An Urban's Rural View

American Business Faces a Chinese Obstacle Course

Urban C Lehner
By  Urban C Lehner , Editor Emeritus
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During the Cold War, trade between the combatants was minimal. In 1989, a relatively robust year, U.S.-Soviet two-way trade totaled $5 billion, less than 1% of total U.S. trade. (https://www.census.gov/…). The U.S. imported only $700 million in Soviet goods that year.

Thirty years later, the trade numbers with another rival nation are orders of magnitude bigger. U.S.-China trade in 2019 totaled $558 billion, more than 10% of America's trade with the world. (https://www.census.gov/…)

Tense exchanges between the U.S. and China have become a nearly everyday affair, so it's understandable that the term Cold War is back in vogue. Google "Cold War with China" or "New Cold War" and you'll get hundreds of millions of results. I confess, I've used the term once or twice myself. (https://www.dtnpf.com/…)

But ultimately it's a misleading term. The two countries are engaged in a serious and often antagonistic competition, no question. But the Cold War is the wrong historical analogy.

Trade with the Soviet Union was a half-hearted, tactical affair. American companies built plants in Russia in the 1920s and 1930s but after World War II investment was rare, technology transfer rarer. When you're in a nuclear arms race with another country, you don't do anything to strengthen its industrial base. (At times during the Cold War from 60% to 80% of U.S. exports were ag products.) (https://www.rand.org/…)

As contentious as the U.S.-China relationship has become, it's not a nuclear arms race. Moreover, both sides have already done much to strengthen each other's economy.

In addition to a voluminous trade, consider the investments. As of the second quarter of 2020, the U.S. had $258 billion invested in factories and other facilities in China while China had $154 billion in such investments in the U.S. (https://fas.org/…)

Thus, the two countries are economically interdependent in a way the U.S. and the Soviet Union never were. They are definitely rivals, serious rivals, but they both benefit from the interdependence. The nature of their rivalry, then, will inevitably be different from the U.S.-Soviet rivalry.

Many talk of the U.S. "decoupling" from China, but there are limits to how much decoupling is likely to take place. That's clear even to China hawks like Matt Pottinger, who was President Donald Trump's main China advisor.

"No one in Washington is seriously threatening a wholesale decoupling of the two economies," Pottinger wrote in a Wall Street Journal op-ed piece. "That's a straw-man argument put forward by Chinese propagandists and a few alarmists here at home." (https://www.wsj.com/…)

But as Pottinger goes on to say, "Decoupling of a more limited variety -- particularly in key technologies -- is well under way, as it should be." As I've noted previously, President Joe Biden's call for $50 billion in incentives for semiconductor manufacturing targets that industry for partial decoupling. (https://www.dtnpf.com/…)

If decoupling remains selective, economic interdependence will continue even as the U.S. and China compete economically, technologically and ideologically. The Cold War playbook will be of limited value in dealing with this somewhat contradictory situation. A new strategy and new tactics will be needed.

American high-tech companies will have to do more of their manufacturing domestically. Consumer-products companies will have to navigate between the conflicting demands of politically motivated consumers in China and the West.

The Swedish clothing company H & M learned this the hard way when Chinese consumers, egged on by state media, boycotted its products. Its products disappeared from online searches. The location of its stores disappeared from map apps. (https://www.bloomberg.com/…)

H & M's sin? Promising not to use cotton from China's Xinjiang province. H & M had said it was "deeply concerned" about reports of forced labor there.

A week after the boycott began, H & M began pulling its punches, saying it was working to restore the trust of Chinese customers. Problem is, if it bends too far to please China H & M risks being boycotted by socially conscious Western consumers. As a Wall Street Journal article put it, "A new consumer decoupling between China and the West -- driven less by security concerns than by values and nationalism -- may have begun." (https://www.wsj.com/…)

Optimists reason that while Chinese officials frequently stoke the nationalistic fires, they won't want to see large-scale consumer decoupling. They know their companies could become the targets of consumers in the U.S. and Europe.

They also know some foreign companies are important players in China. A Bloomberg opinion piece points out that Nike's products are still available on the Chinese internet even though Nike, too, has said it avoids Xinjiang cotton. "Perhaps that's because Nike accounts for more than a fifth of the Chinese sportswear market, and thus a tremendous amount of jobs and sales," the Bloomberg piece opines. (https://www.bloomberg.com/…)

Pessimists, like William Reinsch of the Center for Strategic and International Studies, see a "train wreck" ahead. China's behavior is getting worse, Reinsch maintains, making more sanctions and countersanctions inevitable. Western companies will find themselves in "untenable positions." They'll be forced to choose between doing business in the U.S. or China, with further decoupling the likely result. (https://www.csis.org/…)

American ag commodities, being unbranded, may escape the worst of China's countersanctions. But it would be wise for American farmers to assume the pessimists are right and redouble their efforts to develop other markets. If things go well, U.S. ag will still have the huge and profitable Chinese market. If U.S.-China tensions worsen, they'll have a backup plan.

Whoever prevails, the optimists or the pessimists, the path ahead for America's private sector will be an obstacle course. The new U.S.-China relationship may not be a Cold War replica, but whatever it's called it won't be any fun.

Urban Lehner can be reached at urbanize@gmail.com

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