This week’s upcoming meeting of dozens of Asian and Western defense and trade ministers with shared concerns over business, diplomatic, and security in the Pacific, juxtaposed alongside high-profile US CEOs such as Elon Musk meeting with top CCP officials, reinforces difficult questions regarding U.S. businesses in China.
By researching and then profiling a fluid list of over 1,000 major multinational companies exiting Russia in outrage over its unjustified, illegal invasion of neighboring Ukraine, we helped to catalyze a historic business pull-out. President Biden even cited our list of Russian business exits in his private dialogue with President Xi Jinping exactly a year ago as a warning of the potential economic damage which could be inflicted on China. However, is it far more complicated for businesses to retreat from China en masse.
Just last week, Nike CEO John Donahoe explained his company’s ongoing presence in China, arguing that “if you’re a global company, you’ve got to just accept it [referring to China-related risk]. Yes, there’s risk and we’ve done some contingency planning like all of us have, but we’re clear, we’re going to try to keep moving forward. We believe that frankly, it can help promote peace and understanding”.
But just because that is how things are with U.S. companies and China today does not mean that is how they must always be. While the status quo might be the path of least resistance for U.S. business leaders in their approach to China, one cannot help but be reminded of former Citigroup CEO Charles Prince’s infamous 2006 comments, on the verge of the 2008 financial crisis. “As long as the music is playing, you’ve got to get up and dance. We’re still dancing,” Prince said. And as the last few years of “friend-shoring” have shown, ultimately, there is little the U.S. gets from China economically which is not largely replaceable (even if not easily).
But as things stand now, the U.S. still retains alarming dependence on China in foundational industries. The U.S. sources some 90% of the active ingredients in pharmaceuticals and antibiotics, 40% of its apparel, and 48% of its electronics from China, to name just a few. These vulnerabilities are not entirely surprising. Some consulting firms have been touting misguided projections of labor cost savings and supply chain efficiency and encouraging companies to offshore to China for decades.
The promotion of global business and economic interdependence beyond simple mercantile colonization has been a steady drumbeat of conventional wisdom since economist David Ricardo’s classic 1817 treatise popularized the theory of comparative advantage.
For decades, global interdependence has been celebrated, not criticized, in supposedly reducing political conflict. In 1996, New York Times columnist Tom Friedman confidently proclaimed that no two nations that both had McDonald’s franchises would wage war. Sadly, that commerce shield from conflict was not true in Africa, the Middle East, or Central Europe at the time, and the 110 McDonald’s restaurants in Ukraine and 847 McDonald’s in Russia have since underscored just how naïve his sentiment remains today.
While the population interpretation of Ricardo holds that free trade between countries is mutually beneficial, presuming all bring their most efficiently produced goods and services to global markets, it does not anticipate the kind of global competition borne out of deep, fundamental differences over the value of freedom and human rights, disparate governing ideologies, and divergent conceptions of world order that is playing out today, as pointed out by several Nobel Prize winners in economics.
Against that backdrop, deep U.S.-China economic ties are hardly an infallible safeguard against conflict. Corporate leaders are now in plainly uncharted territory, and there is no precedent. The business exodus from Russia is an imperfect analogy considering Russia weighs less than 2% of global GDP, Russian revenues consisted of less than 1-2% of most Western businesses’ revenues, and Russia is no economic superpower. Meanwhile, China is one of America’s single largest trading partners. However, last year was the first time Mexico and Canada surpassed China as America’s largest trade partner in the last decade, with $735 billion, $732 billion, and $715 billion in total trade, respectively, speaking to the significant re-shoring that is already taking place.
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With time and the concerted efforts of the business community, it is not impossible to unwind the U.S. and Chinese economies. After all, U.S.-China trade represents $715 billion compared to an annual $27 trillion U.S. GDP. It’s equivalent to just 2.6% of U.S. GDP–and less than 0.75% of a $100 trillion global GDP. In reality, it is a number of companies in certain sectors that tend to have the most outsized exposure to China.
With no clear playbook, C-suites seem to be muddling through largely along three vastly divergent paths: significant withdrawal, gradual scaling back, and inertia (or even expansion).
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The first category, companies that are de-risking Chinese exposure by withdrawing, are few in number. So far, the only companies that are suspending any business are the ones that have been effectively banned from selling into China by government policy, in high-tech industries such as semiconductors or U.S. companies such as Micron that have been reciprocally banned by the CCP.
More companies fall into the second category of gradually and quietly scaling back their dependence on Chinese supply chains through re-shoring/friend-shoring of production. All Western apparel makers boycotted Xinjiang cotton in 2019 despite short-lived counter-boycotts by angry Chinese consumers even before the Trump Admin placed sanctions on all Xinjiang purchases, with first-movers including Nike, H&M, Levi’s, and Adidas.
More recently, Hasbro’s production in China fell by half last year as it moved production to Vietnam and India, Intel has invested $100 billion in new chip fabrication plants in the U.S. and Europe. Microsoft is starting to ship Xbox consoles from outside Ho Chi Minh City and Amazon is producing Fire TVs in bustling Chennai, India. Apple, which previously relied on China for 90% of its manufacturing, has accomplished a gargantuan task of moving up to 25% of its supply chains out of China and into India and Vietnam in less than two years. Seeing the writing on the Great Wall, even Taiwan Semiconductor has pledged to invest $100 billion in new chip production plants in the U.S., with the first two chip fabrication plants in Phoenix already approved and under construction for $40 billion.
What this shows is that if companies need to move out of China, they can–faster and more seamlessly than many would expect. But these shifts are generally still in the early innings, with supply chain surrogates such as Vietnam and India remaining underdeveloped, and companies are hardly rushing to broadcast their contingency planning publicly. U.S.-listed companies are not required to disclose supply chain exposure to China, so it is impossible to pinpoint with any accuracy how much U.S. companies continue to rely on Chinese supply chains.
Most companies fall squarely into the third and by far the largest category–they are content to continue selling into China. Of the companies in the S&P 500 that break down sales by geography, we observed that well over half reported an increase in revenues from China last year despite stringent COVID lockdowns. The companies that are most exposed to China-related risk are doubling: Qualcomm is at 63% revenue from China and Texas Instruments at 50% and still growing. Other companies are trumpeting their expansion plans or freshly entering the country.
Just a few months ago, BlackRock launched a set of mutual funds and other investment products for Chinese consumers, the first foreign-owned company allowed to do so, pouring billions into the country despite strident criticism. They are not alone: According to a survey by the American Chamber of Commerce in Shanghai, 30% of foreign businesses are planning to increase investment in China. In other words, despite some pullback, it is largely business as usual in China for most Western companies.
Some of these business leaders position themselves thoughtfully as forces of stability, peace, and moral conviction in improving U.S.-China relations. For example, the legendary Hank Greenberg of C.V. Starr commendably leads the Morefar Project, which builds on his personal 50-year history as an “old friend” of China to “help re-establish a constructive bilateral dialogue”. But not all CEOs approach their presence in China with such conscientious thoughtfulness. In many other cases, charging ahead with growth plans in China reflects poor risk management and default inertia.
The risks of U.S. businesses remaining so tethered to China are rising dramatically and rapidly–while the economic payoff is becoming increasingly cloudy. The cost of Chinese labor has gone up arithmetically as China develops, while China’s competitive advantages as a manufacturer are dropping due to supported by technological breakthroughs and government subsidies in the U.S. If anything, with elevated transportation and supply chain costs on top of tariffs, it is becoming cheaper to manufacture in North America. Even in areas where China supposedly has leverage, such as its dominance in certain rare earth mineral processing, that leverage is transitory as new processing facilities and supplies are developed across North America and allied nations. Indeed, not only can most U.S. interdependence with China be reversed or replaced but it’s also becoming increasingly economically efficient to do so.
A quote generally attributed to Yale-educated theologian Reinhold Niebuhr is “God grant me the serenity to accept the things I cannot change, the courage to the change the things I can, and the wisdom to know the difference”. Should U.S.-China relations become more confrontational, business leaders will have to de-risk their business supply chains and revenues away from China, no matter what they say today.
Jeffrey Sonnenfeld is the Lester Crown Professor in Management Practice and Senior Associate Dean at Yale School of Management.
Kyle Bass is a Dallas-based asset manager who is a life member of the Council on Foreign Relations
Steven Tian is the director of research at the Yale Chief Executive Leadership Institute.
The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.
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