Reminiscent of Cold War contention, last year’s invasion of Ukraine resulted in extremely frigid relations between Russia and the United States. Layer in the mounting tensions between the U.S. and China, and the global economy became even more unstable and risky for foreign investment.
While the strained relationship with Russia has stunted some industries and affected economic growth, it pales in comparison to the potential impacts of a decoupling between the U.S. and China. It is difficult to fathom the economic effects on markets, ways of life, and today's highly interconnected global economy.
Completely severing ties to China seems unlikely — perhaps even impossible. Nonetheless, business leaders and financial decision-makers must pursue proactive, strategic moves that protect assets, operations, and supply chains while the world watches how situations between the U.S., Russia, and China unfold.
The U.S. Department of Commerce Bureau of Industry and Security reports that in 2021, 9% of total U.S. exports went to China, but 19% of U.S. imports came from China. Compare that to Russia, which in 2021 accounted for 1% of all U.S. imports and less than half of a percent of total exports.
To look at it another way, the trade attachment between the U.S. and China was almost 20-fold that of the U.S. and Russia. Disconnecting from Russia presented challenges, but it was much more realistic and achievable than attempting to decouple from China altogether.
Complicated Dynamics With China
The economic interdependence between the United States and China cannot be ignored. Despite mounting tensions and concerns about intellectual property protection, American businesses still view China as an important market for both supply chain efficiencies and sales opportunities.
According to the American Chamber of Commerce in China’s 2023 Business Climate Survey, 74% of American businesses operating there reported that they do not anticipate reducing investment or activity in the country. It’s simply not feasible to ignore the nearly 1.5 billion consumers who comprise the Chinese market.
Regarding specific goods these nations require, it's worth noting that China heavily relies on the United States for agriculture and accounts for nearly 21% of U.S. exports into the country each year. China has a large population to feed and is not as fast or efficient in its agricultural production — at least not yet.
Similarly, the United States is focusing attention on growing green energy. There is a significant need for lithium batteries, and which country has a stranglehold on lithium battery production, and will continue to for the foreseeable future? It’s China, of course.
Furthermore, there are steep financial implications related to decoupling. According to the U.S. Department of the Treasury, China is the second-largest foreign debt holder of U.S. treasury securities, buying an average of nearly $1 trillion of U.S. debt each month. Removing those purchases would seriously impact interest rates and cash flow and could destabilize the U.S. economy.
All Eyes On America
While the United States still has fundamental financial and trade ties to China, growing opportunities exist to bring operations to the U.S. and North America.
China is facing infrastructure problems, and its population declined in 2022 for the first time in more than 60 years. Meanwhile, a supportive investment culture, a stable and sophisticated power grid, clean water, and abundant other resources required for operations make the U.S. more attractive to investors. Despite economic shifts, the labor market is strong, and the neighboring North American countries offer optimal conditions for mutually beneficial trade.
Federal pushes like the Inflation Reduction Act and the Chips Act incentivize domestic production of cleaner technology, microchips, batteries, and other increasingly essential products. As a result, many foreign companies, like Panasonic and LG, are showing interest in operating in the U.S. to take advantage of those funds. Money, resources, strong currency, and short supply chains all have business leaders at home and worldwide turning their attention toward the United States.
Advice for Leaders
Geopolitical issues are evolving weekly, daily, and sometimes hourly, creating challenges for business leaders assessing operations in Russia and China. It will be crucial to avoid making knee-jerk reactions to exit or drastically change course.
Complying with legal requirements and prohibitions is necessary, but considering the smaller trade relationships with Russia, it may be less cause for concern there. With China, businesses should assess activity in the region strategically, starting with a blank slate, and consider opportunities, risks, and what actions would be most lucrative if entering the market today. Consider customers, product categories, and prospects to decide the ideal strategy that aligns with long-term goals.
Diversification is crucial, and businesses should aim to expand the product mix, supply relationships, and customer base. Consider a regionalized strategy to help balance risks and create a diversified portfolio. Breaking down relationships and supply chains into smaller, granular pieces, including ship-to and ship-from points, can help businesses achieve greater diversification regardless of size.
Riding Economic Waves
No matter the situation, economic decoupling has reverberating adverse effects. However, there is no comparison of the overall impact of decoupling with Russia versus China. The U.S. and Chinese economies are very intertwined, and disentangling them would be incredibly expensive, time-consuming, and disruptive — a house of cards neither government can afford to shake.
Cooler heads will probably prevail, but organizations could face tough days ahead as each nation positions itself as more powerful with reciprocating tariffs, bans, or other changes that affect business. It is essential to take steps to handle the imminent ups and downs.
Fortunately, the symbiotic relationship between the United States and China acts as a safety valve that aligns economic interests between the two nations. But if one decides to shut off that valve, it will create financial waves felt around the world.
Lou Longo is a partner with Plante Moran and leader of the firm’s international consulting practice.