More Nuance is Needed With Regard to China

on May 21, 2020

There’s little question that the situation with regard to China is becoming increasingly fraught and tense. But it’s also highly incongruous. On the one hand, severe actions are being taken against companies such as Huawei. On the other hand, many U.S. companies are significantly expanding their operations in China, particularly in certain retail segments.

From a tech sector perspective, I’m concerned that if we don’t adopt a more balanced, nuanced, and better thought through approach, there could be real damage to U.S. companies, the economy, and even our health and well-being. The extent to which the economies of China are intertwined is, I believe, significantly under-recognized.

To begin with, we need to dismiss that the U.S.-China “Cold War”, as it has been characterized by some, is anything like the 1950s-1980s era Cold War between the United States and the then U.S.S.R. That Cold War was primarily military and geopolitical. But there was very little economy and trade between the U.S. and the Soviets. Very few U.S. companies did business there, and very few Russian companies did business here. The global economy was also much less interconnected at the time. Even if, today, the current U.S.-Russia rift expanded into a broader economic war, the impact would not be that significant, comparatively.

With regard to China, there’s ample reason to be concerned. The Trump administration has been directionally correct to make this a bigger issue. Obama, and his ‘Asia pivot’, downplayed some of China’s egregious actions and potential long-term threat. There’s ample evidence that Chinese companies have spied on U.S. companies and individuals, stolen our technology, and fomented discord. The Chinese have placed onerous demands on U.S. companies wanting to do business there, and have outright banned some companies and ‘categories’ of business. It’s OK to recognize that our societies are fundamentally different.

However, I think many people don’t fully understand how dependent the U.S. is on China, in three ‘mega’ ways. First, China is a huge market for many U.S. companies, in a broad range of sectors. If the situation were to escalate, causing the Chinese to place greater barriers on U.S. businesses, there could be a major impact back home. And the U.S. economy, already in a coronavirus-induced fragile state, can ill afford another shock.

Second, the U.S. is highly dependent on China’s massive manufacturing capacity and its role in the global supply chain. The trade war and tariffs in certain sectors have caused some damage. But if things were to escalate, the effects could be profound. It would be inconvenient if you couldn’t get your new iPhone. But many critical pharmaceuticals, and much medical equipment, are manufactured in China. We’d be in big trouble if that were significantly disrupted. Frankly, I’m surprised that it’s held up as well as it has through the Pandemic, given the school-yard-ish rhetoric being spewn by the White House.

Third, there are a lot more ‘comings and goings’ between these two countries than many people realize. The fact that 430,000 people arrived in the United States on direct flights from China in the first three months of 2020 is illustrative. There were some 400,000 Chinese students in the United States in 2019, many of them paying full boat at U.S. universities (thereby subsidizing the financial aid given to U.S.-based students). Many U.S. universities have significant operations in China. And, there is a lot of cooperative R&D between the two countries. Chinese tourists spent nearly $10 billion in the United States in 2018.

Put a different way, the impact of a significant reduction in relations and commerce between the U.S. and China would be far more damaging than between the U.S. and Europe — from an economic perspective.

So, what to be done? I think we need a coordinated national strategy, and more middle ground. One disappointment in the federal government’s approach is that there has been little involvement of the private sector in the decision-making. Yes, there are potential conflicts of interest, but what if the White House assembled a task force of some key U.S. companies in tech, aerospace, pharma, and so on to at least get some advice and counsel on how real is the threat, and what prudent measures can be taken?

Recognizing the importance of our mutual economies and the fact that there are grave reasons for concern, we need to develop an effective, longer-term approach. This means developing an overarching policy, proper safeguards and means of verification. There are certain to be individual skirmishes, but it would be helpful if those were applied across a broader set of principles and policies. Maybe we should look at this as the 2020s version of negotiating an arms control treaty. Only this would be more economy/tech based.

Take Huawei as an example. I don’t think there’s much to be gained by masterminding a full takedown of the company. Why not use Huawei as a textbook case to develop some of these security mechanisms? Their management has shown a willingness to engage.

This strategic view should also take a look at manufacturing. Again, the Trump administration is directionally correct to want to bring more manufacturing back to the United States. Between the China trade war and coronavirus, it would be prudent to be less dependent on China’s role in the supply chain for certain critical industries and products.

Perhaps, on the way to this, we can tone down the rhetoric. Calling COVID-19 the ‘China Virus’, and other such xenophopic behavior is unnecessary, and beneath our ideals. It can only come back to bite us at some point.

As we emerge, haltingly, into a ‘Covid re-entry’ world, let’s focus on the constructive, rather than the destructive. The economy needs it. Our mental well-being needs it.