On the Brink? The Impact of COVID-19 on U.S.-China Business Relations

On+the+Brink%3F+The+Impact+of+COVID-19+on+U.S.-China+Business+Relations

Guest Submissions, Bing Chen

Closing borders, restrictions on student visas, and recent arrests of U.S. professors associated with the Thousand Talents Program illustrate the continued downward spiral of U.S.-China relations since the start of COVID-19. Business linkages that have played an essential role in the relationship have not been exempt from this general trend of decoupling, as Washington calls on U.S. companies to divest their Chinese holdings. 

The economic partnership that both countries have shared in the last 30 years has had a significant day-to-day impact not just for the American consumer but also for the Chinese factory worker, yielding fruits and thorns alike. On one hand, American consumers have seen their purchasing power rise with the wide availability of Chinese products, and American demand has helped lift millions of Chinese out of poverty. On the other hand, the relationship has seen the theft of American intellectual property and the exodus of millions of blue-collar jobs. 

While clearly complex in nature, the relationship between these two countries can be boiled down to one key point: current U.S.-China relations will fundamentally alter not just the geopolitical status-quo but very possibly day-to-day life, from the products we buy to the jobs we hold. In hopes of uncovering what this new future would look like, I sat down with Mr. Henry Yu, the President of the National U.S. Hong Kong Business Association and the HK Association of Atlanta, to talk about the future of U.S.-China business relations. The discussion with Yu touched on three key topics: supply chain disruptions, foreign investments in America, and the possibility of a Chinese debt bubble.

Yu predicts that a significant portion of the global supply chain is likely to move out of China, although American companies will undoubtedly encounter a Chinese presence in markets outside of China, as they attempt to diversify their supply chains. Yu claims that it is unlikely for these blue-collar jobs to return to the States, as they will likely be transferred to nations like India and Taiwan or ASEAN countries like Vietnam. 

Yu draws from his personal business dealings in the region and explains that American companies must take into careful consideration cost-quality tradeoffs, compliance risk, and political risk involved in each investment decision. As a result, some industries may be hesitant to move production to cheaper sites in developing nations. These industries would be most concerned by the capacity and quality of production if supply chains are moved out of China. For smaller developing countries like Vietnam, Yu questions if they have the necessary capacity to replace production in China as well as the technology and know-how to ensure product quality. Yu points out that China has an edge over developing nations, having enjoyed technology transfers and extensive manufacturing experience over the past 30 years. 

The risks involved in diversification might lead some American companies to disentangle from China at the surface level but still maintain deep ties with Chinese suppliers. By doing so, U.S. companies could politically disentangle from China, but at a day-to-day level, business would likely continue as usual. For U.S. companies choosing to move into other Asian countries, Yu states that American business leaders ought to prepare to do business with Chinese subsidiaries in these developing countries, as China has become the largest investor in ASEAN countries and has acquired numerous foreign enterprises through its Belt and Road Initiative.

On the impact of Chinese spending in the United States, Yu warns that the reduction in international travel will have negative implications on the U.S. economy. The education and tourism industry will encounter major repercussions. As Yu notes, “China has close to 400 thousand students in the USA. You know how much they spend annually? More than $13 billion. Plus, there’s nearly 3 million visitors from China every year. Each can spend between $7-8k easily. That’s like over $21 billion.” The possible long-term economic impact of decoupling is likely to be even greater, as even the limited trade war has left each American family with $650 less in their pockets.

Despite the gloom surrounding current relations, Yu is optimistic that Chinese interest in doing business in the U.S. will continue. In China, fierce competition and the outward flow of foreign clientele will still drive small to medium sized enterprises to the United States in search of a less crowded environment. The diversification out of China would require Chinese companies to invest in overseas assets, whether in terms of plants and equipment or in terms of currency. However, with U.S. restrictions on Chinese investments, Chinese investment in the U.S. is unlikely to recover from its 2016 peak.

Regarding Chinese debt, Yu explains that COVID-19 is likely to cause a credit crunch for China’s state-owned enterprises (SOEs). Many of these SOEs have required an infusion of government cash to stay afloat even before the pandemic began. China’s large debts coupled with the coronavirus outbreak is likely to exacerbate financial distress within Chinese SOEs. However, the disruption within these enterprises, in addition to major banks, will be limited, since the state controls their operations.

In his concluding remarks, Yu laments that U.S.-China relations are on the verge of a new cold war, and its consequences may extend far beyond the recent trade war. As the linkage between the two nations wane and become less direct, Yu encourages students interested in U.S.-China business relations to learn how countries in Southeast Asia and other developing regions may serve as intermediaries in the relationship. 

Given the likely prospect of a new cold war, our generation is confronted with the very real possibility of backsliding into the same state of incessant fear of the 20th century. This demands new efforts to build bridges and find solutions unattained by previous generations.

Find the full transcript with Mr. Yu here: https://drive.google.com/file/d/1cqKH3il67j7BdLMHhgeVDotSq2ibr-kL/view?usp=sharing