Caixin
Apr 17, 2018 07:42 PM
DOING BUSINESS IN CHINA

Trade Wars Put Foreign Firms on Edge in Land Where Business, Politics Mix Freely

As everyone weighs in on the brewing trade war between the U.S. and China, I thought I’d get in my two cents this week with a look at the impact on foreign businesses here on the ground. The bottom line is there isn’t much impact yet, though the mostly American crowd I surveyed were all a bit worried over what might happen if tensions continue to rise.

Such worries have a good foundation in this unique market where lines between politics, business and pleasure have a long and rich history of being blurred. The result is that disputes in one area often spill into others, even if Beijing never admits to such intent. I’ll explain with some examples shortly, but first some brief background on this clash that could well end up as the global business story of the year.

This particular dispute and its development are quite well documented, but the crux is that U.S. President Donald Trump believes China engages in unfair practices to gain an upper hand in the two countries’ trade relationship. The latest wrinkle saw the U.S. unveil punitive tariffs on about $60 billion worth of Chinese imports earlier this month, though Trump added a grace period for the two sides to reach an agreement to resolve the matter.

China has been resolute but also relatively low-key in its responses so far, to the point where you can pretty much tell what most officials will say before they even open their mouths. That message is that China doesn’t want a trade war, but will do whatever it takes to protect its interests.

The tenor of that message is actually quite important for people doing business here in China. The relative restraint signals that, at least for now, Beijing wants to try to resolve the matter without inflaming the situation by moving it outside the political realm.

Less Restraint

The country is riddled with recent instances where Beijing wasn’t quite so restrained, often with disastrous results for businesses from the country on the other side of the conflict. The most recent of those occurred just last year, when Beijing was at odds with South Korea over the latter’s decision to install a sophisticated U.S.-built anti-missile to protect it against potential attacks from the North.

During that period, China’s media carried regular coverage of Beijing’s displeasure, resulting in huge drops of local tourists visiting South Korea and big drops in business for the China-based operations of South Korean firms. The undeclared assault didn’t end there, and a number of Korean-invested businesses were forced to shut down when government inspectors suddenly “discovered” various safety violations that were apparently never issues in the past.

Korean retailing giant Lotte became a poster child for the kind of damage Beijing can inflict, as many of its locally based supermarkets were forced to close after failing inspections. Not that business was all that good anyhow, since many Chinese consumers had stopped shopping at the stores to show support for Beijing’s position. Things got so bad that the company reportedly decided to sell its China stores last fall, though we never heard anything after that.

Beijing has meted out similar treatment to show its displeasure at other countries over the years, including one case against Japan in 2012 over a territorial dispute and another targeting Sweden in 2010 when that country awarded one of its famous Nobel Prizes to a candidate opposed by China. In all those cases, firms from the other country suffered the most, in some cases taking years to recover from lost business.

All that brings us to the present, and why it’s significant that Beijing has yet to take major action that could make life difficult for local American businesses. One person I talked to was fairly representative of the group, working for a major multinational that sells agricultural equipment here. “I haven’t heard of any issues yet of U.S companies being targeted, but everyone is on edge,” he said.

Another contact described word on the street that Beijing was dragging its feet on approval of some major global M&A deals involving American companies to show its displeasure. The Wall Street Journal seemed to confirm that talk earlier this week when it reported that two major microchip deals involving U.S. companies had yet to be approved by Beijing, even though both had received the green light from antitrust regulators in all other markets.

This kind of subtle retaliatory action certainly isn’t unique to China, and similar stories abound during times of war. But this isn’t war, at least not in the conventional sense. What’s more, most Western countries tend to go to the other extreme these days and emphasize that their political conflicts are just that. At such times they also bend over backward to show they have no gripes with citizens or businesses from the nation on the other side of the conflict.

At the end of the day, China is what it is and is unlikely to change this pattern of mixing business and politics anytime soon. Anyone doing business here needs to be aware of that fact and make necessary preparations, even though there’s not a whole lot someone can do in this kind of skirmish. One of the only non-Americans I talked to this week also noted that even such bleak situations could provide business opportunities for some, pointing out Chinese exporters that traditionally sell to Americans might be willing to cut good deals for non-American buyers at this particular moment.

Doug Young has lived in Greater China for two decades, including a 10-year stint at Reuters, where he led China corporate news coverage. Send your questions or comments to DougYoung@caixin.com

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