their ‘de-coupling’ desire to a more acceptable ‘de-risking’ narrative.

The drawdown has good reasons:

• The US realises it isn’t easy for its economy to get off the China wagon when bilateral trade has continued to boom, despite trade sanctions.
• There is an understanding that throwing everything off the plate at once won’t be helpful, so best to remain, in the words of US National Security Advisor Jake Sullivan, ‘narrowly focused on technology’.

Bilateral trade has, indeed, continued to bloom. Trade in goods hit a new record in 2022, rising by 2.5% y-o-y to touch $690.6 billion. The previous record was $658.8 billion in 2018, the year when the two countries became embroiled in a trade war after president Donald Trump imposed tariffs on $300 billion worth of Chinese goods. Beijing retaliated, targeting some $100 billion of mainly agricultural goods from the US.

The US trade deficit grew by 8.3% y-o-y to touch $382.9 billion in 2022 with imports of Chinese goods hitting $536.8 billion and exports, $13.8 billion. China was the US’s third biggest trading partner -- and the biggest source of imports. So, the big question: How quickly can the US shift its sourcing to other countries? Answer: Not very quickly. Which means Washington and its kettle of China hawks will have to learn to live with this reality.

At the foundation of this shifting narrative lie deep business interests built over several decades that Sullivan indicated had hollowed out the US’s industrial base. Now, it is extremely difficult to fill the chasm and bring manufacturing back to the US. So, American companies are not deserting the Chinese market in hordes. They are looking to find alternatives suitable to their future expansion.

Former US treasury chief Henry Paulson wrote in Foreign Affairs as early as January that America’s China policy wasn’t working, and was likely to hurt Americans more than the Chinese over the long term. According to him, a shift to a confrontational relationship with China meant US companies would be at a disadvantage relative to its allies.

The role played by US businesses in opening up US and China relations, following the 1971-72 Nixon-Kissinger ‘ping-pong’ diplomacy with Mao was large. Little has changed since.

The de-risking narrative is also supported by others such as the European Commission and Germany, who are now also focusing on reducing ‘one-sided dependencies,’ keeping their security in mind. So, low-value Chinese goods and services are pretty much on the table. What isn’t is everything hi-tech from AI to semiconductors, to drones and biotechnology. From here it is about a targeted strategy, rather than a wholesale approach.

All this sits well from the US perspective. The larger question is whether China will buy into this new narrative at a time when it seriously believes that a ‘technology blockade’ is underway solely to contain its rise as a global power. Where shall the twain meet, if at all?

It all boils down to trust. And at this point, there isn’t much of it despite the new diplomatic rhetoric from Washington. A recent commentary on Xinhua, China’s government news agency, told Washington: ‘You can’t have it both ways.’ China doesn’t want to be a junior partner, ‘a minion who would deliver on America’s priorities,’ it added. It wants to be seen as a rising global power backed by its own technology and resources, not as a ‘T-shirts and socks manufacturer’.

It is about eventual supremacy. China is no longer an economy made up of low-skilled and low-wage labour. The problem is that while American business may be willing to accept this and build strategies to still keep profiting from it, American politics may not be ready yet to do business with a new China.


The writer is co-founder and former president, Public Affairs Forum of India