As trade tensions escalate between the U.S. and China, Washington is sending a warning to U.S. companies: Think twice about doing business with China. “If I were a business, I would basically just stay away from China right now. Their misbehavior is so terrible.” Kevin Hassett, chairman of the Council of Economic Advisers said on Yahoo Finance’s Market Mover Friday. “That’s why President Trump is taking a hard line with them. They’ve got to change the way they behave if they want to be part of this modern world global economy.” Hassett also cited the bombshell story from Bloomberg Businessweek, which claims China’s military deployed a microchip to attack hardware in the supply chain and had infiltrated U.S. tech giants like Amazon and Apple. Both companies have denied the report. But it still raised many concerns about Chinese electronic manufacturers. Hong Kong-listed Lenovo and ZTE saw share prices drop by 15% and 10%, respectively, on Friday.Hassett’s sentiment was widely echoed by the Trump administration. In an aggressive speech about China on Thursday, Vice President Mike Pence claimed Beijing “directed its bureaucrats and businesses to obtain American intellectual property”. He also called out Google to end its project of developing a censored search engine for China, a market the internet giant exited in 2010.
Not easy to give up on ChinaThe ongoing trade negotiation adds many uncertainties to U.S. companies that are planning to access the Chinese market, with its population of 1.3 billion and an expanding middle class. American companies have been active in the Chinese economy since the reform period in the late 1970s, investing hundreds of billions of dollars. President Trump has said the U.S. rebuilt China. Meanwhile, China has become the growth engine of some U.S. companies. Starbucks (SBUX) is among the biggest success stories. Since opening its first store in Beijing in 1999, the Seattle-based coffee chain now runs 3,400 stores and plans to open a new one every 15 hours through 2022. Apple’s premium iPhones are red-hot status symbols in China, where the iPhone maker (AAPL) reported $13 billion in revenue during its fiscal second quarter this year, contributing more than 20% to its global revenue. Now U.S. businesses are facing a more complicated situation against the backdrop of the trade disputes. Tesla (TSLA), the high-profile electric car maker, is caught in the rising geopolitical fight. The company said the trade conflict has led to a 40% retaliatory tariff on Tesla vehicles exported to China. Exports to the country accounted for about 20% of Tesla’s automotive revenue during 2017, according to Moody’s.
U.S. companies operating in China have already felt the pinch of the trade war, but it’s hard for them to walk away, citing difficulties moving a supply chain or creating a new one over a short period of time. More than 60% of U.S. companies have been hurt by tariffs imposed by both countries, according to a survey by American Chambers of Commerce in Beijing and Shanghai. “We support President Trump’s efforts to reset U.S.-China trade relations, address long-standing inequities and level the playing field. But we can do so through means other than blanket tariffs,” Eric Zheng, chairman of AmCham Shanghai, said in a statement last month.
