Chinese and US economies start to decouple

Mark O'Neill June 04, 2019 08:01

After more than 30 years of increasing integration, the economies of China and the United States are starting to decouple – a historic change.

It is a result of the intensifying Sino-US conflict, which started as a trade war but has now spread into many other sectors.

On May 22, the American Chamber of Commerce in China issued a somber report that showed the severe impact of the bilateral tariffs and the trade war on their members.

A survey of its members found that 40.7 percent were considering or had relocated their manufacturing facilities outside China. The top destinations are Southeast Asia, 24.7 percent, and Mexico, 10.5 percent. Less than 6 percent have or are considering relocation to the US.

The vast majority, 74.9 percent, said that increases in Chinese and US tariffs were negatively impacting their businesses, through lower demand for products, higher manufacturing costs and higher sales prices.

One in five have experienced increased inspections and slower customs clearances; 14.2 percent experienced slower approval for licenses and other complications from more bureaucratic oversight and regulatory scrutiny.

Things will get worse. Last Friday, China’s Ministry of Commerce announced that it would establish its own black list of foreign companies “that harm the interests of Chinese groups”. This is in retaliation for President Trump’s banning Huawei from the US market and its judicial pursuit of Meng Wanzhou, its chief financial officer.

On Sunday, Wang Shouwen, deputy head of Beijing’s negotiating team with the US, said that foreign companies should be investigated if they violated Chinese law or abetted “non-commercial” actions against Chinese companies, including “blockades”.

This decoupling is the policy of the two major "China hawks" in the cabinet of President Donald Trump – National Security Adviser John Bolton and Trade Representative Robert Lighthizer. They see China as the main competitor for US economic domination in the world and this disengagement as vital before it is too late and China becomes technologically too advanced.

Joerg Wuttke, re-elected chairman of the EU Chamber of Commerce in China on May 28, said that a cold technological war had started. “As an association with 1,600 international companies with integrated global value chains, minimizing trade barriers and tariffs is essential. I am deeply convinced of the value of open markets and a rules-based global order. However, a resolution in the near future seems unlikely.

"The direct impact is limited at the moment, largely due to the intense onshoring into China that many European companies committed to long ago. The indirect impacts, through customers losing confidence and rising certainty in the future, are much more intensely felt at this point.

“Many people ask me: 'Where do I see the Europeans in this US-China fight?’ We are a concerned party that has to safeguard her interests. The EU cannot be a mediator, but is already engaging in certain areas like climate change and WTO rejuvenation, which is of common interest to China and the EU. If the US and China seek an impartial mediator, they can find one in the WTO.

“European companies in China remain upbeat about the market itself. It remains a top three investment destination for 62 percent of our members. European firms see golden opportunities to serve China’s growing consumer market and learn from China’s innovative private sector.

"Pessimism with regard to China is not about the market, it is about the death-by-a-thousand cuts of market access barriers, ambiguous rules, conflicting regulations, unequal treatment of foreign companies and favoritism extended to China’s SOEs and ‘National Champions’. Give us a level playing field in an open market and you’ll see optimism soar,” he said.

US firms in China, like Chinese firms in the US, are the main victims in this war. They have spent decades building up their production in China and training local and foreign staff; opening sales channels, advertising and marketing; and cultivating relations (guanxi關系) with local officials and partners. This is a work of years, not months.

The firms do not want to give up this hard-earned work.

The trade war has hit inbound investment. On May 16, the Ministry of Commerce said that China’s overall inbound FDI growth fell to 6.4 percent, worth 305.24 billion yuan (US$44.36 billion), in the January to April period. US direct investment in China grew 24.3 percent year-on-year in the period, down from 71.3 percent in the same period in 2018.

The AmCham survey found that 35.3 percent of firms were adopting an “In China for China” strategy and 33.2 percent were delaying or canceling investment decision. This is a strategy to localize manufacturing and sourcing within China to mainly serve the Chinese market. This will enable them to insulate themselves from the tariffs.

More than half, 52.7 percent, are most concerned about a deterioration of the Sino-US relationship, while 53.3 percent favor negotiations towards a deal that addresses structural issues allowing them to operate on a more level playing field.

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RT/CG

Mark O'Neill

A Hong Kong-based writer, teacher and speaker.