Multinationals in China Say Trade War Hurting Sales

Almost half of companies that responded to the U.S.-China Business Council's annual survey on the business climate in China said they have lost sales in China since the trade war began. The most common reason is because of retaliatory tariffs on U.S. imports to China, according to these 100 multinational firms based in the U.S. Another third said they lost sales because of U.S. tariffs.

The survey, released Aug. 29 but completed in June, predated the most recent rounds of tariff rate escalation on both sides. Overall, 26 percent of respondents said their Chinese operations had lower revenue than the previous year -- the highest proportion in 19 years of surveys.

The council has 220 members, and having 100 replies to its survey is a typical response rate, Council President Craig Allen said at a press conference where the group rolled out the survey results. Approximately 25 percent of USCBC members use China as an export platform, while the rest have Chinese operations largely or exclusively to serve the Chinese market.

Businesses that sell to other manufacturers in China said that they lost sales because customers are unsure that they will be able to have a steady supply of U.S. inputs -- 40 percent of companies said that.

Council Senior Vice President Jake Parker, who moved back to the U.S. this summer after 10 years in Beijing, noted that although tariffs on both sides was the No. 1 challenge mentioned by survey respondents, the trade distortions mentioned in the Section 301 report were seven of the top 10 challenges, such as government-endowed advantages to Chinese companies, both state-owned and private; data localization rules; and lack of intellectual property protections. Although nearly 60 percent said China's IP regime is improving, 23 percent said they are very concerned about the vulnerability of IP in China, and 68 percent said they are somewhat concerned.

Outside the bounds of the survey, Allen answered questions about decoupling. He said that while most companies are not moving operations out of China, those in telecom, semiconductors and electronics are seeking ways to diversify the supply chain because they fear future export controls on the U.S. side or entity list restrictions on the Chinese side. "No one in our membership is divesting from the Chinese market," Parker emphasized. "That is not happening." But some companies are moving new investment to Vietnam, Thailand, Malaysia, Mexico and Eastern Europe, he said.

Nearly 90 percent of respondents said they are not planning to move any operations out of China; more than 80 percent said they did not stop or reduced planned investments in China.

Allen, who spent years as a diplomat in Beijing, emphasized how beneficial it would be for China to make the kinds of changes the U.S. trade representative is demanding, to stop favoring domestic champions and allow more unfettered competition between Chinese and foreign firms. He said overdependence on state-owned enterprises and government investment "is great in the catchup period but not great ... to get out of the middle-income trap." The middle income trap is the idea that it's easy to grow fast when your country is a lot poorer than developed countries, but as the gap narrows, your country needs to become more innovative and entrepreneurial in order to keep fast growth rates going. Not all analysts agree with this prescription.

He said that "the Chinese government knows this well." When asked by International Trade Today why China backed away from changes it was entertaining along these lines back in May and shows no signs of moving back toward ambitious reforms, Allen said: "The political dynamics of the negotiations are obviously complex, and the measures that the Chinese are taking to open the economy are continuing outside the bilateral context. Tariffs are coming down. The [value-added tax] has been reduced." Tariffs are coming down for trading partners other than the U.S.

"These reforms are important, and we should recognize them," Allen said. "The pace of these reforms is not rapid enough to satisfy the administration, and we recognize that."

While Allen praised China's decision this week not to retaliate, and expressed hopes for upcoming negotiations, he said after the press conference that it's "possible this could get much, much worse."