China Business

Can Your Business Afford/Stomach the China Risks?

Two months ago, Steve Dickinson wrote a post listing his top 14 “PRC/U.S. trade war wild cards,….at least for today.” It is interesting to look again at those risks to see which have already come true, in just this short time.

The below were Steve’s China wild cards, followed by my updated assessment (in italics) of each:

1. The Dow and other U.S. stock markets continue to respond negatively to the various reports of increased tariffs and other U.S. – China trade issues. If the markets suffer a serious decline in the next several months, it will be hard for the Trump administration to continue to take a hard line on China trade. The same issue applies for the economic damage that has been inflicted on the U.S. farm sector. This sector is a major supporter of President Trump. Negative impact on the farm states could also soften the U.S. position against China. The U.S. stock market has not declined since Steve’s post but farmers have gotten a bit angrier. I though do not see trade resolution no matter what.

2. The situation in Hong Kong has continued for over two months, with no resolution in sight. The PRC government has already blamed the U.S. and Taiwan for the unrest and it has warned the HK protestors against starting a color revolution (the CCP’s biggest fear). The PRC has massed 12,000 riot police on the border and the PLA is on alert. If the PRC takes military action in HK, the impact on trade will be immediate and severe. Sanctions against China will likely come from the U.S., Japan, Australia, and Europe, disrupting trade for many years. The troubles in Hong Kong are escalating and, more importantly, the widening positions between those in the West who are calling for freedom and democracy and those in China is bringing big trouble to foreign businesses like the NBA. This is going to be a huge issue. I see boycotts and I see valuable millennial employees leaving companies that do business with China. 

3. The South China Sea and the Taiwan straight are getting “hot.”  Armed vessels and warplanes from a number of countries are moving in this region in direct defiance of PRC claims that such movement is prohibited. In this chaotic situation, armed conflict could easily break out by mistake due to the actions of “hot headed” local military officers. Keep in mind the Gulf of Tonkin incident and the Corfu Channel Case. One led to a hot war and one led to a cold war. Either could happen here. Still at about the same level of risk. 

4. China has started importing oil from Iran in direct defiance of U.S. sanctions. Violation of Iran sanctions is the reason for the U.S. banning sales to Huawei and detaining Meng Wanzhou in Canada. The U.S. might impose sanctions on the companies importing Iranian oil. More significantly, the U.S. might impose sanctions on the China banks financing these oil trades. Some in the U.S. have even proposed a “nuclear” option where the entities and banks involved would be cut out of the CHIPS and SWIFT systems. Still at about the same level of risk.

5. The FBI says it is currently investigating more than 1000 IP/trade secrecy thefts involving China. Reports are that most of these cases also allege Chinese government participation. If formal proceedings are commenced, normal trade in many sectors will be disrupted and cooperative R&D with Chinese companies, research centers and universities will be curtailed or even eliminated. Finally, U.S. hiring of PRC nationals in the tech sector will be impacted or even eliminated. Still at about the same level of risk. 

6. Huawei is still on the Entity List and sales of technology of all kinds is still banned. The tentative commitment to ease the sanctions President Trump made at the G20 meeting has not resulted in any change. In fact, U.S. actions against PRC companies in the tech sector have expanded with the recent announcement that the U.S. government cannot make purchases from five PRC companies, including Huawei, ZTE and Hikvision. It is not unlikely that this purchase ban will extend beyond government contracts to a more general ban on all U.S. purchases from Huawei and other PRC tech companies. There has also been talk of late of the United States banning China tech companies that facilitate surveillance of Chinese citizensThe U.S. just added eight tech companies to its banned list, along with 20 Chinese government agencies. China is extremely unhappy about this and is promising to retaliate. I see a 50-50 chance of this spiraling so out of control as to reduce US-China trade by 25% or more.

The six above are the most critical wild cards, but there are plenty more, including the following:

7. The Taiwan election is in full gear. At one point, some politicians in Taiwan were pro-PRC, seeking to expand and improve relations with the Mainland. But with the recent events in Hong Kong, the ban on travel from the PRC to Taiwan and the open military threats against Taiwan, no Taiwan politician who wants a future can take any form of pro-PRC position. This all could lead to escalating conflicts in the Taiwan Strait. The continued support of Taiwan by the U.S. will strain relations with the PRC on the military level. Still at about the same level of risk. 

8. The U.S. Congress continues to propose anti-PRC legislation. In the past, such legislation has been symbolic and has not been adopted. If the Trump administration shows weakening in its trade war position, some or all of this legislation may be adopted. This would then take the anti-PRC policy out of the hands of the president, leaving no room for negotiation. The risk of this is sky-high right now and I see this happening and soon. I see this angering both the Chinese government and the Chinese people and I see this greatly impacting trade.

9. The SEC seems intent to cut PRC companies out of the U.S. securities markets. If the SEC will not take action, Congress has threatened to step in. PRC companies see the writing on the wall and most are shifting their big IPO plans to the Hong Kong markets. This trend then further decouples the PRC from the U.S. with impacts both on the U.S. and the PRC. See China and the U.S. Stock Market: Nowhere to GoTrump floated this idea and then withdrew it. I think the odds of this happening higher now than two months ago and I predict it will happen within the next 2-4 months. 

10. There may be a tipping point when consumers in the US and the EU and elsewhere become so troubled with how China treats its Uyghur and Tibetan populations (see this and this) or how it is acting against Hong Kong or Taiwan or with its efforts to exert control outside China. These sorts of things are leaking out more of late as the bloom is off the rose and we are hearing more and more from our own clients (American and otherwise) saying that they are having employees refuse to go to China or consumers complaining about their goods being made in China. Take a company like Patagonia which has a stellar reputation for caring about the environment and people and even goes so far as to call itself The Activist Company; how much longer can it maintain its moral high ground while still having some of its products made in China? This is happening. See the NBA. See the Houston Rockets. See Blizzard. See what our own clients are telling us. I have been predicting for the longest time that this would occur but even in my own firm nobody saw this with the same urgency as me. The floodgates have opened so everybody better step aside. Go to social media if you don’t believe me and then wait until you (and China) see more than half the attendees at opening night at Staples Center wearing these free t-shirts. The anger and counter-anger will escalate to the point that trade will be greatly impacted. Bet on it. 

11. The U.S. has identified the PRC as a currency manipulator for the first time since 1994. The PRC has responded by continuing to weaken the RMB. If this trend continues, the U.S. could respond by raising tariffs rates even higher than the current 25% rate. The back and forth on this currency issue would then further disrupt purchase of PRC manufactured product.Still at about the same level of risk. 

12. Countervailing duty and anti-dumping cases against PRC industry sectors continue to increase. Higher and higher duties against Chinese industry are being ordered. These actions are independent of the administration. Continued action in this area threatens major sectors of trade with the PRC. No change in administration will have any impact. See Yet Another International Trade (AD/CVD) Petition Against China: This Time it’s Metal File CabinetsThis has continued apace. As one of our international trade lawyers is always saying, the tariffs may not kill you but the duties will. 

13. To avoid the impact of tariffs, many companies are leaving China. But it is not unlikely that the U.S. government will expand the current tariffs to other countries, particularly countries in S.E. Asia that are seeing the first wave of moves. Moreover, as more product is made outside of the PRC, it is likely that countervailing duty/antidumping actions will be expanded to cover those other countries as well. This may mean there will be limited options to avoid U.S. tariffs and other duties. We are constantly hearing of the FBI investigating illegally transshipped product. If you are aware of a competitor that is illegally transshipping, please call or email us because there is a good chance our international trade lawyers would be interested in your case. See How To Get Rich From Your Competitor’s Illegal Transshipping: Moiety and the False Claims Act.

14. There are a host of internal factors in the PRC that could have a major impact. Factors I look at are: a) the inability of the PRC leadership to take any stand other than defiance, leading to no chance of any resolution of issues by diplomacy and mutual agreement, b) African swine fever cuts Chinese pork supply in half, c) African army worm substantially reduces Chinese grain crop, d) consumer price inflation coupled with factory price deflation. The first two are happening but not necessarily at levels greater than two weeks ago, so overall little change here, as of now anyway. 

Overall, the risk of doing business with China has gone up substantially in just the last two months — heck, it’s gone up substantially in just the last two days. See also China’s New Company Tracking System: Comply, Comply, Comply and China’s New Cybersecurity System: There is NO Place to Hide.

Many are no longer asking whether China is too risky; they’ve already decided that it is.

What are you seeing out there?

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