Nancy Pelosi’s trip to Taiwan, whether it actually happens or not, will mark yet another step in the accelerating decoupling between China and the West.
A Fair Bit of History, Starting in 2018.
Way back in 2018, in China, the United States and the New Normal, I wrote that relations between the United States and China would ONLY get worse and foreign companies that do business in or with China need to at least consider what that will mean for their business:
The above is but an introduction to what we see as China’s diminished future for foreign companies. Since pretty much the inception of the US-China trade war we have seen it as more than a trade war. At first, we saw the US tariffs as an effort by the United States to get China to “open up” and “act right” on things like the internet and IP. But because we did not see China changing on these things, we did not see the trade war ending.
Vice-President Pence’s speech on China earlier this week has only reinforced that the trade war between China and the US will not be ending any time soon, if ever. The New York Times has called that speech the Portent of a New Cold War between the United States and China, and China’s own Global Times wrote an article, Pence speech shows Washington’s tougher policy on China. Don’t blame us; we are just the messengers. Things are getting tough between China and the United States right now and the trade war is just a symptom of that, not the disease.
The United States is aggressively and unabashedly doing what it can to isolate China and remove it from the world of international trade. The new free trade agreement between the United States and Canada is further proof of this as it essentially blocks Canada and Mexico from engaging in free trade with China. See What Trump’s new trade pact signals about China. Word is that shutting out China is going to become a regular thing in all new U.S. trade agreements. See US Commerce’s Ross eyes anti-China ‘poison pill’ for new trade deals.
The above is why we will continue to write about what North American and Latin American and European and Australian businesses should be doing to deal with the new normal regarding China. We are writing these things because we value our credibility and because we presume our readers value our no-holds barred advice — threatening emails or not.
Almost exactly three years ago, in When Will the US-China Trade War End? It’s the New Normal, I again sounded the alarm on this blog about how relations between the United States and China would only continue to detoriorate and how companies that do business with China need to be mindful of this:
For the last year, the most common question asked of both our China lawyers and our international trade lawyers has been: When will the US-China trade war end. President Trump’s announcement yesterday that the U.S. will be putting a 10% tariff on all Chinese goods not yet tariffed partially answers that question.
My full answer (which has been my answer for about a year) is that there is no end in sight to the US-China trade war. It will not end because it is much more than a trade war; it is a political, economic, and low-level military war. The better question right now is not when it will end, it’s how is it going to spread. In subsequent blog posts we will discuss how you should expect that trade war to spread and how you as an international company should start preparing to deal with what we have been publicly calling the New Normal for going on a year now.
By late 2018, I began to believe the international business community was focusing too much on tariffs and not enough on what was happening to US-China relations beyond just tariffs. In December, 2018, in How to Avoid Being Detained in China, I wrote about how Meng Wanzhou’s arrest could impact US-China business relations. Then in January, 2019, in The Huawei Indictments are the New Normal, we wrote of how what was happening between the US and Huawei would impact US-China relations. And all the while, I was seeing my law firm’s international trade lawyers killing themselves with all the work they were having to put into the steady stream of anti-dumping and countervailing duty cases being brought against Chinese products.
In April, 2019, the Wall Street Journal quoted me in a cover story Trade Deal Alone Won’t Fix Strained U.S.-China Business Relations on how a US-China trade deal will not change that much with US-China relations:
But rattled businesses on both sides of the Pacific are skittish about rushing back in to revive the once-booming investment activity between the two countries.
“There is no way any deal between China and the U.S. will cause everyone on both sides to say, ‘We were just kidding,’” said Dan Harris, managing partner at Harris Bricken, a law firm that specializes in investment with China. “The tariffs and the arrests and the threats and the heightened risk have impacted companies and that will not go away.”
On May 1, 2019, in Yet Another International Trade (AD/CVD) Petition Against China, Adams Lee (one of our international trade lawyers) wrote of how the United States was upping the duties (retroactively and sometimes by more than 200%) against Chinese products as a way of conducting an anti-China foreign policy on the sly:
And yet, from an economic and policy standpoint even I am starting to get concerned by all these cases. I say this because of the massive onslaught of AD/CVD cases being brought against China and how aggressively (on multiple levels) the United States Commerce Department has been on these cases. To the point where I am finding myself wondering how important a trade deal with China will be if the United States giveth on the one hand and then taketh via these AD/CVD cases on the other hand. And is it right for the United States government to almost “on the sly” be pushing American (and foreign companies as well) away from China, without making this policy clearer?
It is important to note that Adams was questioning a U.S. policy that was making him and our law firm a lot more money by giving him and our international trade team way more good international trade work. The silver lining is that this massive increase in work allowed us to bring on a new international trade lawyer, Fred Rocafort, who is a long-time friend of mine and who is fluent in English, Spanish and Chinese!
The day before President Trump’s May 5 by now infamous tariff tweet, I decided to go public with my belief that the tariffs were not the key issue in analyzing US-China trade relations. I was by this point of the view that neither the United States nor China truly wanted relations to improve and that we should expect them to only worsen. See e.g. Does China WANT a Second Decoupling? The Chinese Texts Say That it Does.
In my May 4, post, The US-China Trade War: Winter is Coming I wrote of how “the United States is aggressively and unabashedly doing what it can to isolate China and to remove it from the world of international trade and of how shutting out China will become a regular thing in all new U.S. trade agreements . (See US Commerce’s Ross eyes anti-China ‘poison pill’ for new“trade deals.) I see the future trade deals between the United States and the EU and Latin America forcing countries in those regions to line up with the United States and against China. The new United States/Mexico/ Canada deal already does that. See The New NAFTA’s Real Target? China. I know very few people want to hear this, but I see the EU and Canada and . Australia and most of Latin America eventually following the United States in reducing its China ties. My law firm has a big EU presence and much of our China work is for European countries so I take zero pleasure from this prediction.
That May 4 post made clear that no matter what happens in the US-China trade war, things will NOT revert back to the way they had been for foreign companies:
The above is but an introduction to what we see as China’s diminished future for foreign companies. Since pretty much the inception of the US-China trade war we have been saying that we do not see its end because we have always seen it as more than a trade war. At first, we saw the US tariffs as an effort by the United States to get China to “open up” and “act right” on things like the internet and IP. But because we did not see China changing on these things, we did not see the trade war ending. Vice-President Pence’s speech on China earlier this week has only reinforced for me that the trade war between China and the US will not be ending any time soon, if ever. The New York Times has called that speech the Portent of a New Cold War between the United States and China and China’s own Global Times wrote an article entitled, Pence speech shows Washington’s tougher policy on China. Don’t blame us. We are just the messengers. Things are getting very tough between China and the United States right now and the trade war is just a symptom of that, not the disease.
The United States is aggressively and unabashedly doing what it can to isolate China and to remove it from the world of international trade. The new free trade agreement between the United States and Canada is further proof of this as it essentially blocks Canada and Mexico from engaging in free trade with China. See What Trump’s new trade pact signals about China. Word is that shutting out China is going to become a regular thing in all new US trade agreements. See US Commerce’s Ross eyes anti-China ‘poison pill’ for new trade deals. Will the EU and Japan and Latin America play ball on this? I predict that most if not all of them will.
So yes, the above is why we will continue to write about what North American and Latin American and European and Australian businesses should be doing to deal with the new normal regarding China. We are writing these things because we value our credibility and because we presume our readers value our no-holds barred advice— threatening emails or not.
Whether we like it or not, the US-China cold war has begun and it will spread. The two big questions are what will a spreading cold war look like and what should your international business do in light of this. Stay tuned….
Then on March 3, 2022, I wrote how Russia’s war against Ukraine had greatly increased China risks and how that war and its concimittant sanctions against Russia had caused many companies to realize that increased sanctions against China could (or even would) soon be a reality.
1. Russia’s War Has Already Impacted How Companies View Their China Risks
Our law firm has a flat fee program we internally call “China risks and revisions.” That program consists mostly of our analyzing a client’s China risks and then working with them to reduce their China risks by “lightening their China footprint.” Our goal is to reduce the client’s China footprint and thereby reduce their China risks, while at the same time capturing all or nearly all of the benefits the client gets from doing business in or with China. In just the last few days we have noticed both a massive increase in the fear of China risks and a willingness to take action to reduce those risks.
To get a sense of some of the things we look at to determine our client’s China risks, check out How to Evaluate Your China Risks. Reducing China risks tends to be incredibly specific by industry, by company, and by what exactly the company is doing in China. For a company that buys all its products from four suppliers in China, we might suggest it find at least one supplier outside China and then we help them do that. See How to Move Your Manufacturing Out of China Safely. For a company in a China joint venture with ten of its own people in China, we might recommend it switch from a joint venture arrangement to to a pure distributor-distributee relationship or, to achieve an even lighter China footprint, just license its products/technology/brand name to a Chinese company.
I have seen an increase in China risks (and a concomitant need for China footprint-lightening) in just the last few days, based largely on what has become clearer about China, and Russia and the world.
Since the inception of the US-China trade war, I have consistently lumped the EU into the US side of the China mix. I have done this on this blog, and even more emphatically on Twitter and LinkedIn. I have been often criticized for this — especially by the ever-decreasing number of people who want to absolve China of any blame for China’s growing isolation from the rest of the world. These people claim that the trade war is just between the US and China and that I should not be including the EU in it. My response always is that the EU has the same problems with China as the US, but it is just six months behind in terms of doing something about it and it will get there. I see the EU’s tough sanctions against Russia as proof that the distance between the EU and the US on issues such as human rights is actually quite small and that the odds are good that the distance between the US and the EU on China is likely quite small as well.
2. Russia’s War Will Increase the World’s Anger at China, Which Will In Turn Increase China’s Anger at the World
China is not a popular country right now. Many blame China for deliberately causing COVID (I do not think that it did) and many more blame China for having negligently allowed it to spread (I do think that it did). Lately, many are blaming China for current supply chain problems and inflation. The thinking on this is that the CCP uses its Zero-COVID policy to increase its control over China. Just yesterday, Al Jazeera (not exactly US or EU media) attacked China for exactly this. See Amid Ukraine crisis, China’s ‘Zero COVID’ weighs on global growth: Beijing’s strict pandemic policies add to supply chain and inflation risks amid economic fallout of war in Ukraine.
And then there is Ukraine. . . .
Yesterday, the media was flooded with stories about how China knew and encouraged Russia’s invasion of Ukraine well before it happened. Intelligence reveals that China made no effort to try to convince Russia not to invade Ukraine. Faced with a brutal war China had to have known would lead to the loss of thousands of lives (including children) and massive destruction, China’s only ask was that Russia not begin its brutal war until after the Olympics ended. A world that has coalesced around Ukraine is not going to take China’s extreme callousness lightly. A world that is appalled and furious with Russia’s brutality is not going to take kindly to a country that extols its “no limits” friendship with murderous Russia.
Adding insult to injury, China made clear yesterday that it opposed financial sanctions against Russia and would not participate in such sanctions, but would instead, “maintain normal economic, trade and financial exchanges” with both Russia and Belarus.
3. The World Has Changed. China Has Not Changed With It.
Yesterday, there were a ton of articles on how Russia’s war against Ukraine has drastically changed the world. I think it’s less about how the world has changed and more about how people are realizing that if the Davids of Ukraine can so successfully fight the Russian Goliath, they surely can fight to have their own governments support Ukraine. All over the world, people are realizing their own power and sending a message to democratic and quasi-democratic governments alike that they need to listen more to their people to stay in power.
The following articles (all from yesterday) document the change.
1. In As Russia Invades Ukraine, the West May Be Getting Serious, The Wall Street Journal describes what is happening with Ukraine as “a clarifying moment for the world”. It then notes how “crippling economic sanctions, Europe and North America in a rare show of unity, the strengthening of NATO, and the weakening of the pro-Russian forces in the West” will combine to inflict a lot of pain for Russia.
2. In Putin loses his key ally in the EU as Hungary’s Orban turns on the Russian leader, CNBC noted how even Hungary’s Viktor Orban, “a longtime ally of Russian President Vladimir Putin”, has turned against Russia because he realizes this is what he must do to “play well with his own electorate.”
3. In Europe’s Sleeping Giant Awakens, Atlantic Magazine talks about the”cataclysm” in German politics wrought by Russia’s war with Ukraine. Over the weekend … Olaf Scholz rose to the podium in the Bundestag and … shattered German foreign-policy taboos dating back to the founding of the Federal Republic more than 70 years ago. We are entering a new era,” Scholz told Parliament. “And that means the world we now live in is not the one we knew before.” The German government’s policy shift was “a reaction to the overwhelming pressure his government had come under—both within Germany and among Berlin’s closest allies” and “an acknowledgment that the world has indeed changed.” Germany now understands that it “must pay an economic price to defend its values, that it cannot remain a larger version of Switzerland in a world of systemic rivalries.” On the same day Scholz made his announcements, hundreds of thousands of people came out in Germany to show their solidarity with Ukraine.
The Atlantic sees this political cataclysm impacting Germany’s (and hence the EU’s) relations with Beijing as well:
It is unclear what the implications are for Berlin’s relations with Beijing, which has sealed a “no limits” partnership with Putin and refused to condemn his aggression. China is markedly more important to the German economy and its leading businesses than Russia is. And its threat to Germany’s security, though slow-burning rather than in-your-face like Moscow’s, is no less real or concerning.
But the die has been cast. “Peace and freedom in Europe don’t have a price tag,” German Foreign Minister Annalena Baerbock said last week. It is freedom over prosperity after all.
4. In Biden rallies Congress behind Ukraine, says Putin has ‘no idea what’s coming, Reuters discusses how Congress “stood together to applaud Ukraine, many waving Ukrainian flags and cheering in the chamber of the House of Representatives” and of how this coming together over Ukraine may lead to an uptick in Biden’s approval ratings. In other words, supporting Ukraine is good politics in the United States.
Getting tough on China is also good politics. In early 2021, about 70 percent of Americans had a negative view of China and that number is almost certainly considerably higher now. Since being tough on China is good politics and since mid-term elections are fast approaching, we should expect to see more sanctions and restrictions imposed by the United States as against China.
5. In U.S. Moving to Confront China on Trade, Industrial Policy, The Wall Street Journal (yesterday) discussed how the U.S. government is taking steps to further curtail trade with China, by using Section 301 of the Trade Act, which allows “U.S. officials to single out certain practices of a trading partner and take punitive action should they determine those practices violate trade law.” It also noted that “the White House is also weighing heightened scrutiny of U.S. companies’ investments in China, tighter export controls on sensitive technologies and greater cooperation with European and Asian allies and partners on subsidies and other issues.” In other words, expect trade between China and the United States to become increasingly more difficult.
The die has been cast, and in more than just Germany and Hungary, and with respect to more than just Russia and Ukraine. In large part, Hungary and Germany are opposing Russia because so many of their citizens are horrified by Russia’s brutality in Ukraine. When Russia’s war against Ukraine ends, there will be other human rights issues against which people can press their governments to act, and I think China’s brutality in Xinjiang, Tibet and Hong Kong, and its bullying of Taiwan will become the next big thing. The people power that pushed Hungary, Germany and the United States and countless other countries to get tough on Russia will do the same thing with China.
4. Russia’s War Will Increase Oil and Gas Prices and That Will Increase Your China Costs
The war and the sanctions against Russia are already causing oil and gas prices to rise and that will likely continue at least until the war ends. This will undoubtedly lead to yet further increases in shipping costs from China to Europe and it will also very likely increase your China manufacturing costs as well. One of the worst kept secrets is that Chinese companies typically charge American and European companies more than companies from elsewhere and that is mostly because they are perceived as rich, unreliable, and not friends of China.
As relations between China and the West continue to decline (due in part to Russia’s war), you should expect your Chinese manufacturing costs to increase due solely to that. You should also expect your costs to increase due to Chinese factories having to pay more for their energy costs. Your shipping charges are also likely to increase due to rising oil and gas prices. Lastly, as tensions between China and the rest of the world increase, there is a good chance tariffs on Chinese goods will increase as well. Overall, I see overall China product costs as likely to increase by at least 10 percent within the next three months.
5. Our Cold War Future, With China on the Other Side
When I was in college, many of my classes focused on the Russia-US Cold War. In one class we read about a half dozen books that discussed differing approaches to the Cold War. My professors fed me a constant diet of Graham Allison and John Foster Dulles. I must have read at least 25 books on the U.S.-Russia Cold War. I grew up during the Cold War and it is starting to feel very much like we are in the middle of another cold war that will require countries and companies to choose sides.
Just like the last Cold War, we have Russia and the United States staking out opposing positions, and other countries having to choose one side or the other. I just today did an NDTV interview with Don Ma on how Chinese tech companies are in what Ma called a “lose-lose” situation in having to choose between China and the West. I agreed with him but emphasized that this choice between blocs is something that American companies have been facing for some time and will only increase. The idea of companies having to comply with the varying requirements and sanctions between the U.S. and the EU (and to a certain extent, Australia, Japan, Norway, Switzerland, and India) on the one side and China and Russia on the other side is much of what I discussed in my original post on Ukraine’s impact on doing business with China.
If I am right about this future cold war, we should expect the decoupling between China and the rest of the world to accelerate. You should expect American and EU companies that do business with China to be heavily scrutinized by the U.S. and the EU and also by their own customers and employees. You should expect more laws limiting what your company can do with China and also more moral outrage about doing business with China. See Doing Business with China: Peng Shuai and Your Reputation Risks.
I see this battle/decoupling between democracies and autocracies as the single most important political and economic issue over the next five years. What will your company do to ensure its own international future as this battle rages?
I’ve been sounding the alarm ever sincem but today I am turning that alarm to an eleven out of ten because of the kefuffle surrounding Nancy Pelosi’s expected visit to Taiwan. I do not know for certain whether Speaker Pelosi will go to Taiwan or not, but I am thinking that she will. Most importantly, I have no clue what China’s reaction to her visit will be. But I am certain that this trip will substantially worsen relations between China and the West and that those relations will either stay at that lower level or, more likely, continue to get worse. I also am quite certain this event will make doing business with China more difficult and more risky. And what is true for the US-China relationship will almost certainly soon be true for China’s relationship with many other countries as well, including Japan, Australia, Canada, Korea, and the EU countries.
What are you seeing out there? Will Pelosi go through with her Taiwan visit and if she does, how will China respond?
In a future post we will explain why it is so important that you decide whether you will continue doing business with China or not and what you should do to protect your company should you decide to stay, leave entirely, or simply try to minimize your China footprint.