“ Any forced ‘decoupling’ from China would have a devastating impact on businesses and the global economy. ”
Business leaders are increasingly concerned about the state of U.S.-China relations. CEOs I have talked with have been surprised and dismayed by the way in which the discourse in the United States has assumed an inevitability of conflict or even war.
Recent trips to China by U.S. Secretary of State Antony Blinken and Treasury Secretary Janet Yellen are, of course, reassuring indications that the two superpowers may be prepared to engage in diplomacy and find common ground. This is a welcome change from the confrontational rhetoric and provocative behaviors that have characterized much of their bilateral relations over the past decade (but even more dangerously so in recent years).
But business remains on the front line of tensions between these two countries, in a fight it’s ill-suited to wage.
No solid alternative
Manufacturers point out that there is no real alternative to China in many cases in the short- to medium term, given economies of scale and well-integrated supply chains that China enjoys. Investors, meanwhile, worry about losing access to what has been the driver of global growth over the past 20 years. And everyone wants to be able to sell products and services to China’s growing middle class.
“ China is so intertwined with the global economy that decoupling is neither realistic nor desirable. ”
Most CEOs point out that they can “de-risk” but not fully decouple from China. The criticisms of the “new cold war” outlook that I have heard from CEOs divide along two lines: 1) the practical and 2) the philosophical.
On the practical level, CEOs observe that China is so intertwined with the global economy that decoupling is neither realistic nor desirable. The value-add from Chinese manufacturing is now more than from the United States and the European Union combined. The Chinese consumer is also an increasing large market for many global corporations, representing, for example, about 50% of Volkswagen’s
VOW,
sales and 20% of Apple’s
AAPL,
Luxury-goods giant LVMH Moet Hennessy Louis Vuitton
LVMHF,
continues to open new stores in China and is “optimistic” about the growth prospects there. In 2022, despite ongoing COVID-related restrictions, Asia ex-Japan was LVMH’s largest market, representing 30% of global revenue.
Any forced “decoupling” from China would have a devastating impact on businesses and the global economy. More than 40% of global economic growth has been driven by China since 2010, and while that oversized impact will likely diminish over time, China will continue to be one of the most significant contributors to global economic output.
“ Talk of containment and confrontation — a new cold war — could take on a momentum and inevitability of its own. ”
On the philosophical front, CEOs worry that talk of containment and confrontation — a new cold war — could take on a momentum and inevitability of its own. It could obviously lead to a hot war — which no one wants, but it can also lead to decisions with zero-sum outcomes (like an accelerated trade war).
Of course, China’s actions in many areas, including human rights and intellectual property, are concerning and should be called out. This is what many CEOs find the most challenging — finding the right balance between their practical, commercial interests and their organizational and stakeholder values.
Regulatory and national security restrictions have limited the deployment of certain Chinese technologies in the U.S. and Europe. Human rights concerns led to the boycott of Xinjiang-grown cotton by many Western brands, which, in turn, led to retaliatory actions by the Chinese government.
Walking this tightrope is by no means simple. Witness Seqouia Capital’s recent decision to split its Chinese business from that in the rest of the world. More companies may choose to follow, but I suspect they will prove to be the exception rather than the norm in the absence of an escalation in conflict between the two countries.
Would further isolating China, cutting it off (in terms of economics, travel and tourism, education, ideas) from the West, produce a desirable outcome? Most CEOs with whom I’ve spoken think not. Instead, the say, it would lead to a worse set of problems for all parties concerned.
How about the much-cited possibility of a war over Taiwan? The consensus view from my discussions is that this is extremely unlikely in the absence of U.S. provocation. That is not to say that Beijing will not continue to pursue its goal of reunifying Taiwan with the mainland, but a full-blown, military conflict seems improbable. When I ask CEOs to list the concerns that keep them up at night, a Chinese invasion of Taiwan is not in their top 10.
The central brilliance of trade and comparative advantage — Adam Smith’s invisible hand — is that everyone can become better off, not necessarily equally but an expanding pie that we all share is something to value and worth achieving.
Steps by the U.S. and Chinese governments to renew engagement are positive signs. That Secretary Yellen said that the U.S. is not trying to decouple its economy from China is a helpful acknowledgement of reality. Of course, it was CEOs such as Jamie Dimon of JP Morgan Chase and Tesla’s Elon Musk who paved the way in their recent trips to China.
Perhaps business is reintroducing a voice of reason — and common sense — into this discussion, because a new cold war would be good for no one.
Simon Freakley is CEO of AlixPartners, a global consultant that specializes in restructurings and turnarounds.
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