Three ways American business can profit from China-US competition

The era of ever-closer relations between China and the United States is over.

The early days of the Biden administration have made clear that Donald Trump’s get-tough-with-China policy is here to stay. We have entered a new paradigm in which the world’s two biggest economies and most powerful countries will compete with each other, over everything.

This new world of strategic competition will no doubt destabilize geopolitics, and instability is always the enemy of business. But amid the fracturing of Sino-American relations, there are still great economic opportunities for American business.

Here are three ways companies can profit from all the negative fallout.

1.    Invest to win in the Chinese market

China emerged from the COVID pandemic far earlier than other countries. Its currency has risen 10% against the dollar in the past year. China is on track to replace America as the world’s biggest economy by the end of this decade, years earlier than expected.

At the same time, the Chinese economy is pivoting from export-led growth to domestic consumption-led growth. After years of haranguing by the US, the Chinese government is also making it easier for foreign businesses to operate in China. Put it all together and now is the time for American firms to ramp up their activities in China, and some big players are already jumping on the chance.

While all things high-tech will be off limits for national security reasons, and exports from the US will continue to be challenged by high Chinese tariffs, there are many other opportunities to benefit from China’s bourgeoning domestic market. To name just two examples: Tesla now expects that more than half its 2021 production will come from its new Shanghai megafactory, and American money managers have been flooding Chinese markets with cash to take advantage of significantly higher bond yields than in the US.

2.    Diversify supply chains outside China

From semiconductors to rare-earth minerals, masks to pharmaceuticals, America wants to “decouple” from its extensive China-based supply chains developed over the past 30 years. While politicians will talk about “reshoring” assembly and production to America, the cost advantages of global supply chains will continue to be substantial. They just won’t rely nearly so much on China.

American firms were already diversifying away from China because it is no longer a low-cost economy. That trend will only be exacerbated by rising geopolitical tensions, with locations as different as India and Vietnam, Brazil and Mexico generating interest. While the economics look compelling, there is real political risk associated with most supply chain alternatives to China. But for many firms there will simply be no choice, and there will be real first mover advantages for pioneers.

Apple and its go-to assembler Foxconn are in the vanguard of diversifying away from China, having opened new plants in the past few years in several Southeast Asian countries and contemplating a major investment in India.

3.    Take advantage of America’s coming industrial policy

The idea that the government is better than the market in making new investments in new products – has been anathema to America’s pro-market ethos since at least the Reagan administration. For decades, growth in Europe and Japan lagged well behind the US precisely because governments there played an outsize role in picking economic winners and losers, while America left those decisions to the market.

No longer. Indeed, it seems that the only evidence of bipartisanship agreement in Washington today centers on confronting China.

Republicans like Josh Hawley and Marco Rubio have actively embraced government-led industrial policy as essential to American competition with China. The Biden administration has piggybacked on this theme by framing its “Build Back Better” infrastructure plans in those terms.

America’s coming industrial policy will create enormous opportunities for American business, particularly in the areas of most intense competition with China like AI, 5G, and robotics. America’s last great industrial policy - massive R&D support from the US Defense and Energy Departments in the 1970s for what became the internet – made possible today’s tech titans like Google and Microsoft. Large-scale government investment in next generation tech will create similar opportunities for new companies in the coming decade.  

For much of the past two decades, ever greater economic interconnections between China and the US has been the bedrock on which greater prosperity for human kind was built – and many American companies took full advantage of the opportunity.

We have now entered a new era in which economic “self-reliance,” not interdependence, will be the watchword in both countries. Now is the time for American businesses to position themselves for this very different world.