Business in a trade war: Part three

In the final of a three-part series based on a study of managerial perceptions of the U.S.-China trade war, researchers Hongzhi Gao, Monica Ren, and Ivy Guo take a closer look at how Trans-Tasman businesses are responding.

Since 2018, the U.S.-China trade war has reminded us how vulnerable global markets and supply chains are to political upheaval.

Trump administration trade adviser Peter Navarro reportedly told Fox News earlier this year that “the trade deal [with China] is over”, causing shock among investors and companies alike.

He later walked back his comments and clarified, saying trust in China was over, after America learned of COVID-19’s spread only once a Chinese delegation left Washington, having signed the phase one deal.

One thing is certain – business has not been “go(ing) as usual” in the trade war. Reaching normal appears even less likely when the two governments negotiate the trade deal while exchanging shots over other political matters.

Most worryingly is the collateral damage incurred by businesses who were once seen as the bridge between the two markets but are now facing risks as hostages, like China’s Huawei, or U.S’s FedEx.

For 40 years, economic-centric collaborations between the U.S. and China have been overshadowed by political and ideological conflicts, and the COVID-19 pandemic has only seen trust erode further.  Accusations around the virus and its causes have been directed towards political leaders and even political systems, counterproductive to the global fight against the virus.

In the name of national security, trade and investment barriers have increasingly stalled in many parts of the world, including the U.S., E.U., India, and even Australia and New Zealand.

Highly political, country-to-country conflicts during the trade war and the pandemic highlight how the differences in political leadership, economic ideology, and even culture play a role in a country’s handling of trade- and health-related international conflicts.

All of these have implications for a firm’s export strategy.

For an exporter, strategy analysis during uncertain times is guided by two perspectives: external, or business environment-focused versus internal, or resources-focused.

External analysis examines how an exporter adjusts their products, export markets and in-market strategies in response to a changing international environment. An exporter can establish external business or social connections who help mitigate political risk, such as a powerful, well-connected distributor who can lobby the government.

In contrast, internal analysis examines how a business can acquire and exploit valuable resources, such as proprietary knowledge about a new technology, and develop dynamic capabilities to engage the dynamic business environment.

Both analyses cannot be separated from managerial perceptions of the global business environment. Given the uncertain nature of the trade war, managerial perceptions should not be considered moderators that play a “tuning” role. Instead, they are drivers playing a key role in adjusting export strategies.

"The ducks sense the warmth of the water first when the Spring is coming” is a Chinese metaphor: Ducks are the first to sense the changing seasons.

Among the first “ducks” here would be export, international business development or PR managers of an exporting company who communicate with international suppliers, clients, government officials and the international media.

Their perceptions of the nature of the trade war and its causes and effects drive the firm’s export strategy in an increasingly political business environment.

One view from interview analysis shows the U.S.-China trade war has a geopolitical rational, but it's a temporary Trump effect.

The trade war is basically power grabbing and could be avoided if there is a political leadership change in one of the two powers. Chemical product trader (AU3) said the trade war was misguided by Trump in the way it’s been executed.

“Because a lot of tariffs are placed on products where there are just no substitutes around the world, or at least not competitively. The trade war is hurting the interest of U.S. customers.”

While applications for tariff exemption might work for powerful, resource-rich companies like Apple, the red tape around applying has become a costly and political process, disadvantaging American SMEs.

“People do realize this is a short-term political thing that probably would end with Donald Trump's presidency…U.S.-China trade war is caused by President Trump, I think.” (AU3)

A furniture manufacturer, NZ3, said “Americans never imagined in their wildest nightmares that somebody would make it into the White House […] through the primary system, through the election campaign, and into a position of power in the White House, that had the characteristics of a Donald Trump. They never imagined it.”

“I do not want to overwork this, but really what that geopolitical behaviour is about is basically taking a leaf out of Hitler's playbook, which is when you are divided, unite against a common enemy. I mean, that's the way you do it right, if he's got people banging down the door to have a go at Donald Trump. He wants to unite all his followers against the common enemy and he's just chosen China as that. China is the fall guy.” (NZ3).

Some of the managers hold anti-protectionist stances and are optimistic about a return to normal after the Trump era. These companies would continue to focus on the global market, and a combination of the U.S. and China markets.

For now, firms use a dynamic balancing strategy that weighs export markets and sourcing locations.

Exporters are trying to balance their opportunities and risks by concentrating on markets less affected by the trade war (like Europe and Southeast Asia). In the meantime, they also remain engaged with markets directly affected by the trade war.

By doing both, they benefit in both interim and the long term. They hope to re-integrate their markets at the global level once the trade tension is over.

Another view is that the U.S.-China trade war has evolved into an ideological conflict. It was unavoidable from the start as the two superpowers competed on political systems and global leadership.

Some interviewees had a deep understanding of the historical evolution of the two superpowers. Based on their past experiences, they accumulated much deeper insights into entrenched issues between the two and saw these conflicts were largely unavoidable. The U.S.-China trade war is the starting point of further all-out confrontations.

Their insights made them ‘choose’ which side they would stand on, especially as room to sit on the fence has become increasingly squeezed.

A specialised equipment trader (AU2) said there is a large ideological conflict between socialist and capitalist ideologies, and between private ownership/economic freedom and state ownership/control during the trade war. The rivalry for global leadership between the U.S. and China is the underlying reason for the trade war.

AU2 said the ongoing conflict would penetrate all walks of life, including social, cultural, and immigrant life.

According to a specialised equipment manufacturer (NZ2), an ideological element hadn’t surfaced yet in the US-China trade war (by October 2019) but "there is an ideological element underneath this and it's like a clash of cultures.”

“I think, this is the start of a battle between two systems of organising the world.” (NZ2)

When managers saw the trade war as an ideological conflict with no outcome other than a complete one-win-one-lose situation, firms would not opt for the dynamic balancing strategy mentioned earlier. Instead, they would concentrate on a fencing strategy focused on the markets with a close institutional linkage with AU/NZ (e.g., the U.S.).

In contrast, according to AU2, “there was very little we can do (about the trade war). This is our fate. We have to stick with China”.

This company predicted the U.S.-China trade war five to six years ahead and relocated manufacturing to South Africa, hoping their Chinese-based factory could be replaced by one in a more ‘neutrally positioned’ country.  However, they failed in their South African venture and retreated to their China base as their key connections and supply chains were largely embedded in China.

As a result, they adjusted their export markets away from the U.S.

“America is the biggest market for our products. However, since we cannot change our factory in China, we have decided to let go of the American markets. We have been focusing on new market developments in the E.U. and Russia.” (AU2)

The final view sees trade war as about constraining state power and control in the global trading environment. It rebalances unfair competitive advantages, or monopoly power enjoyed by certain industries from China.

“Maybe one thing this (trade war) did to damage China's position is that it got people thinking about the risk of being so China-centric.” (AU3)

“There were some benefits in that China has to become a little bit more aware of how they're doing. They're trying. The previous US administrations…China was basically just walking all over in terms of the global trade.” (AU3)

The trade war is about fixing the ‘national monopoly pit (the risk to a country who has become reliant on the supply from China’s national monopolies)’.

The trade war pushed countries like Australia to fix structural misplacements in some strategic sectors, including telecommunication equipment, so they wouldn’t be trapped by predatory moves from China's monopolies. In local markets, these sectors have an opportunity to revive themselves and compete strongly at home due to the trade war.

AU2 said “There is also a monopoly issue (from China). I am talking about the national monopoly. In some countries, their strategic sectors, like shipping, bridges, motorways, trains, and automobiles, have been monopolised (by manufacturers from China)."

“All these strategic sectors in these countries have lost their foundation (to manufacture at home). Global industrialization has been developing so fast. Everyone only sees its advantages – products are manufactured in low-cost locations and resources are integrated globally. But there is a problem, that is forming a “pit” of monopoly – many people do not see it."

“As a business operator, at least I had noticed this ahead of the conflicts. Therefore, political economy is the key, and culture only exacerbates this confrontation, together with religion, morality, immigration, and more. This kind of confrontation between China and the U.S. will remain for a long time.” (AU2).

This article was origninally published on the Asia Media Centre website.