US-China rivalry: How companies can adjust to geopolitical shift as decoupling accelerates

Companies can count on the rules and dispute resolution mechanisms of free-trade agreements, take advantage of Western funding agencies such as the DFC and seek global forums such as Apec to keep conversations going

James CarousoandPenny Tucker

Published: 5:01pm, 22 Jul 2020

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No matter which candidate is successful in the November US elections, the geopolitical contest between the United States and China is likely to continue. Whatever the merits of the arguments of each nation’s political elite, they are both locked into a narrative about the other that has widespread support among most segments of their populations.

This means the decoupling of the global economy is likely not only to continue, but to accelerate. We already see Huawei banned from the British telecommunications system, only months after the government said it had no problem with the Chinese company being part of its 5G roll-out. There is more talk of the TikTok app being banned in the US.

Taiwanese semiconductor companies are rapidly reshoring from mainland China, and Japan is devoting billions of dollars towards moving the production lines of its corporations out of China. Beijing will continue to favour, subsidise and promote globally its national companies in ways that often violate the rules of the World Trade Organisation.

For companies with an international footprint – or with hopes of achieving that goal – what does this geopolitical paradigm shift mean? What are the opportunities and risks to consider?

03:01

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First, trade agreements matter. With the WTO in disarray, companies may still depend on the rules and dispute resolution mechanisms of free-trade agreements. While the web of such agreements can be daunting to understand, such pacts as the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) bring together 11 countries representing more than 13 per cent of the global economy and provide a broad range of tariff reductions and market access concessions.

Furthermore, within the CPTPP and other such free-trade agreements, nations may have bilateral agreements with various third countries that would offer additional benefits. The recently promulgated agreement between Australia and Indonesia is one example.

Is it time for a change to both China and the CPTPP?

Second, global competition. The increasing economic competition between the US and its partners and China is manifesting in several ways. Infrastructure development and financing is one.

After several years of watching Chinese firms win the vast majority of new infrastructure projects, with the concomitant economic and political influence, the US government has launched efforts to refocus, reorganise and simplify its infrastructure assistance mechanisms. Most important, the former Overseas Private Investment Corporation has become the International Development Finance Corporation (DFC) – a one-stop shop that can offer debt financing of up to US$1 billion at low rates, plus equity financing, technical assistance and feasibility studies.

The DFC has also signed agreements with sister agencies in Japan and Australia. All this to better compete with China’s Belt and Road Initiative, whose financing rates are often higher than those of multilateral banks and bring in thousands of Chinese workers. Target country governments are pleased that there are more alternatives.

The DFC and other agencies are anxious for projects to fund. Companies can take advantage of the fact that these Western agencies need companies to propose projects to them – they do not typically designate or design projects.

Global commentators have written widely about how the post-Covid-19 world and the impetus to make supply chains more resilient will affect trade and investment considerations. It behoves the governments of Southeast and South Asian nations to negotiate their inclusion as trusted suppliers to their large trading partners. Western companies can and should help in these efforts.

Third, use international forums. While organisations such as Asia-Pacific Economic Cooperation (Apec) have long been criticised for being more about lofty goals and silly shirts than actual outcomes, the reality is that they provide a valuable conduit for maintaining a constructive conversation.

While Apec’s weakness might be its lack of binding prerogatives, it is also its greatest strength. Where else can the three Chinese economies (mainland China, Taiwan and Hong Kong) sit down with their Pacific Rim colleagues and talk through issues in a comparatively open and collaborative manner?

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Apec is a theatre designed to tease out compromise and test the water for policy initiatives which may make their way into other more formal trade negotiations. Just as people in a strained relationship might observe that lawyers tend to get involved when the main parties stop talking, geopolitical environments spiral downwards when countries shut down meaningful dialogue.

Until the WTO is rehabilitated to achieve greater focus, functionality and ambition, plurilateral forums will continue to have disproportionate importance. It is more important than ever for senior company officials to attend these meetings (once they resume) for access to and to learn about business opportunities.

Covid-19 may have shifted some of the geopolitical dynamics across the Indo-Pacific, but the fundamental dynamics that companies and governments will need to succeed will remain largely unchanged – be it breaking down the barriers to trade or leveraging the power of diverse voices in multilateral forums.

James Carouso is the managing director for BowerGroupAsia (BGA) in Singapore and a former senior US diplomat in various posts in the Asia-Pacific. Penny Tucker is a senior adviser to BGA in New Zealand and a former official in New Zealand’s Ministry of Foreign Affairs and Trade

This article appeared in the South China Morning Post print edition as: Firms can adjust to geopolitical shift as decoupling accelerates

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