U.S. China Conflict Has Only Just Begun

Chief Executive Officer

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The rapidly escalating U.S.-China great power conflict has more enduring causes than questions of responsibility for Covid-19. The implications of heightened confrontation will be profound and lasting. Enterprises with significant exposure to the world’s largest bilateral economic relationship increasingly will be compelled to choose between rivals, especially when operating in a growing list of sensitive sectors.

CEOs should plan now for a variety of scenarios linked by a common theme: an unraveling U.S.-China relationship.

The United States and China will not return to the economic relationship that developed following enactment under the Clinton Administration of Permanent Normal Trade Relations. Instead, and to the great consternation of Beijing, the status quo that prevailed for nearly twenty years has been fundamentally disrupted. Covid-19 only has reinforced and accelerated the preexisting direction among U.S. policy makers in support of decoupling. Chinese state officials have signaled their anxiety, as Chinese Foreign Ministry spokesperson Zhao Lijian tweeted, “It might be US [sic] army who brought the epidemic to Wuhan. Be transparent! Make public your data! US [sic] owe us an explanation!”[1]

In the United States, a powerful bipartisan consensus has emerged in favor of downsizing the economic relationship with China. CEOs should consider current tensions only the beginning of this long-term process.

The reason to understand separation as a secular trend: The United States and China both seek to significantly decrease reliance on foreign countries for supply chains and critical goods. The powerful forces driving Beijing and Washington, D.C. toward conflict undermine the viability of a “balanced” approach to corporate engagement.

Now is the time for CEOs to reevaluate their company’s exposure to U.S.-China tensions. Mitigating risks to companies headquartered in the United States or in U.S. allied countries will require:

• Planning for long-term difficulties for foreign companies operating in China, and Chinese companies operating in the United States, including forced exclusion from markets. The risk of market exclusion extends beyond sectors such as telecommunications equipment and major Internet platforms that have most recently been the focus of policy makers in China and the United States. Beyond direct market access, corporations with international footprints will need to examine risk to supply chains, intellectual property, staffing and other operational aspects.

• Putting in place plans to respond to politically-driven mandates from the Chinese and/or U.S. governments. Recent events in the U.S.-China relationship demonstrate that changes can be sudden and nearly impossible to forecast precisely. The central role of trade – and potential economic decoupling – in the ideological tensions of the bilateral relationship means that sectors and even individual companies can come under political scrutiny with little to no warning. CEOs need to be prepared to manage crisis situations requiring day-to-day political engagement and public-facing communication. Companies with clear scenario plans will be able to respond more effectively and rapidly, limiting downside risk and sometimes unlocking new opportunities.

• Proactively providing the U.S. government with solutions to reshore supply chains and otherwise reduce economic dependence on China. Companies should not wait for economic decoupling mandates. Companies that are first movers in their sectors benefit from several advantages. First, organizations are likely to achieve better outcomes in the long-term by putting in place proper systems on timelines that work best for their company. Second, those who act early can shape the contours of future government policy – an important competitive advantage. Finally, late adopters risk being portrayed as part of the problem rather than part of the solution, potentially inviting further policy action against them.

CEOs who lead on these issues will gain an advantage over their peers, no matter who wins in November. American policy makers on a bipartisan basis support reshoring supply chains from China to the United States. Democratic presidential nominee and former Vice President Joe Biden’s “Made in All of America” plan aims to “bring back critical supply chains to America so we aren’t dependent on China or any other country for the production of critical goods in a crisis.”[2] Similarly, President Donald J. Trump declared that “this pandemic has underscored the crucial importance of building up America’s economic independence, reshoring our critical supply chains and protecting America’s scientific and technological advances.”[3]

Chinese companies already are facing mounting challenges in accessing U.S. consumer and capital markets, especially as China’s human-rights violations and military assertiveness raise concerns. Specifically, efforts on both sides of the aisle seek to reduce the U.S. footprint of Chinese telecommunications companies such as Huawei and ZTE on the basis of national security concerns. More broadly, a bipartisan group of Senators introduced a bill to “delist [Chinese] firms that are out of compliance with U.S. regulators for a period of three years,” a move that might affect Chinese corporate giants such as Alibaba.[4]

American companies also are at risk. U.S. Attorney General William Barr in July warned that the U.S. government will not tolerate corporate cooperation with China previously considered noncontroversial: “America’s corporate leaders … might think, for example, that cultivating a mutually beneficial relationship is just part of the ‘guanxi’ – or system of influential social networks – necessary to do business with the PRC. But you should be alert to how you might be used, and how your efforts on behalf of a foreign company or government could implicate the Foreign Agents Registration Act.”[5]

Whatever the ebbs and flows, the observable evidence in both political systems foretells decoupling. Smart corporate leadership is preparing long-term plans to handle the impact.

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