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Strained US-China relations: key considerations for treasurers, CEOs and CFOs

When the CEOs of America’s biggest bank (JPMorgan Chase), most valuable technology company (Apple), largest electronic vehicle maker (Tesla) and leading coffee chain (Starbucks) visited China in recent months to reiterate their long-term commitment to doing business in the world’s second largest economy, they were aware of the strained US-Chinese relations. Nonetheless, they highlighted the fact that China remains a major focus of importance for their businesses due to the considerable investments made by these companies in the world’s leading exporter nation.

Even though China is one of the top two foreign investors in US national debt and one of America’s three biggest trading partners, tensions between Washington and Beijing have heightened in recent years, primarily because of geopolitical crises and unresolved trade, technology and national security issues.

US Treasury Secretary Janet Yellen made a four-day visit to China earlier this month as a part of ongoing efforts to ease tensions between the world’s most powerful nations. In a prepared statement for delivery at a press conference in Beijing on July 8th, Yellen said, “The relationship between the United States and the People’s Republic of China is one of the most consequential of our time. As the world’s two largest economies, our nations collectively represent 40 percent of the global economy.”

The Treasury Secretary further commented, “Broadly speaking, I believe that my bilateral meetings – which totaled about 10 hours over two days – served as a step forward in our effort to put the U.S.-China relationship on surer footing.” While Yellen’s meetings with Chinese officials were “direct, substantive and productive” and a likely step forward in improving US-China relations, “significant disagreements” ranging from trade practices to geopolitics remain.

Given the increasing complexity and the history of long-standing disputes, competing interests, and intense rivalry between two of the world’s most influential nations, analysts believe that it is unlikely that Washington and Beijing will mend fences.

Here are three aspects that CEOs, CFOs and treasurers of multinational corporations should bear in mind that are likely to make it harder to repair fractious US-China ties:

De-risking from China might be decoupling in disguise

Last year, China’s COVID lockdowns and geopolitical conflicts exacerbated disruptions in the global supply chain, forcing companies and countries to reconfigure their sourcing and production strategies, particularly those with ties to the “world’s factory”, China.

Geopolitical concerns fuelled the commentary about the possibility of the US and China decoupling from each other. However, decoupling of US-China economic ties and supply chains is considered by experts as an unrealistic proposition given their deep economic interdependence and their corporate and cultural connections.

An alternative to decoupling is de-risking. De-risking involves taking steps to diversify supply chains to hedge against risk and uncertainty, reducing excessive dependency on China as a market and as a supplier. De-risking of supply chains for products that are highly dependent on China would also reduce critical vulnerabilities while minimizing potential damage to bilateral trade and investment.

Although “There is a sense that ‘de-risking’  might be ‘decoupling’ in disguise”, the Chinese state-run Global Times wrote in an editorial in April, Yellen noted that “China’s growth has lifted hundreds of millions out of poverty and made clear that the United States is not seeking to decouple from China. There is an important distinction between decoupling, on the one hand, and on the other hand, diversifying critical supply chains or taking targeted national security actions. We know that a decoupling of the world’s two largest economies would be disastrous for both countries and destabilizing for the world. And it would be virtually impossible to undertake.”

The sceptics in China, however, aren’t convinced. “On the surface, de-risking seems more moderate and less confrontational than decoupling, but in essence it isn’t really any different”, observed Wang Yufan, Assistant Research Fellow, Department of American Studies, China Institute of International Studies (CIIS), in a recent article published in the China-US Focus website.

Considering that the rhetoric of “de-risking, not decoupling” isn’t accepted by China, and the US-China relationship is marred by sharp differences over issues that include Taiwan, trade, technology, human rights and security, even a small trigger of miscommunication could spark an unintended crisis or economic conflict.

The war for chip supremacy is likely to intensify

Semiconductors have driven transformation in critical industries, including finance, aviation, defence, education, healthcare, automotive and electronics, making the global economy highly reliant on them. They go into everything from smartphones, vehicles, radios, computers, refrigerators and video games to medical devices and vast datacentres that power the internet. For instance, a modern car system can have anywhere between 2,000 and 3,000 chips. 

Last year, citing national security concerns, the US imposed semiconductor export controls on China, limiting the sale of advanced chips and chipmaking equipment to the country’s chip industry. Key chip-making nations and US allies, Japan and the Netherlands, also agreed to place chip-related export controls on China.

In June 2023, the Dutch government announced new export restrictions on advanced semiconductor equipment. China decried the move, and in retaliation hit back earlier this month by imposing restrictions on exports of gallium and germanium, two rare metals that are considered crucial to the manufacturing of semiconductor chips. The export curbs on these two strategic raw materials serves as a warning to Europe and the US, as the battle for chip supremacy in an increasingly digitised world is likely to intensify in the years to come.

National security trumps economic growth

National security is central to both US and Chinese policy decisions and is prioritised over economic growth.

Ratcheting up national security concerns, the US is debating a ban on Chinese-owned video-sharing app TikTok. Beijing is also stepping up the feud with Washington over national security. In May this year, China’s government “Told users of computer equipment deemed sensitive to stop buying products from the biggest U.S. memory chipmaker, Micron Technology Inc.”, as was recently reported by the Associated Press (AP).

“Micron products have unspecified ‘serious network security risks’ that pose hazards to China’s information infrastructure and affect national security, the Cyberspace Administration of China said on its website”, the AP article further added.

Some months ago, the US business community was rattled when state security authorities in China raided two US consulting companies, Bain & Company and CapVision, and a due diligence firm, Mintz Group. These raids and subsequent investigations were carried out in the name of national security.

Foreign companies and their employees are also feeling unnerved by the amplified restrictions on commercial information access and the recent broadening of China’s anti-espionage law.

This revised anti-spy law is a growing cause for concern, even as the US Chamber of Commerce has said that, “In the context of China’s new Counter Espionage Law, which casts a wide net over the range of documents, data or materials considered relevant to national security, the additional scrutiny of firms providing essential business services dramatically increases the uncertainties and risks of doing business in the People's Republic. This is a matter of serious concern for the investor community and likely is as well for their local business partners in China.”

The increased focus on national security and geopolitical issues is putting companies in a tough position. This may constrict the flows of investment between the world’s biggest importer (the US) and the world’s largest exporter (China).

Meanwhile, Tesla is building a second factory in China to produce its MegaPack or large-scale batteries, US drug maker Moderna is set to invest US$1 billion in China to develop mRna medicines, and Volkswagen has announced plans to invest $1 billion in a new development and procurement centre for electric cars in China. However, US venture capital giant, Sequoia Capital’s decision to split off its Chinese operations into a separate entity (separating its US and China businesses) amid escalating tensions between Washington and Beijing, has drawn attention from American lawmakers.

“The moves come on the back of growing scrutiny from US lawmakers about Beijing’s influence on Chinese companies doing business in the United States. A group of congressional Republicans in April called on the Biden administration to ‘use all available tools’ to sanction cloud computing firms with links to China”, as per a recent article published on CNN.

The US government is increasing scrutiny over Chinese investments in the US and mulling over new rules that could prohibit American companies from making outbound investments in certain sectors in China. There is a distinct possibility that if the latter were to happen, it could shake investor confidence in China’s economy. The Chinese government might then push back and take countermeasures against US entities in the form of clamping down on the export of critical minerals (lithium, cobalt, graphite and nickel) that are used in making electric vehicle batteries.

Thus, it is highly probable that US-Chinese relations will face a continuing period of political and economic uncertainty, as both nations have made national security a pervasive paradigm deeply ingrained in every aspect of their governance. Consequently, multinational corporations may have to continually reconfigure for opportunity and risk over the medium to long term.

In conclusion, with the US and China locked in a race for global political, economic and technological dominance, “No one visit will solve our challenges overnight”, as Yellen remarked in Beijing. “But I expect that this trip will help build a resilient and productive channel of communication with China’s new economic team.”

The Treasury chief emphasised that it is important for the two nations to work together to “Make sure businesses understand there is a wide swath of economic interactions that are uncontroversial to both sides”. Nonetheless, it is still difficult to see how the United States and China will come together to cooperate effectively and resolve their differences given that they engage in tit-for-tat retaliation on grounds of national security.

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