Nothing Free

more resilient to unexpected crises – eliminating chokepoints in supplies of essential goods, building in redundancies, and so forth – there wouldn’t be nearly the sense of urgency behind the push to decouple. Most U.S. companies will be wary enough of overdependence on chokepoints in China to want to diversify on their own accord. The U.S. government and others could just boost stockpiles of essential goods, incentivize domestic production in key sectors, and establish plans in advance to ensure diversity of foreign suppliers and so minimize the risk of disruption at home. Indeed, emergency preparation could be a cornerstone of a U.S.-China relationship defined by cooperation against mutual threats, with the U.S. combining its R&D power with China’s unparalleled production capacity to prevent the next super-spreading virus from doing nearly so much damage.

But, of course, this isn’t just about the pandemic. It’s also about existing fault lines in the international system and immense new political pressures unleashed by COVID-19. Beijing is fronting as a country that’s spearheading global cooperation. Yet, it evidently can’t help but spread disinformation about the pandemic both at home and abroad – and it’s mostly still acting like a government with a crippling fear of mass dissent. Collaboration is taking a back seat to other needs in Washington, too. Accusations that China somehow intentionally unleashed the virus on the world are nonsensical, as is the notion that China needs to pay a price to address problems that nearly laid waste to its own economy and thus the ruling Communist Party. Revenge is not a valid strategic motivation, and punitive actions typically backfire – sometimes catastrophically so. Still, this is an election year, so the Trump administration has plenty of reason to keep public anger focused squarely on Beijing’s misdeeds, both real and imagined. And there are enough legitimate strategic and economic concerns about Chinese supply chain dominance to justify the White House’s move to gain leverage over Beijing by exploiting its need for foreign investment and technology – and to push forward potentially costly and/or politically difficult measures it already wanted to introduce.

The problem for the U.S., though, is the same one it’s faced for the past three years: It’s really difficult to disentangle its economy from the Chinese without doing more harm than good, and the bulk of U.S. firms in China just don’t want to leave.

To be sure, for companies that were already wary of issues like rising labour and land costs, risks of intellectual property theft, and government coercion, the fact that Beijing’s micromanagerial and censorial tendencies contributed directly to a disruption in their operations might just be the straw that broke the camel’s back. But for most, when they crunch the numbers, it becomes clear that “the next China” will still be China for years to come. According to an AmCham China survey of U.S. firms in China about the effects of the COVID-19 crisis conducted in March – before China’s success in containing the virus and getting factories up and running was apparent – just four percent said they are actively considering moving some or all of their operations abroad. (Some 55% said it’s too soon to tell.)

There are several reasons for their reluctance, but three stand out.

First, in manufacturing sectors considered essential or key to national security, there’s nowhere else with China’s combination of skilled labour, well-oiled infrastructure, ability to move entire towns around to meet the land and logistics needs of major firms, the degree of innovation that comes from industrial clustering and tight-knit supplier networks, and invaluable proximity to other high-value ecosystems in East Asia. It’s not uncommon for major U.S. manufacturers to demand not only tax incentives from Chinese provincial governments but land and purpose-built infrastructure as well – and for authorities to deliver with astonishing speed. Firms have been moving bits and pieces of operations to South and Southeast Asia, plus assembly hubs in Latin America and Eastern Europe that provide easy access to dominant consumer markets. But even the most attractive of these locations – Malaysia, Thailand, Vietnam, Mexico, India, Ethiopia – lack the skilled labour pools and/or infrastructure and regulatory environment to compete with China at scale. And each are grappling with chronic problems – natural disasters, organized crime, terrorism, labour unrest, meddlesome governments – sometimes at levels worse than in China. None are immune to epidemics.

Second, China’s consumer base is simply irresistible. Companies will put up with plenty of market barriers and government coercion just to tap into it. It’s an overlooked fact that, in combination with Hong Kong, Chinese imports now nearly match those of the U.S. The number of automobiles GM sold in China fell 15% last year and still surpassed U.S. sales by more than 200,000. U.S. firms like Qualcomm at the centre of the U.S.-China tech war rely heavily on the revenues they gain from China to fund R&D and thus, somewhat paradoxically, maintain their innovation edge over their Chinese competitors. The best way to ensure access to this market is to put up with the headaches of manufacturing in China. This is why most companies actively moving some operations abroad are doing so only partially – just enough to establish a “China plus one” supply chain model with parallel links that builds redundancy and ensures access to both the U.S. and Chinese markets.

Finally, moving is expensive and time-consuming. This is a problem now more than ever, with companies suddenly starved for cash amid the fallout of the pandemic. All told, relocation is generally a three- to five-year process, according to the Economist Intelligence Unit. Companies will be loath to take on the costs of moving unless it becomes clear exactly how the current surge in U.S.-China trade tensions will shake out – especially considering the possibility that U.S. tariffs might follow them to other destinations.

There’s not a lot the U.S. can do about these issues – and none of its options are cost-free. It can (and may) raise tariffs again on imports from China, but tariffs are a largely ineffective tool of coercion and a tax borne primarily by U.S. businesses and consumers, which is a bad idea at the height of an economic crash. It can (and will) strengthen restrictions on imports of national security-sensitive goods, but doing so risks crippling U.S. firms and ceding market share to foreign competitors – especially if the definition of security risks is applied too broadly. Both of these, moreover, would almost certainly provoke Chinese retaliation and would thus make things more expensive. Washington can subsidize the costs of relocating outside of China, but to do this for everyone would cost the U.S. trillions of dollars and do nothing to address the potential loss of competitiveness of U.S. firms that follow suit.

The U.S. has every reason to want to pry itself apart from the Chinese economy – in key sectors such as pharmaceuticals and sensitive emerging technologies, it’s inevitable – but there’s no reason to think Washington can do it quickly, cheaply or efficiently. It will struggle to strike an optimal balance that preserves national security without undermining its own ability to innovate and compete in global markets. And it will be impossible to achieve all of its oft-conflicting political, economic, security and strategic goals.

Phillip Orchard is an analyst at Geopolitical Futures. https://geopoliticalfutures.com/