Fall 2023 | Publication

Underrecognized China Scenarios

More than 20 years after the normalization of trade relations, U.S. government and business leaders increasingly struggle to navigate China.  This challenge reflects not only the daunting complexity of China, but also the limitations of mainstream analysis.  Despite decades of effort, conventional China consultancies have proven unable to anticipate and apply the trends that confound American decision makers.  Western analysts of China frequently underestimate the erratic nature of the Chinese system and overweight the likely continuation of the status quo.  Baron helps corporate and U.S. government decision makers prepare for unexpected shifts in China, including by exploring the following potential scenarios:

Scenario: U.S. efforts to decouple from China strengthen the position of Chinese companies in international markets.  The U.S. government increases pressure on U.S. companies to delink from China and provides them with reshoring support and regulatory and tax relief.  Entrepreneurial Chinese companies relocate outside of China to maintain access to the U.S. market, shifting their operations to Northern Mexico, Vietnam, and India, among other locales.  These increasingly global and resource-rich Chinese companies present an unprecedented challenge to U.S. companies in international markets.

Scenario: U.S. near-shoring policies facilitate China’s presence in the Western hemisphere.  China expands its commercial presence in the Western hemisphere, and especially Mexico, benefiting from U.S. near- and ally-shoring policies that shift manufacturing from China to Latin America.  A larger Chinese footprint closer to the United States compromises the value of nearshoring in shifting supply chains away from Chinese control: supply chains are relocated away from China to Mexico or elsewhere in Latin America, but Chinese control largely remains.  In addition, U.S. companies with strong market presences in Latin American countries come under increasing pressure from Chinese competitors. 

Scenario: UFLPA sets a precedent for restrictions in other areas: Beijing applies policies similar to its “Xinjiang model” to other parts of China, including Tibet and Inner Mongolia.  The U.S. government responds by imposing new restrictions on U.S. corporate activity, including on engagements with Chinese government or military-linked entities, environmental bad actors, and entities with questionable labor practices.  These restrictions could prompt new Chinese government restrictions on U.S. companies, forcing U.S. companies to effectively choose between the U.S. and Chinese markets.  For example, Beijing could eventually require that U.S. companies of a certain size maintain an office in Xinjiang, even as U.S. policy prohibits activity in the region. 

Scenario: A fiscal crisis empowers China’s private sector.  A fiscal crisis hits China, via either government overleveraging or a balance-of-payment crisis as capital outflows begin to far exceed capital inflows.  Among the central government, local government, state-owned enterprises (SOEs), and private firms, privately-owned technology companies are the least constrained by high debt.  These firms become vehicles by which the Chinese government can acquire assets overseas but their growth simultaneously threatens Beijing.  Shifts in the balance of power between Beijing and the private sector lead to internal jockeying for political control in China.  U.S. companies’ position is unclear: U.S. companies could confront increasingly powerful and resource-rich Chinese competitors, or competitors that have been effectively handicapped by Beijing. 

Scenario: “Reform and Opening Up 2.0” gives rise to a new generation of Chinese commercial giants.  A “Guangdong clique” regains power in China at the expense of the northeast-dominated ruling elite.  The rise of this commercially-oriented southern Chinese faction leads to greater commercial exchange with the West.  U.S.- China competition continues in a new form: with political constraints removed, Chinese corporate titans accelerate their growth, presenting an unprecedented challenge to U.S. businesses at home and in third-party countries.  The U.S. government, no longer perceiving China as a national security threat, is less likely to support newly besieged U.S. companies. 

Scenario: Factional struggles break out in China.  China enters a period of political transition, and different factions compete for power.  The opacity of Chinese politics makes it difficult for U.S. companies to ascertain which factions are most powerful, or are poised to become more powerful.  Amid the confusion, certain factions seek American support.  In this setting, U.S. companies in China must navigate turmoil and uncertainty in not only Chinese but also U.S. politics, as the United States determines which, if any, faction to support. 

Scenario: China restricts American access to rare earth and other critical minerals.  China enjoys significant control over mining and refining of critical minerals.  For example, Beijing has recently imposed export restrictions on gallium and germanium, ostensibly in response to American export controls aimed at restricting China’s ability to obtain certain high-end semiconductor devices with potential military applications.  Beijing has also employed separate export restrictions for the sole purpose of hamstringing Sweden’s nascent semiconductor industry.  America’s supply chain for products such as semiconductors and batteries remains vulnerable and could be weaponized by Beijing.  Yet serious disruption may be unlikely, or at least short-lived: U.S. or U.S.-allied companies dominate other key parts of the supply chain – such as the chip-design software required to produce semiconductors – that could allow the United States to inflict equal pain on China.

Scenario: A powerful Chinese e-commerce and logistics company emerges.  The remarkable success of the fast-fashion retailer Shein in the United States demonstrates the speed with which Chinese companies can seize significant portions of U.S. market share.  Following the model of Shein, a powerful new Chinese e-commerce and logistics company emerges and avoids critical pitfalls – poor product design and execution – that have previously impeded the success of Alibaba, JD Logistics, SF Express, and other Chinese e-commerce and logistics behemoths in the United States.  U.S. competitors are caught off-guard by the rise of a formidable and unknown new competitor yet are left without U.S. government support.  An already decades-long debate among U.S. policy makers over how to restrict the presence of Chinese companies in the United States continues without any substantive change in approach. 

Scenario: The Dalai Lama dies.  The death of the 88-year-old Dalai Lama inflames long-standing tensions in the Sino-Indian relationship as each nation vies for control over spiritual authority in Tibetan Buddhism. The dispute exacerbates long-standing flashpoints in other areas of the Sino-Indian relationship, including territorial disagreements along the two powers’ contentious Line of Actual Control.  These religious and territorial disputes spark economic tit-for-tat as each side exchanges targeted sanctions and imposes new restrictions on the commercial activities of each other’s companies, with India restricting the activities of Chinese companies in India, and vice versa.  Economic conflict extends to U.S. companies with a significant presence in India and China, as these companies face retaliation from each country for expanding in the other.