China and the West Are Decoupling: Please Act Accordingly

The US-China Trade War is and will be the new normal. Relations between the EU and China are soomewhat better, but those are quickly getting worse as well.

If you are doing business in China or with China you should at least once every day look in a mirror and say this: Relations between China and the West are not getting any better and they will only get worse. I say this not to make a political statement or to offend anyone. I say this as a matter of fact and because I badly want Western companies to succeed.

My law firm is financially neutral on all of this. We make money from companies that go to China and stay in China. And we make money from companies that leave China entirely or diversify away from China or simply set up in countries other than China. We are an international law firm not a China law firm. Our slogan is “Tough Markets Bold Lawyers” not Tough Market Bold Lawyers. We have more lawyers in Europe than we do in China. Our financial neutrality frees us to focus on the truth about China and Hong Kong. Most who rabidly criticize our take on China and Hong Kong or insist that little to nothing has changed with China/Hong Kong have tied themselves exclusively to China/Hong Kong.

Since October, 2018 we have been clear on how decoupling between the West and China is inevitable. I set out the below timeline not so much to show that we have been right all along, but to try to convince you that we are right when we now say decoupling is inevitable and the sooner you recognize this and act on this the better off your company will be.

  • On October, 6, 2018, In China, the United States and the New Normal we called the US-China trade war as the “New Normal” and we predicted a “diminished future for foreign companies” manufacturing in China. We alsoo said that “since pretty much the inception of the US-China trade war we have been saying that we do not see its end because we have always seen it as more than a trade war.”
  • On October 30, 2018, in Would the Last Company Manufacturing in China Please Turn Off the Lights, we recommended companies move their manufacturing out of China (if reasonably possible) and we have relentlessly done so ever since.
  • OnJanuary 30, 2019, in The Huawei Indictments are the New Normal, we wrote how what was happening between the US and Canada and Huawei would negatively impact the West’s relations with China even further.
  • On April 21, 2019, the Wall Street Journal quoted me in a cover story, Trade Deal Alone Won’t Fix Strained U.S.-China Business Relations, on how “There is no way any deal between China and the U.S. will cause everyone on both sides to say, ‘We were just kidding,’ and on how the tariffs, the arrests, the threats, and the heightened risk have impacted companies and that reality will not go away.”
  • On May 1, in Yet Another International Trade (AD/CVD) Petition Against China, we wrote of how the United States was upping duties (retroactively and sometimes by more than 200%) against Chinese products as a way of conducting its anti-China foreign policy on the sly.
  • On May 4 — the day before President Trump’s by now infamous tariff tweet — in The US-China Trade War: Winter is Coming we wrote how neither the United States nor China wanted relations to improve and we should therefore expect relations between those two countries to worsen. We said “the United States is aggressively and unabashedly doing what it can to isolate China and to remove it from the world of international trade” and shutting out China will become a regular thing in all new U.S. trade agreements.
  • On May 8, in The US-China Cold War Starts Now: What You Must do to Prepare,  we proclaimed the start of the US-China cold war.
  • On June 20, in Has Sourcing Product From China Become TOO Risky? we laid out the many growing and unpredictable risks inherent in having products made in China and we posited that China was becoming too risky for many who make their products there.
  • On June 21, in Does China WANT a Second Decoupling? The Chinese Texts Say That it Does we wrote of how China wants to decouple from the West. We used Chinese government writings (in Chinese) to reach this conclusion.
  • On August 12, in The Top 14 China Wild Cards/Future Risks, we set ou the 14 biggest risks for Western companies doing business with China and promised to monitor the extent of those risks (and new ones) going forward.
  • On August 24, in Repeat After Me: There Will be No US-China Trade Deal we wrote how President Trump had intentionally “made it all but impossible for China to make a trade deal with the United States” and of how he U.S. plan has always been to force a slow decoupling of the U.S. and China and then work to convince the rest of the democratic world (the EU, Australia, Canada, Latin America, Japan, etc.) to decouple from China as well. And then we said that this means you “must stop believing there will be a solution to the trade war that will allow you to go back to doing business with China the way you used to do business with China. You need to instead recognize that this situation is the New Normal as between the United States and China and that, if anything, things are way more likely to get worse than they are to get better.”
  • On September 4, in China’s New Company Tracking System: Comply, Comply, Comply we wrote how China’s new company tracking system would be used to bring foreign companies doing business in China to heel and/or to push them out of China.
  • On October 9, in Can Your Business Afford/Stomach the China Risks? We looked again at the 14 key risks involved in doing business with China and concluded that “the risk of doing business with China has gone up substantially in just the last two months — heck, it’s gone up substantially in just the last two days. Many are no longer asking whether China is too risky; they’ve already decided that it is.”
  • On October 17, in China Detains 2 Americans Amid Growing Scrutiny of Foreigners, the New York Times wrote the following: “China has become a risky place,” Dan Harris, a lawyer at Harris Sliwoski . . . . says. “If you are going to do business there you had better know what the laws are and you had better follow them, because China is not going to let anyone slide, especially not an American or a Canadian. Little things that were virtually ignored for years are leading to foreigners going to jail.” I would now put Swedes in the higher risk category. See today’s SCMP article, on China’s threats against Sweden.
  • On October 20, 2019, in How to Avoid China Prisons: Know YOUR China Risks, we wrote how “every foreigner and foreign company is at risk in China; it’s just a question of how much” and then we laid out how to reduce your risks.

During this entire period I have (on this blog and on Facebook and on Linkedin and on Twitter) been vociferously touting the benefits of manufacturing and doing business with countries other than China, and providing examples of clients that have moved out of China and are loving it. We perpetually tout other Asian countries like Thailand, Malaysia, Vietnam, Indonesia, the Phillipines, Pakistan, and India for manufacturing. We are also big believers in Mexico and many other countries in Latin America. Ditto for Poland and other countries in Eastern Europe and for Spain (where we have offices) and Portugal and other countries in the EU. Last but not least, our United States foreign direct investment lawyers are increasingly working with companies moving their China/Hong Kong operations to North America.

The media tends to focus on manufacturing leaving China for elsewhere because that is easiest to measure. But with Hong Kong in an political-economic freefall, plenty of companies are moving some or all of their operations from Hong Kong and Mainland China to Singapore, North America, Latin America and Europe. Western companies are moving out of China and for every one that has already moved out, there are probably three or four looking to do so and about half of those will do so within the next year. Please do mark my words on this.

Why We Are Writing This Now? What Will the Future Hold?

This post is coming out now because I am tired of seeing companies tie their global plans to every possible upward tick in the US-China trade war. Too many companies keep holding off on moving out of China based on news reports that this deal or that deal will soon be made between the United States and China. This is happening again with the so-called Phase One deal that has been perpetually touted as being on the verge. See Millimeters’ separate U.S., China from phase one trade deal.

This post is intended to burst that bubble.

First off, I put the odds at less than 50 percent of even a very limited Phase One happening. Financial analysts and economists keep saying that deal will happen, but that is because they view things from an economic perspective and they are convinced that such a deal makes economic sense. But as we have been saying since day one, if the US-China trade war were based on economics, China would have been able to end it by buying more soybeans and Boeing airplanes. Also, the longer the U.S. economy continues roaring ahead, the less economic need for any deal at all.

Second, even if the Phase One deal does happen, it will be so limited as to be meaningless for most companies and nothing but a short-term pause in the decoupling. Look at all that has happened between the United States (and the West) and China over China’s treatment of Hong Kong and the Uighurs and tell me that the US and China are millimeters away from patching things up. Look at what is going on between Australia and China and between the EU and China and between Sweden and China and tell me that relations between the West and China will get better. Look at how “Beijing orders state offices to replace foreign PCs and software” and tell me who you think will stop the straight line detoriation in relations between the West and China.

Decoupling is happening and will continue happening and you and your business need to act accordingly.

Full disclosure: the following books greatly inform my view of where things will be going between China and the West:

  1. Khrushchev’s Cold War: The Inside Story of an American Adversary.
  2. The Cold War: A New History
  3. Origins of the Cold War
  4. The Tragedy of American Diplomacy
  5. Destined for War: Can America and China Escape Thucydides’s Trap?
  6. Dragons Entangled: Indochina and the China-Vietnam War
  7. The Best and the Brightest

Western-China relations are not the same as Western-Soviet relations and what happened then need not necessarily happen now. But the past does inform the present and by explaining so well how relations between countries can and do rapidly deteriorate the above books make for important reading today.

What are you seeing out there? What do you see for a year from now?