DiligenceChina

Is there a chance that the growing US-China trade tensions can be averted – or at least minimized? Well, sure – theoretically. The reality, however, is that we are probably already in the early days of a trade dispute that will characterize relations between China and the US for months or years to come. That doesn’t mean that you won’t be able to do cross-border business anymore, but that the rules are shifting and the challenges are getting more formidable. But on the other hand, the hurdles have gone up equally for everyone – so your competitive situation probably hasn’t gotten much worse.

What will a trade war look like?
A trade dispute between the US and China is more likely to play out in the ports and the courts than in the legislature or politburo – at least in the early days. If you already have business in China, you should be more afraid of quiet bureaucrats and anonymous customs officials – not talky politicians or glib media types.

Early stages of a trade dispute
If you lose millions on a cross border deal between US and China, it is much more likely to be because of some invisible bureaucratic shift, new paperwork procedure or administrative regulation. This morning China banned imports of Tyson chicken and a half dozen other American food processors. This is most likely a tit-for-tat response to an earlier US move to restrict the import of Chinese seafood. Look for more and more of this kind of thing, at least in the early days. For those of you in import/export trades, this is a particularly nasty tactic since it doesn’t involve new laws, debate or public discussion. These actions take place on a bureaucratic level using existing – often murky – regulatory backing. It’s hard to get national-level trade reps to take action on such gray areas as custom clearance times, inspection rates, and bacteria level. If the authorities on either side of the drink decide to make their point by destroying your shipment, you have very little recourse.

Another intangible outcome at the start of the trade war will be the mood of the publics in both China and the US. The mutual love-fest is over, and now there’s a good chance that long-held suspicions and tension will start to surface and become mainstream. On the US side, we’re already witnessing people like Lou Dobbs take the lead. Whenever you hear phrases like, “Communist China and American public safety” in the same sentence, you know that the message will be pretty unfriendly. Chinese reaction will be a little delayed. A small percentage of highly vocal nationalists and racists have been spewing the anti-Western and anti-US vitriol all along, but they’ve never had much traction. Trade with the US has played a huge role in making coastal China prosperous, and a solid management position with a US company is still the gold standard of Chinese Yuppidom. But any westerner who was in China during the 2005 anti-Japan demonstrations knows just how volatile this place can be. The keywords to be on the look-out for are “national pride” and “take advantage of the Chinese People”.

Chinese public opinion is interwoven with official policy – both influencing officialdom and acting as a tool of government will. Remember to read the official People’s Daily and other official media to gauge where the prevailing winds are blowing. Today’s A Wrong Remedy By the US is a fairly restrained discussion of the currency debate in Congress, and only uses the phrase “anti-Chinese” twice. But a front page Foreign Media Rapped Over Food Reports takes a much harsher tone,

Two senior quality control officials have lashed out at a section of the foreign media for inciting fears over the safety of Chinese products. “Some foreign media, especially those based in the US, have wantonly reported on so called unsafe Chinese products. They are turning white to black,” Minister of the General Administration of Quality Supervision, Inspection and Quarantine Li Changjiang said during inspection of some food enterprises in Beijing yesterday.

Legal judgments, civil court cases and administrative approvals are likely to be heavily tied to public opinion. If the Chinese Street turns anti-US we can expect an upswing in the number of lawsuits, legal complaints, and commercial disputes between ordinary Chinese and US companies selling into this market – so make sure your house is in order. On the other side of the Pacific, be prepared for a few loud protests and a lot of even louder class action suits. Wal-Mart will be the lightning rod for street protests, but the lawyers are going after anyone who has ever imported food or toys. If there’s even a chance that your company has been involved in China trade that can be traced to a sick or injured kid, you had best clear time to talk to a lawyer. That is probably the greatest pressure point for lawyers and lobbyists to work, and there are plenty of opportunities.

Later stages of a trade dispute
Well, there’s a great chance that once we’re all seen how ugly a potential trade problem between the US and China would be, we’ll all come to our senses and back away from the edge of the abyss. But what happens if this dispute wants to escalate? We’ll take a look at that tomorrow.