China-US Relations: What’s Next?

Globalization has opened China up to the world in a pace like no other before. You can imagine that cultural and social norms are also playing catch up. With such a large population, it’s astounding how quickly this transition is happening in many different facets. There has been a long academic debate on the reason that China fell behind when the rest of the world embraced the scientific revolution over the past few centuries. The current explosive growth of technology startup scene in China is as much a cultural breakthrough as it is a great leap forward in economic growth.

While international companies are busy shifting their “China strategy” from low cost manufacturing focus to the growing Chinese middle class market in the last decade, China itself is quickly and not-so-quietly transforming its economy to the next phase of development into an innovation driven economy. Companies which have been successful in China by continuously making adjustment as the country was evolving will need to make strategic adjustments continuously to reflect the fast moving market dynamics.

The stormy clouds over US China relationship add one additional layer of complication for businesses. While the current focus of US China relationship has been most directed towards trade and economics, it is to some extend the underlying clash of ideology that is driving the rivalry of US and China. It seems both sides are making an effort in not letting the situation spiral out of control. It is imperative for international companies to decide how to proceed and succeed in the China market where innovation is quickly becoming a major driving force, and how to participate in what will probably be the world’s most dynamic technology growth environment while safeguarding core IP and know-how. Managed properly, winning in China could transform who you are as a company. You’ll discover new ways of working, new business models for competing, and new waves for growth. Winning in China would not only help you there, but everywhere. With that said, the dynamic nature of the business environment will require companies to recognize that China has a distinctive political, economic, and social system from the Western system and will not likely to fundementally change. Companies will need to be firm with its core principles yet adaptable in operation, with clear vision yet be agile in execution. 

Here I would like share opinion pieces from a few recognized thought leaders on the subject along with a case study on the transformation of KFC in China. Of course, I have to start with two of the most respected leaders from my alma mater. 

L. Rafael Reif, President, Massachusetts Institute of Technology (link)

As a nation, the United States needs to change its focus from merely reacting to China’s actions to building a farsighted national strategy for sustaining American leadership in science and innovation. If all we do in response to China’s ambition is to try to double-lock all our doors, I believe we will lock ourselves into mediocrity. But if we in the United States respect China as a rising competitor with many strengths we can learn from, that view will inspire America to be its incomparable best.

Geoffrey Garrett, Dean, The Wharton School, University of Pennsylvania (Link)

China-U.S. competition over innovation is here to stay. I do not expect the current trade tensions to spiral out of control — the potential for major damage to the economies of both countries, and to the global economy, is just too great. But even if Trump and Xi continue to emulate their predecessors in managing down their tensions, the underlying struggle over who will win the battle for global pre-eminence in innovation will only intensify. Calling it a trade war is not only misleading. It is also an understatement of what is really going on between the two most powerful countries in the world.

Henry M. Paulson, Jr, Former US Secretary of the Treasury, Former Chairman and CEO, Goldman Sachs (Link)

Even when the United States and China have shared interests, our distinctive political, economic, and social systems—and our distinctive histories—have ensured that there will be plenty of obstacles for leaders on both sides to negotiate. We have reached another of those consequential moments. And the stakes—for our economies, and for the world—are higher than ever before. We need to craft a new framework that works for today’s world, not the world of the past. And for that, we will need statesmanship—wise and strong leadership in Washington and Beijing.

Liao Zhengrong, Executive Vice President, Institute of Peaceful Development, Chinese Academy of Social Sciences (Link)

The current economic and trade disputes between China and the United States have been in existence for a long time, and most of them are related to structural problems. As a step in rebuilding mutual trust, China and the United States could focus on emerging areas outside of WTO, and negotiate economic and trade rules in these areas as soon as possible. The first area could be investment. There is currently no uniform international norm for investment protection. China has become a major investment country in the world. Investment from China and US can be competitive or cooperative. Mutual investment between China and the United States requires standard protection as well as global investment. The second area could be the digital economy. According to McKinsey's report, e-commerce and digital trade is accounting for 12% of international trade, and data traffic will increase five-fold by 2022. China and the United States are currently engaged in WTO reforms to promote a new trade order. However, the US is aiming at the reform of traditional trade practices in China. In fact, digital trade is the big market of the future. While promoting the reform of the WTO, countries may wish to focus more on promoting the establishment of a system of rules in emerging fields, looking for more win-win opportunities to expand the pie by promoting cooperation in emerging fields.

Ray Dalio, Co-Chief Investment Officer & Co-Chairman of Bridgewater Associates, L.P. (Link)

The most important things are that 1) China has a culture and system that has worked well for it for a long time so it shouldn’t be expected to change much, 2) the U.S. has the same, 3) these systems (and those of other countries) will be both competing and cooperating, and how well they do that will be an important influence on global conditions, 4) how well each system works in practice will have a far greater influence on where each country stands in the future than the terms of the deals that they strike with each other, so each would do well to examine its own weaknesses and come up with reforms to rectify them, and 5) there is a lot to respect about the Chinese culture and approach that led to its remarkable accomplishments, 6) we would do well to learn from each other, cooperate and compete to bring each other up rather than to tear each other down, and 7) China is a place we need to continue to evolve with and invest in. 

Gordon Orr, Senior Advisor, McKinsey and Co (Link)

The next stages of China’s transition away from economic equilibrium with the United States will likely create volatility in market growth and require conservatism in some areas and bold moves in others. And so 2019 is a year to remain highly alert to signals on where the economy is headed, most critically for being prepared for a wide range of outcomes and being bold when it comes to taking action. It is not a year to set a budget plan for China in January and just expect it to happen as forecast month by month. This is more likely to be one of those years where you toss out your plan for the year by March, moving fast to seek to get ahead of sudden changes in the domestic and international situations.

Pascal Lamy, Former World Trade Organization (WTO) Director-General (Link)

China has generally complied with the WTO rules. The big problem is that the WTO rulebook is quite old and a number of disciplines are different for developed countries and developing countries. A second issue which the WTO must resolve is the issue of whether Chinese companies benefit from excessive subsidisation as a result of state ownership. “Chinese subsidisation is a problem and it is not in the spirit of the WTO, but China does not cheat. It is the WTO rules that in some areas are not disciplined enough,” he pointed out. “[Does this mean that] trade is unfair? It depends whether you believe the definition of fair trade is trade done in accordance with the rulebook or if you believe fair trade is trade which you and I both believe is fair.”

Case Study: How KFC Changed China and How China Changed KFC by Neil Thomas at University of Chicago (Link)

Seen in the context of 40 years of reform and opening—during which KFC transformed from an expensive novelty to a market trailblazer to a localization pioneer to a first-among-many-equals in an intensely competitive industry—the latest spin-off of Yum China seems to simply signify the increasing, and perhaps inevitable, convergence of Chinese and American business. KFC’s success in China must also be couched in the successful policies associated with reform and opening. China’s fast-food market would not be as developed without opening to KFC, and KFC’s business would not be as profitable without entering China. Trailblazers like KFC imported to China best practices on how to manage a restaurant chain, build a nationwide supply chain, and maintain high levels of customer service and dining experience. KFC also showed other American restaurants—like McDonald’s—that China’s market was possible to crack.

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