A Popped Balloon From China Presages Business Trouble

Last year, in Three Things Everyone Leaving China for Mexico Should Know, we talked about how when analyzing US-China relations, the “only politics worth watching are in Washington DC”:

The politicians that matter to you are the ones writing, interpreting, executing, and judging United States trade laws. Don’t waste time and energy trying to read the tea leaves of Chinese, Asian, or even Mexican politics. The only decisions that matter to you are coming out of Washington DC, and they are generally NOT favorable to your business. Remember that old rule on how “all politics is local”? Well, the corollary for you is “all international trade is political”, at least for now. U.S. politicians may still be playing lip-service to the notion that government should stay out of local business, but that does NOT apply to international commerce. Globalism is still a dirty word to those on the right, while the left is using trade to prosecute a human rights agenda. Neither trend helps you. Your job is to anticipate and avoid government restrictions and to stay up to speed on how they are being applied and enforced.

Then earlier this year, in Five Potential Shocks to your Chinese Supply Chain in 2023, we listed U.S. Government Actions as number 1 and we noted how the Republicans and Democrats would “fight for the title of toughest on China” and how that will put your China supply chain at risk:

The US has been officially labelling China a strategic competitor since then Vice President Pence’s speech to the Hudson Foundation on Oct 4, 2018. See China, the United States and the New Normal. We don’t expect any radical new policy moves from the United States regarding China, but I’m very concerned about the unforeseen impact of a new wave of anti-China regulations.

The new bi-partisan Congressional “Select Committee on the Strategic Competition Between the United States and the Chinese Communist Party” was set up to target China with new regulations and restrictions. That is its function, and it is the ideal forum for Republicans and Democrats to fight for the title of toughest on China. And with 82% of Americans viewing China unfavorably and 75% viewing China as an enemy, playing tough against China makes for great politics You may love your Chinese team/supplier/factory manager, but that means very little to a politician who sees that 82% figure and it means nothing to a U.S. customs agent who needs you to comply with existing or future regulations by demonstrating that you are NOT

– using slave labor in Xinjiang

– using materials that have been produced by oppressed people

– harming human rights

– harming religious freedom

– making use of non-certified IP

– engaging in non-market activities

or anything else covered by regulations that will undoubtedly be very popular in the home districts of Congresspeople.

We could not have predicted that the first big knock-down drag out fight between the Republicans and Democrats over who is most anti-China would stem from a Chinese spy balloon, but that is exactly what has happened.

In How the spy balloon popped a US-China rapprochement: Relations between Washington and Beijing remain trapped in a downward spiral, The Financial Times nicely describes how The Balloon has and will continue to negatively impact US-China relations:

For some time, American officials have talked about the need to “put a floor” under the sharp deterioration in US-China relations. But the controversy surrounding the Chinese spy balloon has dashed efforts to gradually improve relations between the two countries. A visit to Beijing by Antony Blinken, the US secretary of state, has now been cancelled.

Even before the current crisis, there was little trust or warmth left between Washington and Beijing. Both sides understand that tensions are dangerously high. General Mike Minihan, head of the US Air Mobility Command, recently predicted in a leaked internal memorandum that the US and China “will fight in 2025” — as a result of a Chinese attack on Taiwan.

While Minihan’s views do not represent a settled consensus within the US government, they do reflect the fevered nature of the debate between western officials about China’s intentions towards Taiwan. The rise in military tensions has also led to a much more determined American effort to restrict the supply of cutting-edge technology to China. New restrictions on the export of semiconductors and related equipment to the country have been announced, threatening its high-tech sector and some leading Chinese and western firms. Talk of the two economies “decoupling” is now routine — although the current reality is that the volume of trade between the countries continues to increase.

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The current incident is, however, particularly inflammatory given America’s already heated political debate about China. Leading Republican politicians used the balloon’s journey across the US to accuse the Biden administration of weakness towards Beijing. The White House’s decision to shoot the balloon down just off the US coast may have reflected domestic political imperatives, as much as national security ones. China has its own nationalists and hawks to satisfy. They too may demand a response to America’s attack on the balloon, which the Chinese government has called a serious violation of international conventions. In recent weeks, more moderate voices in both Beijing and Washington had been cautiously trying to restart dialogue between the two countries. Those efforts are over — for now.

Just a few days ago, in China Spying: It’s Everywhere, I — like pretty much every else — predicted how the balloon would immediately negatively impact US-China relations, but likely would not have much “short-term direct impact” on companies that do business in or with China:

This spy balloon has already worsened relations between China and the United States and caused U.S. Secretary of State Anthony Blinken to postpone his upcoming trip to China. This latest incident by China is not likely to have much direct impact on companies that do business in or with China, but it should serve as yet another wakeup call regarding China’s overall risks.

Way back in 2018, we proclaimed that bad relations between China would the United States were the New Normal and we’ve been consistently saying since then that they would be on a straight line decline for at least another decade. See, most recently, China’s Relations With the West: Straight Line Decline. I base this on the facts presented, not on my desires or my politics.

Go back one week, one month, or one year and read the news about China and its relations with the West and for every factual indicator that they will improve, there are about twenty that they are in decline. Heck, just today the CIA warned the world not to underestimate Xi’s ambitions towards Taiwan, noting how “Xi has ordered his military to be ready to conduct an invasion of self-governed Taiwan by 2027.” This sort of thing has become so routine that it has been relegated to the back pages as everyone looks at pictures of China’s bright and shiny spy balloon.

I already want to change my position regarding the balloon’s short-term business impact. When I said I did not think it would have much short-term business impact on business, I failed to fully account for the prevailing anger between China and the West. I naively thought this The Balloon would mostly stay in the diplomatic realm, rather than become such a big. deal for the populaces of both the United States and China. But now that this spillover has occurred, I think it quite likely we will see more than just diplomatic talk and the repositioning of military assets.

I think we will see U.S. politicians proposing laws intended to weaken China and, more importantly, resoundingly let Americans know that their politicians are working hard to protect them from China. American politicians are going to want to show their anti-China bona fides in a way that hits home for Americans and that will need to go beyond diplomatic talk and military assets. I predict trade sanctions and restrictions will ping-pong back and forth between the U.S. and China and that will rather quickly start impacting foreign companies that do business with China.

Quick explanation: Whenever I say “foreign companies”, someone, somewhere writes that things like the above will only impact American companies. That though is virtually always wrong, and for two reasons. First, when the United States toughens trade with China, foreign companies are always impacted. I see this up close with my own law firm’s clients because we represent many European, Latin American, and Australian companies that are impacted. In most instances, this is because many of these companies sell their Made in China products to the United States.

The United States also frequently uses legal and financial pressures to get non-US, non-Chinese, companies to do what the United States wants them to do. See After Japan and Netherlands, the US goes after South Korea to block their chip trade with China. I used to say that the EU, Japan, and Australia tended to follow the United States’ lead on China trade within around six months. I now say that they tend to do so within around six weeks.

If you are a Spanish dairy company that sells milk solely within Spain, you will not likely be impacted by the latest US-China kerfuffle. But if you are a Spanish company that makes half of your tiles in China and ships your product all around the world, you should probably buckle up.

If you are looking to move your manufacturing out of China because of The Balloon and what it presages, or for any other reason, I urge you to attend our free webinar, Moving Your Manufacturing from China to Mexico, on February 23. Go here to sign up.