U.S.-China Business Ties Are “Better Than The Headlines”

Covid lockdowns have led to a stream of criticism of China “zero-Covid” policies by American and other business groups in the country. And yet two-way U.S.-China trade is more than $650 billion a year, with each nation ranking at as a top trade and investment partner. China’s economy, the world’s second-largest, is expected to grow this year, albeit it as a slower pace than last year, making it an important market for many American companies.

How are U.S. companies adapting to the current environment? To learn more, I talked to Steve Orlins, president of the New York-based National Committee on U.S.-China Relations. Orlins, who has led the organization since 2005, has more than four decades of involvement in U.S.-China commercial and diplomatic relations. The National Committee’s members include multinationals such as Blackstone, Chubb, Disney, Intel, Nike and Walmart; it is predominately funded by foundations such as Starr, Carnegie Corporation of New York, Luce Foundation and Dalio Philanthropies.

A key success factor for American businesses in today’s business environment in China is localization of management, Orlins said. He also described a partial shift among U.S. companies that export from China to factories in Southeast Asia, sized up the possible impact of the newly implemented Uyghur Forced Labor Protection Act, and endorsed a cut in Trump-era tariffs on Chinese imports as a way to lower inflation. Edited excerpts follow.

Flannery: What’s the state of U.S.-China business relations?

Orlins: It’s better than the headlines. I always distinguish between those who are “in China for China” and those who are “in China for exports.” Covid and a variety of Chinese government policies have caused companies that are in China and using China as an export base to diversify somewhat. None are leaving, but they’re sourcing from other places outside of China, even though it means a higher cost and less efficiency.

But those who are “in China for China” are there to stay. The lockdown in Shanghai has, at most, stalled their investment plans, but none are thinking about pulling out. They still see it as integral to their global expansion plans. For many of them, it’s the most important market in the world.

Flannery: Where are the export-oriented companies heading?

Orlins: Some are going to Southeast Asia. Vietnam has been a beneficiary of U.S. tariffs. Malaysia less so –it is a higher cost place, and Indonesia less so – partly because the infrastructure isn’t great. But there certainly are moves to countries throughout Southeast Asia. (See related post here.)

What is not happening — and you can almost count the examples on one hand — is reshoring. I do not see evidence that companies are closing up in China and relocating to the United States. The business councils and chambers don’t see evidence that is happening. The premise of (Trump era increases in) tariffs to reshore those businesses has turned out, as we predicted, to be faulty.

In fact, lower tariffs can help keep inflation down. People differ on how much a reduction in inflation would be, but the Peterson Institute has estimated a 1.3 percentage point decline in the consumer price index. People could see prices coming down and would believe inflation is decreasing.

Flannery: Why hasn’t reshoring happened?

Orlins: Because the cost differential is too great. The infrastructure that exists around those suppliers is too well developed. You just can’t pick it up and move it to the United States, unless the U.S. government decides we’re going to have an industrial policy that provides $500 billion for U.S. companies to reshore their manufacturing to the United States.

The CHIPS Act is one case where the U.S. government is prepared to spend at least $50 billion — that’s billion with a b – of taxpayer dollars to reshore chip manufacturing to the United States. And obviously, states are throwing in more tax incentives and land for those investments.

But is the United States government prepared to spend what ultimately would be hundreds of billions of dollars to get U.S. manufacturers to reshore to the United States? Given the $30 trillion of national debt that we currently have and that the interest rates are going up, I don’t think that is likely at all. So what we’ll see is a diversification of U.S. companies and the suppliers of U.S. companies of their production bases to Southeast Asia.

Flannery: Given the difficulties involved in visiting China at the moment, what can be done by U.S. companies looking to that market for growth?

Orlins: When you and I were just getting our start in dealing with China years ago, one thing I advocated was to get some of these brilliant Chinese managers, bring them to the United States, and train them in your corporate culture and your management, because the future of everybody’s business is going be through local managers.

And what the travel restrictions related to Covid have done is accelerated that concept. It is basically put this process of having local management run these American companies on steroids. Suddenly, we can’t be sending our folks into China anymore. We have to have folks in China doing it. If an American company hasn’t trained them in their management, in their values, and in the way they run their business, they’re going to be more challenged in this environment. Whereas those who have gradually brought up local managers to run their business are much better situated than those who haven’t.

Flannery: What’s ahead for the implementation and policing of the Uyghur Forced Labor Prevention Act?

Orlins: Some U.S. companies were prepared for it. We’re going need to see the data as to what is really being blocked. Then most importantly, we’re going to need to see whether China retaliates and who it retaliates against. We talk about Chinese economic coercion, and the Chinese talk about this act as economic coercion. I think this chapter is not written. I can’t predict where it’s going to end up.

Flannery: What do you think might be blocked?

Orlins: Textile and products with cotton from Xinjiang, but now we’re also seeing potentially solar panels and other things which may have (materials) from Xinjiang but aren’t assembled there. Will they block those? What does it mean for America’s solar industry, which is critical for creating an alternative source of energy? Will that put the folks who advocate for alternative energy sources at odds with those who want a more aggressive human rights approach from the U.S. government? Again, I don’t know where that’s going to come in.

Flannery: What from your perch can be done by the private sector to improve the current atmosphere between the two countries?

Orlins: What I think is most important for businesspeople on both sides to do is speak out. We’ve seen the liaison office in Hong Kong asking for foreign businesses for suggestions of how to improve the business environment in Hong Kong. That’s terrific. And Liu He and others in the Chinese economic policy-making have called in foreign businesses for suggestions. People should take up those opportunities.

See related posts:

China’s Unpredictability Is “Poisonous” For Its Business Environment, EU Chamber Says

U.S. Firms In Shanghai Cutting Revenue Forecasts, Investments — AmCham Survey

UAE Ranks No. 1 For Migrating Millionaires; U.S. “Fading Fast,” China Falls

@rflannerychina