China-US Trade Watch: If the Empire Strikes Back

While last month’s US Senate move to amp up the pressure on China’s foreign exchange policy looks more symbolic than serious, the fact is that trade relations between China and, well, everyone, seem to be straining to the breaking point. The RMB:USD debate is merely theater for policy wonks in Washington DC and Beijing – it carries little weight as a serious economic measure or tool of trade war. (Forex is simply not a hot-button populist issue on either side of the Pacific.) Up until now western leadership has been pretty spineless about making any kind of real sacrifices or taking any bold stances with Beijing, but China is becoming a target of convenience for both sides of the political spectrum in the US.

This begs the question, how will Beijing react if it perceives a real, sustained threat from the West? Last time we looked at several non-forex / non-tariff options the US could exercise if trade tensions intensify – namely visas (particularly student), financial (the irony is that the more Wen Jiabao and Xinhua publically fret about the dollar’s demise, the more important it becomes as a safe haven currency for Chinese reserves) and food exports.

If trade tensions move beyond the rhetorical, what kinds of big moves do the Chinese have? China is a big believer in asymmetrical tactics, and tit for tat trade restrictions aren’t really its style. Look for China to respond to threats indirectly. Here are a few moves that the international business community in China needs to be on the lookout for.

    Increased regulatory and bureaucratic hurdles. China has never shied away from applying regulations selectively, and raising bureaucratic obstacles for specific companies is already part of the business landscape in the PRC. Beijing has been quite effective in getting western firms to part with their technology and IP – largely without comment from Washington or Brussels.

    Pressure on local managers of international firms. Localization was the Holy Grail of international business throughout the 90s & 00s, but now those native Chinese management teams are the Achilles’s heel of the Fortune 500. Recent troubles at Wal-Mart are just the beginning. “Local customs” and “harmony” are double-edged swords. Locals are the only ones who can make business hum in China, but homegrown managers are also susceptible to pressure, intimidation and arbitrary legal treatment.

    Selective embargos. China has already played the embargo card when it stopped shipments of rare earth metals to Japan and the US in Oct of 2010 in a dispute over fishing territory. While China doesn’t control too many sensitive materials or technologies, it certainly has the ability to disrupt supply lines and timetables.

A trade war between China and the West will be destructive and damaging, but those who are counting on national leaders to be guided by self- interest are hoping for too much. The slope leading to trade war is particularly slippery because the weapons at hand are asymmetrical and unequal. China’s levers of international economic power center around limiting access to the Chinese market and its ability to make non-Chinese firms compete on an unequal playing field. The US and Europe still favor punitive tariffs and WTO sanctions. That means that it will be relatively easy for leaders to start problems, but much tougher to unwind them.

Next: Is it a MAD world? There is no doctrine of “mutually assured destruction” between China and the West, but maybe we need one. Cyber war, proxy battles & rogue actors.

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