Sino US tensions – Wider Implications for Business – SVA Risk Assessment Report

Hopes are high that Chinese Communist Party (“CCP”) General Secretary Xi Jinping and US President Donald Trump will declare a truce in the trade war at a forthcoming G20 meeting.

Whilst this worthy goal would be positive in the short term, the harsh reality is that this trade war is merely a symptom of a growing divergence between the US and China; a little diplomatic bonhomie will therefore not alter that systemic trend.

Rather, businesses must now understand that this divergence will reshape the commercial environment in the Asia Pacific region markedly. Companies must adapt to the new reality if they are to prosper, however painful such changes may appear.

From Trade War to Cold War?

Tensions between the US and China have intensified, of late. The most obvious manifestation has been in the US government’s imposition of tariffs on imports from China worth more than USD250 billion.

These tariffs have already affected trade flows. Chinese purchases of US soybeans have plummeted, replaced by deliveries from Brazil – to the chagrin of Midwestern farmers.

The US, in August 2018, also tightened rules on oversight of foreign investment, to cover real estate and critical infrastructure – all aimed at China. American officials have raised fears about the actions of Chinese students at US universities.

In a much under reported move the US government has decided to withdraw from the Universal Postal Union, which sets postal costs, discomforting the logistics industry. From the US perspective the rates for Chinese, Singaporean and German exporters were cheaper than for the US; thus enabling those states’ internet sales.

US actions have certainly troubled the markets, but in some respects may be merited. China has been accused for a very long time of the plundering of foreign intellectual property, has kept swathes of its economy closed to foreign business, and has recently reinforced regulations that that Communist Party Committee cells in companies are to have sway over private companies’ decisions and compliance to national policy. The Made in China 2025 plan, which champions domestic industrial development, has proven the final straw as far as some US interests are concerned.

This dispute is about much more than trade. A bipartisan consensus; one which perceives China as an open adversary is taking hold in Washington. Indeed, a speech by Vice President Mike Pence in early October 2018 hinted not so much at “containment”, in Cold War parlance, as at “rollback” – a much more fraught task.

In Beijing, initial confusion at American ire has given way to a firm belief that the US wishes to curtail China’s rise to wealth and power, to stop the much-touted “revival” of the Chinese nation.

The trade conflict thus speaks to a broader loss of trust, which was always tentative given the political and cultural gulf between the US and China, and has resulted in a shift towards a more adversarial relationship.

For now, companies should not overreact. Barring black swan events over military issues, tensions should not spiral out of control, into a new Cold War; neither side wants a full blown crisis, and Trump and Xi may broker a temporary truce at the G20 meeting on 29 November. Moreover, systemic shifts take time.

Yet divergence does seem certain. Like two huge ships, China and the US are moving slowly apart. Diplomatic bonhomie in November – if that is what we see – will change little in the longer term.

The new order?

Businesses must now recognise that the status quo ante will not return.

Rather, geopolitical tensions will, over time, reshape the business landscape of the last three decades, which has been defined by a cooperative relationship between the US and China, and transnational supply chains.

Any such shift will pose threats to those businesses reliant on this symbiotic globalism. Take the US casino companies operating in Macau, such as Wynn Resorts, Las Vegas Sands, and MGM China. These gaming businesses have profited mightily since 2001, soaking up funds gambled away by mainland Chinese visitors.

Now, though, the Chinese leadership has cause to ask whether to allow American companies such a boon, particularly given the strong and very visible ties between one or two of the gaming tycoons and President Trump.

Companies reliant on technology may also be impacted. The US appears intent on choking off Chinese access to advanced technology, which could weaken PRC sectors such as manufacturing, robotics, biochemistry, pharmaceuticals, and e-commerce.

Yet necessity is also the mother of invention; and Xi Jinping has already called for self-sufficiency. China may take longer to improve its technology, but experience suggests can do so given time, spending on research, and technology transfer – if all of this is at the cost of divergent standards in the world’s two largest economies.

Those hoping for further liberalisation of the Chinese economy may also prove disappointed. Rather, the temptation for the CCP will be to bolster state-owned enterprises, so as to manage the economy. State intervention in finance may also intensify, given that high levels of debt already pose risks, and the government could tighten capital controls in order to manage the price of the Chinese yuan.

Looking beyond China, regional trade and investment flows may also shift. Already, both western and Chinese businesses are investing in Vietnam, so as to circumvent such restrictions. This change should benefit South East Asian states, although such investment flows present other risks, given the regulatory and operational challenges in places such as Indonesia.

Some industry may even “repatriate” to North America. iPhone manufacturer Foxconn, for instance, plans to expand production in the US. Certainly, Washington hopes as much; the US has used the North American Free Trade Agreement (“NAFTA”) renegotiations to compel Mexico and Canada to eschew deals with “non-market” economies – meaning China. In response, of course, China will use its Belt and Road Initiative to win access to markets elsewhere.

How should business respond?

This changing environment poses notable risk to companies, such as:

The trade conflict will raise costs. Companies need to protect themselves from price rises, by stocking inventory, by setting aside funds, or by making use of financial instruments. Even so, price rises may crimp revenues, and facilitate or encourage fraud.

Instances of non-payment by customers will increase. The changing circumstances will add to payment risk, owing to economic weakness and tighter finance. Companies should protect themselves by buying insurance, and by gathering detailed business intelligence about challenges facing their key counterparties.

Alterations to trade flows and tighter finance will affect suppliers. Businesses must stress test production chains, so they know which links are weakest, and can pre-empt interruptions in component supply.

Regulatory risks will intensify. Measures that impede access, or target foreign investors, could become more irksome, particularly if nationalism emboldens enforcement authorities. Senior executives could become targets after stepping off airplanes in China. Businesses should monitor regulatory risks much more closely. Many foreign insurance companies are booking revenue from mainland clients in Hong Kong to the ire of mainland regulators.

Broader political risks will grow. A “siege mentality” may take hold in China and / or in the US, perhaps encouraging boycotts, or other measures against foreign business. Worse still, the big powers may seek to politicise commercial decisions, or even try to force companies to “choose sides”.


Systemic shifts are under way in the Asia-Pacific region, even if Donald Trump and Xi Jinping announce a truce to the trade war. These changes will take time, but will directly affect business operations, throwing up winners and losers. Businesses must now make long term adjustments if they are to survive.

Key initial steps should include:

  • drawing up actionable plans to deal with contingencies;
  • briefing staff on the practical risks, and training them as to how to respond;
  • ensuring control systems over local offices are sound and that better monitoring is in place;
  • managing senior executive travel, so as to limit exposure to regulatory action in companies, especially in the insurance and private wealth businesses where action is likely by PRC authorities in connection with capital controls and related regulations;
  • developing internal flexibility, so as to improve crisis management; and
  • independently monitoring key developments, regulatory or political, more closely and reporting of such should go directly to the “C suite”.

How can SVA assist?

SVA ( is a specialist risk mitigation, corporate intelligence, and risk consulting company. The firm serves financial institutions, private equity funds, corporations, high net-worth individuals, and insurance companies and underwriters around the world.

SVA has carried out many political risk, business intelligence, investigative and special risk projects across Asia. The team has many years of experience in assessing business risk, and assisting in the search for practical business solutions.

SVA is in a very strong position to help firms weather these changes, by preparing analyses of the policy environment, by examining the liabilities of current or prospective joint venture partners, and by investigating the risks of, or reasons behind, regulatory actions.

SVA is independent of conflict, is politically neutral, and can appraise Senior Management and Boards of directors as to the reality of changing situations. Change is inevitable, but is not always popular. As such, it is important to have early, reliable and unbiased intelligence – which is actionable. This is SVA’s core competence.

Please do not hesitate to contact us by telephone, or via email at [email protected].