The Risks of Doing Business With China Today
By Brai Odion-Esene
January 09, 2023
In light of growing geopolitical and global economic challenges, as well as pressure from Chinese partners to facilitate their access into the U.S. market, many companies are considering how to approach their operations in China – whether to wind things down or maintain their presence. Part of that calculation includes an assessment of the U.S. political climate vis-a-vis the U.S.-China economic relationship.
There are also several policy obstacles to U.S. companies’ continued operations in China, and both public perception and media coverage of China that influence policymakers and should be assessed for business risk.
Maintaining operations in China – even if companies simultaneously invest more in U.S. facilities – can expose companies to increased policy and reputational risks. For manufacturers in particular, there is an ongoing effort in Washington DC to reward companies – through subsidies and tax credits – for increased domestic investments at the expense of those who continue to do business in countries like China.
A company’s relationship with lawmakers may be damaged by its continued presence in China. If the Chinese government were to follow-through on its threats to use military force to unite Taiwan with mainland China, then a U.S. company could find itself caught in the crossfire of U.S. sanctions and punitive legislation from Congress.
In terms of the potential damage to its reputation, doing business in a country with a poor human rights record, thrown into sharp relief by the oppression of the Uighurs, the brutal crackdown on Democratic movements in Hong Kong, and the recent demonstrations against strict COVID lockdowns, can give the impression that a company cares more about profits than democratic values or human rights.
It is worth noting that it might not be financially feasible to relocate all of a company’s operations to North America, which is why many companies – with the blessing of the Biden Administration — are moving operations to U.S. allies such as India.
For example, Apple’s business and reputation has been negatively impacted by the business practices and poor working conditions at its largest supplier in China – Foxconn. Now, the company is working to diversify its supply chain away from China to India.
Situational Analysis: Bipartisan Anti-China Sentiment & The Push To Encourage More Domestic Manufacturing
The presidencies of Bill Clinton, George W. Bush and Barack Obama saw efforts by each administration to strengthen the United States’ economic relationship with China, fueled by the belief that forging closer ties would be beneficial for the U.S. economy, open up the lucrative Chinese market to American businesses, and potentially give democracy a foothold in China. This view was largely supported by successive Congresses made up pro-trade, centrist lawmakers.
That belief steadily eroded over the years, cumulating in the election of Donald Trump, who made direct confrontation with China a central pillar of the administration’s economic policy. This is not a partisan sentiment, as Senate Majority Leader Chuck Schumer (D-NY), for example, has always been a China hawk. He has sponsored multiple bills intended to punish China for what he believes are anti-competitive policies.
The anti-China sentiment – to varying degrees – among U.S. government officials and lawmakers of both parties is driven by:
- China’s human rights record
- Fierce economic competition between both countries
- National security concerns, especially U.S. supply chain vulnerabilities
China’s human rights record has fueled the passage of laws such as the Uighur Forced Labor Prevention Act, and sanctions on Chinese government officials for their roles in repressing ethnic and religious minorities.
China’s economic growth puts it in direct competition with the United States as the world’s largest economy, and the U.S. Trade Representative (USTR) has accused China of pursuing a state-led, non-market approach to the economy and trade and rejecting open, market-oriented principles.
There are also growing concerns regarding the resiliency of the U.S. supply chain, and what some believe is an overreliance of U.S. companies on China. One example was the critical shortage of personal protective equipment at the height of the COVID-19 pandemic, as well as the 2021 supply chain crisis that was due in part to the lockdown of major Chinese ports as part of the government’s zero-COVID policy – and the fact that many companies were overly reliant on Chinese partners.
The belief that the U.S.’ long-term economic and national security requires a sustainable, competitive domestic industry, coupled with concerns about not falling behind China, spurred the enactment of legislation such as the CHIPS and Science Act as well as the Inflation Reduction Act, but of which provide incentives to U.S. companies to invest in and grow their domestic operations.
CHIPS and Science Act
Following the passage of the CHIPS Act, President Biden signed an Executive Order to guide how the government would implement the law. This included the requirement that all CHIPS programs must meet economic and national security needs. The order stipulates that the CHIPS program “must address economic and national security risks” by building up domestic capacity to address the U.S. reliance on vulnerable or overly concentrated foreign production, and increase United States economic productivity and competitiveness.
For example, Treasury Secretary Janet Yellen noted the impact of the semiconductor shortage and how it “caused automakers like Ford to temporarily shut down their assembly plants.” She said it is the administration’s belief that cultivating a full semiconductor ecosystem in the United States will reduce economic and national security risks.
Inflation Reduction Act
The goal of this law is to incentivize carmakers to produce their vehicles in the United States and to rely less on China. For example, the law seeks to reduce America’s reliance on lithium-ion batteries made in China (its share of the market is 80%) by forcing manufacturers to produce locally. It also provides up to $7,500 in tax credits for buying domestically-made new electric vehicles and $4,000 for used electric vehicles.
Public Policy Review: What Policymakers Are Saying About China
President Biden campaigned on a platform of restoring the American middle class, particularly through policies that boost domestic manufacturing and create a level playing field with China. During a November 29th speech at a manufacturing facility in Michigan, the president lamented the fact that “we forgot how critically important the skill of the labor force we have in the United States of America,” declaring that “instead of relying on chips made overseas in places like China, the supply chain for those chips will be here in America, in Michigan.”
Biden Administration’s Approach to the U.S.-China Relationship
Last year the administration released details of its approach to the U.S.-China relationship, in which it noted Beijing’s resistance to meaningful reforms to address concerns about its state-dominated economic system. This is why the administration focused on investing in the country’s domestic renewal as well as revitalizing our alliances and partnerships abroad.
The administration said it would take some initial steps to re-align U.S. trade policies toward China, including defending U.S. economic interests by “using the full range of tools we have and by developing new tools as needed” to address:
- China’s policies and practices that distort competition by propping up state-owned enterprises, limit market access, and other coercive and predatory practices in trade and technology.
- Broader concerns with abuse by state-owned enterprises, anti-competitive behavior and subsidies, and the theft of American intellectual property.
In its National Security Strategy published in October 2022, the administration described China as America’s most consequential geopolitical challenge, and said it will prioritize support for U.S. private sector innovation with strategic public investments in the U.S. workforce, strategic sectors, and supply chains –particularly in critical and emerging technologies.
The administration also vowed to hold China We to account for abuses such as the genocide in Xinjiang, human rights violations in Tibet, and the dismantling of Hong Kong’s democracy.
The Biden Administration’s National Security Strategy also made a commitment to deeper cooperation with other democracies to develop “strong, resilient, and mutually reinforcing relationships.”
This is why in May the administration launched the Indo-Pacific Economic Framework for Prosperity (IPEF) with Australia, Brunei Darussalam, Fiji India, Indonesia, Japan, the Republic of Korea, Malaysia, New Zealand, Philippines, Singapore, Thailand, and Vietnam. The framework is intended to fuel cooperation, economic activity and investment.
Treasury Secretary Janet Yellen described the administration’s “friendshoring” approach as diversifying away from countries that present geopolitical and security risks to the U.S. supply chain and deepening economic integration with trusted trading partners like India. It also involves eliminating a reliance “on manufacturers whose approaches clash with our human rights values.”
The U.S.-Mexico-Canada trade agreement will be another vehicle through which the administration will encourage companies to diversify away from China and invest more in North America.
Securing Critical Supply Chains
The U.S. Department of Defense in February published a report on ‘Securing Defense-Critical Supply Chains’, in which it noted the challenge posed by China’s industrial base, particularly for the supply of Lithium batteries.
The DoD warned of the risks posed by the U.S.’ reliance on “sole-source” suppliers and foreign sources, and in particular called out the competitive pressure from China (in the form of massive government subsidies) which has put U.S. companies out of business.
Impact on Job Losses
The U.S. International Trade Commission (USITC) published a report in November 2022 cataloging information on the distributional effects of trade and trade policy on underrepresented and underserved communities.
It noted the view of many of those surveyed that policies resulting in increased import competition had negative effects on workers in their communities and that imports were competing unfairly, for example, due to dumping or lack of worker protections in exporting countries like China. Many participants said that U.S. trade policy needs to move toward a framework that better protects U.S. workers and strengthens domestic supply chains.
As already noted, Senate Majority Leader Chuck Schumer is a prominent China critic, as are more right-leaning lawmakers such as Marco Rubio (R-FL) and Tom Cotton (R-AR), a potential 2024 Presidential candidate who has called for a targeted decoupling from China. There are also centrist Republicans wary of Beijing, such as like Mitt Romney – who said the prospect of a China-led global order would be troubling given the country’s many oppressive practices.
In addition, House Republican leadership is likely to create a select committee focused on economic and security competition with China in January. Leaders have vowed to – among other things – “restore supply chains and end critical economic dependencies on China.”
Congressional Executive Commission on China
The Congressional-Executive Commission on China was created in 2000 with the mandate to monitor human rights and the development of the rule of law in China, and to submit an annual report to the President and the Congress. It consists of a bipartisan group made up of nine Senators, nine members of the House of Representatives, and five senior Administration officials appointed by the President.
The Commission published its Annual Report in November, in which it documented ongoing repressive actions by the Chinese government to including by pressuring and threatening transnational businesses to turn a blind eye to, or in some cases be complicit in, its abuses.
The Commission was also very critical of the plans by the heads of prominent U.S. financial firms to attend a Hong Kong investment summit alongside sanctioned officials. They said their participation makes them complicit not just in the human rights abuses in Hong Kong but also in the Chinese government’s efforts to actively undermine the democratic political processes of other countries and export an illiberal model of international order.
U.S.-China Economic and Security Review Commission
The U.S.-China Economic and Security Review Commission was created by Congress in 2000 and given the mandate to monitor, investigate, and submit to Congress an annual report on the national security implications of the trade and economic relationship between the U.S. and China, and to provide recommendations to Congress for legislative and administrative action.
The recommendations in its latest annual report include ensuring that any legislation by Congress intended to support reshoring or existing production in the United States does not lead to additional dependence on supply chains running through or relying on China.
It also called on lawmakers to pass legislation that requires U.S. government suppliers in “critical” sectors, as defined by Congress, to confidentially disclose all tiers of their contractors for the purpose of identifying supply chain dependencies on China. If the suppliers are unable to meet this requirement within three years and each year thereafter, they should be ineligible to receive government contracts.
How to Approach Closing or Scaling Back China Operations
Generate goodwill for your company while securing air cover against a potential backlash from Beijing.
Proactive and regular engagement with key stakeholders to educate them on the company’s plans to shift operations out of China, promoting its key messages and position the company as a positive corporate actor.
- Biden Administration – National Economic Council Director Brian Deese, Domestic Policy Council Director Susan Rice, Commerce Secretary Gina Raimondo, Treasury Secretary Janet Yellen, Secretary of State Anthony Blinken.
- Capitol Hill – Senate Majority Leader Chuck Schumer, House Republican Leadership
- Media – Axios, Bloomberg News, CNBC, New York Times, POLITICO, Wall Street Journal, Washington Post.
- U.S. States of Operation – Office of the Governor, state government officials for your headquarters location, state-level Department of Commerce or equivalent.
- This company will be part of the solution to improving America’s supply chain resiliency and growing the U.S. manufacturing base to make the vehicles of the future.
- This decision demonstrates this company’s commitment to American economic growth.
- This company is not blind to the abuses perpetrated by the Chinese Communist Party and is not motivated solely by business considerations.
The company’s leadership should engage directly with senior U.S. government officials – both to telegraph its plans to close down operations in China, as well as to secure government support in the event of threats and possible retaliation by the Chinese government.
As needed, especially for smaller organizations, the company should leverage its relationships within its home state congressional delegation to advocate on its behalf with Congress and amplify its message.
The company should also proactively educate key media outlets with a dedicated Washington D.C. readership to control the narrative around its reasons for leaving China.
Request a consultation with Brai Odion-Esene using the link below to discuss your organization’s policy and government affairs risks from doing business with China.