In the aftermath of the decision to pull Huawei from the UK's 5G network for security reasons, David Moschella, Research Fellow at the Leading Edge Forum,makes the case for a long-term strategic initiative to structure engagement with China.
In the late 1940s, a senior US government official, Rufus Miles, explained the deep political divides of his time with the wry observation that: “Where you stand depends upon where you sit.” Nowhere are these words more true than in today’s debate about what to do about the rise of China.
Aside from the shared anger stemming from covid-19, western priorities, attitudes and behaviour toward China differ sharply. There are now four distinct constituencies, with people seeing China mostly as:
A major market
A major supplier
A major business competitor
A major military and/or geopolitical competitor
China as a major market
China is the largest international market for many US and European firms. In China today there are some 4,100 Starbucks, 2,300 McDonalds and 430 Walmarts. Similarly, Apple’s China revenues are over $40 billion, Intel’s are over $20 billion, and Nike’s are more than $6 billion. GM sells more cars in China than it does in the US, and China accounts for 20% of Boeing’s commercial sales.
Building this type of local presence and trust was often difficult and took many years. Understandably, these firms are not big fans of rapid decoupling.
Additionally, it has been shown that Mercedes-Benz, America’s National Basketball Association, and others have felt compelled to publicly yield to Chinese pressure over relatively minor advertisements and statements. Companies with significant revenues in China want, at almost all cost, to avoid rocking the boat. They are virtually silent regarding human rights and other pressing Chinese controversies, even as they are increasingly expected to speak out on events within their home nations.
China as a major supplier
Walmart, Target, Dell, Nike, the big pharmaceutical firms, and many other companies that rely upon Chinese manufacturing are happy to reduce their dependency on China over time. But right now they need to keep their supply chains running.
More uneasily, these same firms are inseparable from today’s huge China trade imbalances. These deficits aren’t the result of western consumers buying products from Chinese companies. They result from western consumers buying products from American and European companies that happen to source them from China. If these products were sourced from elsewhere – or made domestically – much of the China trade deficit would disappear. Despite endless talk about the deficit issue, this basic fact gets very little attention.
The working conditions within western firms’ extended supply chains within China are another awkward topic that many companies would rather avoid. Like the China-as-a-market group, the China-as-a-supplier constituency stays silent on most China concerns.
China as a major business competitor
Western companies in, for example, information technology, steel, solar panels, toys, drones, sporting goods, appliances, and textiles are much more willing to complain publicly that Chinese competition is 'unfair' in one way or another. Issues raised include IP theft, government subsidies, low wages, forced labour, protected markets, violation of WTO rules, and so on.
Many smaller, non-multinational companies are also in this camp. Not surprisingly, companies fighting for their survival will often criticize China harshly and plead for urgent government action to “protect jobs.”
Many US and UK firms once complained about aggressive competition from Japan in similar ways, and with considerable success. For example, western governments eventually pressured the major Japanese auto companies to make more cars in the US, the UK, and elsewhere. In addition, the US government strongly supported the 1987 creation of SEMATECH to boost America’s semiconductor competitiveness. This China-as-a-competitor camp generally seeks as much media attention as possible.
China as a major military and/or geopolitical competitor
China is now a major military power within east Asia, and western dominance in the region during the 2020s can no longer be taken for granted. The US Department of Defense has stated publicly that self-sufficiency in advanced technology manufacturing is inseparable from US national security. It is deeply concerned about various Chinese (and Taiwanese) dependencies.
Additionally, through its Belt and Road initiative, international development banks, engagement in global institutions, and other efforts, China’s influence in Asia, Africa, Iran, Russia, Southern and Eastern Europe, and Latin America has risen significantly. Western leaders coming from this military and geopolitical perspective are now among the fiercest China critics. Their voices ultimately carry more weight than “mere” business concerns.
Reconciling differing perspectives on China
The four perspectives above are pretty much impossible to reconcile, as government efforts to help in one area almost inevitably risk harming another. For example, today’s country-specific bans on Huawei 5G equipment will result in fewer sales by Qualcomm and other Huawei suppliers. This is why tariffs, sanctions, and similar interventions will remain controversial and difficult to sustain.
Looking back, there have always been many more western companies in the China-as-a-market and China-as-a-supplier camps than the two competitive ones. This has enabled the quiet voices of continuity to prevail over the louder demands for change.
Put more harshly, for more than 20 years, the West’s short-term business interests have outweighed national competitiveness, human rights, and pretty much everything else. Put even more harshly, the West willingly transferred the technologies, trained the students and engineers, and set up the factories upon which it is now so dependent upon, and challenged by.
For better or worse, by taking direct actions against Huawei, TikTok, and WeChat, the Trump administration – with the support of the UK and other governments -- has reversed the historical pattern, and sided firmly with the two competitive camps, at least for now. Not surprisingly, companies that see China as either a major market or major supplier (and in many cases both) are terrified about the various ways in which China might retaliate. It’s clear that an accelerated tit-for-tat trade war could be very damaging for everyone involved in today’s already fragile global economy.
But if the West really wants to make national security and national competitiveness its top China policy priority, there are no quick fixes, only long-term possibilities. Our research has identified 20 steps that should be taken. These include basic things such as: national efforts in advanced technologies, closer ties with India, improved STEM education, strategic self-sufficiency, greater trade transparency, incentivizing reshoring, better coordination with like-minded nations, insistence on reciprocity, increased productivity, and winning today’s global talent and culture wars.
Without sustained efforts in these and other areas, today’s bans and mandates will probably do more harm than good. But taken together, carefully targeted interventions and long-term competitive revitalization are fully capable of meeting the challenge from China, which has plenty of its own weaknesses.
The good news is that while today’s short-term business and government interests are often in direct conflict, the recommended long-term agenda will draw strong support from all four constituencies. Rather than focusing on today’s deep divides, western governments and companies must now stand up for a shared, long-term China strategy initiative. It feels like our Sputnik moment, but are we ready for the challenge?
This column is drawn from a recent LEF report: “What to do About China – Short-term Tensions and Long-term Strategies.”
About the author: David Moschella is a Research Fellow at LEF where he explores the global business impact of digital technologies, with a particular focus on disruptive business models, industry restructuring and machine intelligence.
Before LEF, for more than a decade, David was in charge of worldwide research for IDC, the largest market analysis firm in the information technology industry, responsible for the company’s global technology industry forecasts and insights.