When a familiar and comfortable situation changes dramatically, the human instinct is to believe that things will soon get back to normal. The idea that life may have changed permanently is too unsettling to deal with. We are seeing this mentality with Covid-19. We are also witnessing it as business responds to the downward spiral in US-Chinese relations.
After 40 years of ever deeper economic integration between the US and China, it is hard to imagine a real severance of ties. Many executives believe that politicians in Washington and Beijing will patch up their differences when they realise the true implications of "decoupling" the world's two largest economies. The hope is that a trade deal will stabilise things, even if it has to wait until after the US presidential election.
But that is too complacent. The reality is that decoupling has much further to go. It is already spreading beyond technology and into finance. In time, it will affect every large industry, from manufacturing to consumer goods. And all multinationals — even those based in Europe — will be affected.
This process is being driven by a fundamental shift in the way both the US and China see their relationship. For the past four decades, business logic has prevailed over strategic rivalry. But we are in a new world in which political rivalry overrides economic incentives — even for a US president who prides himself on being a dealmaker. When Donald Trump was informed that his new order — forcing US companies to cut ties with WeChat, a Chinese messaging app — would hurt American sales in China, his response was, "whatever".
This is not just Trumpian folly. There is now bipartisan consensus in Washington to get tough on China, even if it hurts corporate profits. A bill to force Chinese companies to delist from US stock exchanges if they do not open their books to US regulators was passed unanimously by the senate in May.
In Beijing, too, the political imperative to assert sovereignty now overrides the business incentive to avoid confrontation with the US — China's largest export market. Since President Xi Jinping took power in 2012, China has built military bases across the South China Sea, ended the autonomy of Hong Kong and imprisoned millions of Uighur Muslims in Xinjiang. Military threats to Taiwan are becoming more overt.
Both sides blame the other for starting hostilities. The Chinese point to Trump's unilateral imposition of tariffs. The US responds that Google and Facebook were blocked in China more than a decade before the US took serious action against Chinese tech companies such as Huawei.
Whoever fired the first shot, both sides are now locked into a retaliatory logic. If the US takes more measures against WeChat and Huawei, Beijing is likely to respond by further restricting US tech companies in China. As political tension mounts, so American consumer brands will be vulnerable to boycotts by a nationalistic Chinese public. That is potentially bad news for high-profile American brands such as Starbucks and the National Basketball Association.
Emotions aside, decoupling is also driven by new assessments of risk. The vulnerability of Chinese companies including ZTE and Huawei to bans on sales of US computer chips has intensified China's drive to become self-sufficient in key technologies. US companies are also hedging their bets. Apple, which has built its business around manufacturing in China, is making its latest iPhone in India, as well as China.
The emerging field of conflict is banking and finance. Over the past decade, the US has deployed financial sanctions against countries including Iran and Venezuela to often devastating effect. Now it is beginning to use this tool in its struggle with China.
Government officials in Hong Kong and Xinjiang have been targeted with sanctions, in effect shutting them out of the US financial system. Given the centrality of the dollar to global trade, international banks are wary of violating these. That risk is manageable, while it is confined to a few individuals. But what happens if and when financial sanctions are applied to major Chinese companies?
Wall Street banks, which have made a lot of money listing Chinese companies in New York, are assuming that even if further listings are banned, they can bring companies to market in Hong Kong. But that would rely on the forbearance of both the American and Chinese governments — neither of which can be taken for granted.
European or southeast Asian countries and companies are unlikely to be able to stay on the sidelines. The UK's decision to open its 5G telecoms market to Huawei — in the teeth of US opposition — proved to be unsustainable. HSBC, which makes 80 per cent of its profits in Asia, has been dragged into the rivalry through its role in giving evidence in the US prosecution of Meng Wanzhou, chief financial officer of Huawei.
Big business will want to stay neutral in the emerging cold war between the US and China. But that may prove impossible. The past 40 years of world history have been built around globalisation and the rapprochement between the US and China. But that world is fast disappearing.
Written by: Gideon Rachman
© Financial Times