I’ve had a front row seat to China for well over a decade. My law firm started this blog in January, 2006, and we were representing foreign companies in China and the rest of Asia long before that. When we started this blog we were unabashedly optimistic about China, but in the last ten or so years China has gotten more difficult for foreign companies and it has rarely missed an opportunity to prove that its promises to open its economy ring hollow. For nearly every small opening China makes there is usually a corresponding closure. Fool me once, shame on me….

Elizabeth Economy, who is smart as hell and knows as much about the US-China relationship as anybody, puts it best in her recent piece, Trade: Parade of Broken Promises:

[T]he trade war signifies far more than President Trump’s desire to rebalance the bilateral trade deficit. It represents the culmination of decades of pent-up frustration within the United States over China’s failure to make good on the promise of its 2001 accession to the World Trade Organization (WTO): to open its markets, develop transparency and the rule of law within its trade regime, and protect intellectual property (IP). Notwithstanding the skyrocketing level of bilateral trade and the successes of some individual U.S. companies, many U.S. administrations have come to understand the U.S.-China trade relationship as a succession of broken promises. The trade war also reflects Chinese President Xi Jinping’s failure to follow through on his early promise of economic reform; during his first six years in office, his initiatives instead signaled a shift away from greater openness and from free and fair competition. And finally, the trade war represents a move toward at least a partial decoupling of the two economies as part of a much larger geostrategic competition, primarily between the United States and China but also more broadly between two models of development.

It is getting difficult these days to find an American or a European businessperson who regularly deals with China who does not feel likewise, especially if you exclude the China consultants whose incomes are directly tied to the idea that everything will be fine between China and the West once the US and China reach a trade deal or once President Trump is voted out of office.

But how will this be the case when so many governments now believe they were duped by China and when their citizenry are in full agreement on this? In the United States right now, Democrats and Republicans are fighting to out anti-China the other. In China Isn’t Cheating on Trade, an article calling on the United States to tone down its burgeoning cold war with China, Peter Beinart admits that being anti-China sells tickets these days on both sides of the political aisle:

But the slide toward cold war with China will likely continue for reasons that go beyond Trump himself. While Trump’s language is particularly extreme—during the 2016 campaign, he portrayed the relationship between the Chinese and American economies in the language of rape—describing Beijing’s economic behavior as predatory, and demanding that America respond with punishments and threats, has become commonplace in both parties. From Elizabeth Warren, who earlier this year claimed that China has “weaponized its economy,” to Marco Rubio, who last year tweeted that the Chinese aim to “steal & cheat their way to world dominance,” leading Democrats and Republicans describe China’s economic practices as uniquely malevolent and getting worse.

Being anti-China gets votes, in the United States and elsewhere in the West.

Ask those who write about China about the hate mail they receive. I think of this blog as hewing pretty close to center when it comes to China and yet hardly a day goes by where someone doesn’t challenge us with a question like “how can you support a regime that does xyz horrible thing?” Many of these come as messages on our China Law Blog Facebook page and an increasing number of them include gruesome pictures of executions and slaughtering of dogs, etc., purportedly from China. I have no idea if those pictures really do come from China or when they were taken, but I would guess many businesses with close China connections receive similar messages. And I know from talking to reporters that a huge number of foreign businesses do not want their customers to know they are either in China or doing business with China. Why? Because doing business with China can be bad for doing business elsewhere and this is getting worse and will only continue to get worse. Yesterday the United States called out China for interning three million Muslims in concentration camps and I am quite certain this sort of calling out is will continue and even escalate after a trade war resolution.

When I was in student government back in my college days, the big issue was apartheid in South Africa and our student government voted to have the college divest from any of its investments in South Africa. That didn’t happen but many companies did pull out of South Africa so as to placate their customers/clients. We are seeing similar things happening with Saudi Arabia these days and there are China stirrings as well. I am NOT saying this will have a major impact on most companies, but if you pitch your company as socially conscious and you are not thinking of ending your dealings with China, you are behind the curve. What if you are just a run of the mill start-up or SME? What should you do? Should you flee China now to avoid social problems later? Almost certainly not. But if you can, let’s say, slowly and relatively painlessly move your supply chain elsewhere, you absolutely should seriously consider that. Everything being equal, would you not rather tell your customers (and even your own kids) that your company does business with Mexico or Thailand as opposed to China?

Just as many companies boast of how their products are organic or cruelty free, companies seem almost eager to let the world know that they have stopped manufacturing in China or are doing all they can to accomplish that. See the Wall Street Journal article, Trade Deal Alone Won’t Fix Strained U.S.-China Business Relations, whose theme is that the smart money wants to invest in companies that are out of China, getting out of China, or at minimum, have a plan to do so.

The acceleration of this decoupling trend has been unleashed and no trade deal is going to end that. Why would it? The tariffs may disappear or be reduced but the tension is going to remain and my law firm’s China lawyers and international trade lawyers are seeing evidence of this everywhere, both in how the US treats Chinese companies and how China treats US companies. The US is cracking down (and hard) on China deals with US companies on national security grounds. And China is doing what it can to stop its own companies from dealing with the United States. The numbers starkly reflect this. In 2018, “Chinese companies completed acquisitions and greenfield investments in the United States worth only $4.8 billion, down 84% from $29 billion in 2017 and 90% from $46 billion in 2016,” per the trusted Rhodium Group. I fully expect 2019 numbers will make China look profligate in 2018. It is that bad. The US is cracking down (and hard) on imports from China and a trade deal will likely accelerate this. We are seeing similar things happening in much of Western Europe as well, just a bit more slowly.

In Yet Another International Trade (AD/CVD) Petition Against China: This Time it’s Metal File Cabinets, one of my firm’s international trade lawyers, Adams Lee, wrote about the unrelenting and unprecedented number of trade petitions being filed in the United States against incoming products from China. Adams made a point to say that even though he makes his money off these trade cases, he is starting to question how the US Government is using them to encourage/force US companies to look outside China for their products:

Again, the international trade lawyers at my firm make our money by representing the Chinese manufacturers and their US importers so the more petitions brought against incoming Chinese products the more money we make. The more petitions, the more our law firm financially benefits and the more I personally financially benefit.

And yet, from an economic and policy standpoint even I am starting to get concerned by all these cases. I say this because of the massive onslaught of AD/CVD cases being brought against China and how aggressively (on multiple levels) the United States Commerce Department has been on these cases. To the point where I am finding myself wondering how important a trade deal with China will be if the United States giveth on the one hand and then taketh via these AD/CVD cases on the other hand. And is it right for the United States government to almost “on the sly” be pushing American (and foreign companies as well) away from China, without making this policy clearer?

Based on all that I hear from my own firm’s China lawyers and international manufacturing lawyers, many American and European companies are decreasing or eliminating their business with China. See China-US Decoupling Continues and Will Continue, but Must be Done Right and China Manufacturing: Is the Bloom now Off That Rose? and The China-US Trade War and the Winner is….MEXICO. It appears US foreign policy is to drive business from China to countries like Mexico, the Ukraine, Vietnam, Thailand, the Philippines, and Indonesia, among others. Should not our government just come out and say this? What this means big picture is that slowly but surely the price of products from China in the United States is rising and will continue to rise. So as one of our China lawyers so often tells our clients: “you need to act accordingly.”

The always excellent China File did “a conversation” last week with six top policy analysts/leading scholars on If the U.S. and China Make a Trade Deal, Then What? To grossly simplify, the conclusions are that no trade deal will stem the US-China decoupling and no trade deal will be likely to last. In other words, don’t get your hopes up. Winter is coming…. And just to be absolutely clear, when I say “winter is coming” I am saying that we will be entering a long and difficult period in US-China relations and in US-China trade and much of this will spill over to other countries. I am most emphatically NOT saying that I think anyone should prepare for war and I am even more emphatically not saying this because I want to see this cold war turn into a real war. The freeze in US-China relations brings me no joy and I would urge leaders on both sides to do what they can to prevent further escalation. Just as is true of so many who read this blog, the former trade relationship between China and the United States was very good for me.

I should also note that whenever “all the smart people” feel a particular way, that is the time to hunt out and listen to the minority of good and smart people who feel the exact opposite. So though I have in this post (and in previous posts) marshaled thoughtful views of those who speak about the inevitability of US-China relations going downhill, I urge everyone to respectfully read other views and I welcome other views in the comments below or anywhere else. I talk about it being hard to find those calling for the US and China to step back and try to work together again and so I would welcome people sending me links to good articles or books that call for exactly that. I cited to one such article above: China Isn’t Cheating on Trade. And I urge everyone to read Blaming China, by Ben Shobert, which I last year listed among the top eight must read China books.

But I also urge you to go to China File and read the entirety of this six person conversation, but for those who will not do that, I provide the following somewhat long summaries below.

1. Michael Hirson believes any truce between China and the US will be both fragile and limited and will not much address the “heightened geopolitical competition and fundamental divergences in economic models the trade war has laid bare.” He sees the United State and China continuing to use “non-tariff measures, such as investment restrictions and regulatory actions, to seek independence from each other in strategically important sectors such as 5G networks and artificial intelligence. . . . [hindering the] ability of global supply chains to link the two economies as efficiently as in the past.”

Hirson also believes the “openly geopolitical nature of the trade dispute—with U.S. officials publicly celebrating China’s economic slowdown under tariffs, and taking aim at Chinese firms like ZTE and Huawei—does more to strengthen China’s nationalist voices and Xi Jinping’s statist impulses. It only furthers China’s determination to achieve self-reliance from the U.S. in areas such as semiconductors and software.”

Hirson sees the “fundamental divide between U.S. and Chinese interests on core issues” leading to any trade deal implementation being “rocky, with a real risk that the U.S. will reimpose tariffs in the next one-two years.” American companies that do business in China “may see improvement in the formal business environment, but will still face pervasive informal obstacles where China sees an advantage to limiting the role of foreign firms.”

Hirson sees tensions between the U.S. and China increasing because the “U.S. political establishment will grow more hostile towards China in coming years, driven by consensus that it is the country’s most formidable strategic competitor as well as frustration with China’s lack of political and economic reform. Trump’s hard-edged campaign against China now ensures that both parties will compete in upcoming elections on who can be toughest against Beijing.” He also believes “the shortcomings of Trump’s trade deal will force the U.S. to develop a more unified and coherent strategy towards China. It should involve taking the strong point of Trump’s approach—recognition that the past mode of U.S. economic engagement was not working—and addressing its major weaknesses: the failure to fully enlist allies such as the EU and Japan, and the missing link to domestic policies to boost U.S. economic and technological competitiveness.”

2. Graham Webster does not see a trade deal solving the “U.S.-China economic problem” because “the U.S. government and various U.S. businesses have numerous gripes with Chinese digital economy and cybersecurity regulation, especially regarding the 2017 Cybersecurity Law and conditions of access to China’s cloud services market”: