How changing attitudes towards China could impact global business

Nikita Tilsley September 26th 2022 - 4 minute read

As geopolitical tensions between the East and West rise, sanctions and souring relations could have lasting impacts on business globally.

From new trading partnerships and public investment to sanctions and further supply-chain disruption, here’s how the situation could unfold.

The current climate

Since Russia invaded Ukraine in February, diplomatic relations between the US and Europe, and Russia and China have deteriorated significantly.

Sanctions imposed on the Kremlin following its invasion have prompted retaliatory action, leading to weaponised economic sanctions that are damaging both sides.

Meanwhile, analysts nervously try to guess China’s intentions for Taiwan – a country which China views as a breakaway province. US-China tensions heated up after Nancy Pelosi, Speaker of the US House of Representatives, visited the island – a move that Beijing saw as a provocation, prompting an escalation of Chinese military drills around Taiwan.

As Vladimir Putin’s invasion of Ukraine grinds on, and Russia and the West try to ratchet up the economic pressure on one another, relations only look set to deteriorate further. This could have a significant and lasting impact on the global business landscape.

The impact

Less engagement between the West and China

As relations sour, China and the West may turn away from one another, leading to reduced trade and investment in both . Businesses trading between China and the West may find conditions become less hospitable, and therefore may need to adapt and diversify in response.

For instance, the US recently introduced new restrictions on the sale of artificial intelligence (AI) chips to China, citing concerns that the technology could be used for military purposes by Beijing or Moscow. American chipmakers Nvidia and AMD expect to take a big hit from the new rule.

Overall, China may be able to pivot away from the West with minimal economic impact. As the world’s most populous and second-largest country, China has an incredibly strong domestic economy. As of 2020, over 70% of China’s GDP growth came from domestic consumption.

Conversely, countries in Europe and North America may have to put in more work to plug the gap left by China’s absence.

Stronger economic ties between allies

China is the world’s manufacturing powerhouse, exporting vital consumer electronics and computing components, such as semiconductors, along with a wide range of other goods. If engagement decreases, it could hasten efforts to diversify supply chains following the Covid pandemic.

Of course, this could create challenges, particularly for the UK, which is still in the process of negotiating new trade agreements since leaving the European Union.

However, it also opens up opportunities.

As Western countries tilt away from China, they may look to one another and their global allies for new trading relationships. As such, manufacturers may be able to capitalise on an uptick in demand.

Public investment (and interference?)

This will likely coincide with increased public investment, as Western governments scramble to reduce their dependence on Chinese exports by boosting domestic production.

In August 2022, US President Joe Biden passed a bill committing $280bn in federal funding to support semiconductor research and manufacturing in the United States, following a similar €43bn investment plan from the European Union earlier in the year.

Such funding is a boon to local businesses operating in affected sectors and the associated supply chain.

However, there are industry concerns that increased public investment could come with state interference. As seen with the US restrictions on AI chips mentioned above, governments may try to influence production for political reasons. This could create supply-side issues, as chip production is no longer driven by market forces but by government policy.

Computer chips are of particular political importance, so they may receive both more government funding and closer state scrutiny. Other industries, such as textiles, toys or furniture and furnishings, may see less public money (if any) but enjoy freer reign.

Worsening tensions

One worrying potential outcome of this shift is that tensions between China and the West will worsen. The Chinese Embassy in Washington opposed America’s $280bn investment bill, saying it represented a ‘Cold War mentality’, while Beijing released a statement criticising the restrictions on AI chip exports to China:

‘The US side should immediately stop its wrongdoing, treat companies from all over the world including Chinese companies fairly, and do more things that are conducive to the stability of the world economy.’

As tensions simmer, the likelihood of escalation increases. This could come in the form of more trade restrictions, tariffs, or sanctions and embargoes.

Meanwhile, the risks around Taiwan also increase. If animosity grows then Beijing may feel emboldened to invade the nearby island. This would likely result in severe sanctions from the West, and retaliatory measures from China.

Businesses that already have a stake in China could face write-offs, as companies with a presence in Russia did after Putin invaded Ukraine. It may be prudent for firms to reassess their exposure to the risk of such an event.

Reducing the risks

Hopefully geopolitical tensions will ease in the coming months and we can avoid the most disruptive and damaging scenarios. But whatever happens, we remain in a period of huge global uncertainty.

Building business resilience can help prepare your firm for unexpected events, putting you in a better position to weather any turbulent times ahead.

In the meantime, if you handle multiple currencies then it’s worth looking into developing a risk management strategy. This can help you to protect against currency volatility in these uncertain times.

Written by
Nikita Tilsley

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