Opportunities on the Horizon: Investing Through a Slowing Economy

Thematic updates | WEALTH OUTLOOK 2023 | MID-YEAR EDITION | 45 A recent shift in US-China relations has far-reaching implications for businesses and investors. Western countries are adopting a unified strategy to address China’s growing global aspirations and economic might. Their approach puts national security goals ahead of economic efficiency, a major departure fromwhat most of the western hemisphere seemed to believe, as their economies evolved after WorldWorld II. In a speech at the Brookings Institution this past April, President Biden’s National Security Advisor, Jake Sullivan, stated that the US is focused on “de-risking and diversifying, not decoupling” fromChina. As part of this approach, Sullivan said the US is following a “small yard, high fence” approach to guard advanced US technology against leaks to China and working to build a secure supply chain with friendly nations. EU leaders expressed a similar approach in their dealings with China. 1 Sullivan’s speech was significant because it signaled that the US sees limits on the transfer of technology and innovation to China as a means to increase its security. Technology is not a “small yard” when it comes to value-added products. This means more goods will need to be developed, designed and distributed away from China. And in response, China will need to invest 1 Remarks by National Security Advisor Jake Sullivan on Renewing American Economic Leadership at the Brookings Institution. April 27, 2023 2 AmCham 2023 China Business Climate Survey Report includes approximately 400 survey participants, 2022 JETRO Survey on Business Conditions of Japanese Companies in Asia and Oceania includdes approximately 700 survey participants in its own technology infrastructure to a much larger degree than it contemplated just five years ago. Such actions are “inefficient” in that costs for both China and the West will rise, and the benefits of globalization will fade. Growing tensions Even before Sullivan’s statements, investors believed the US had sought trade, technology, and economic decoupling with China. During the Trump Administration, most Chinese exports to the US were subject to 25% trade tariffs and many Chinese technology companies were put on lists that barred firms from accessing US technology and doing business in the US without explicit permission. Since taking office, President Biden has left the tariffs unchanged and further expanded the scope of the Trump-era policies to further limit US companies from selling a wider range of technologies to even more Chinese companies without a special license. This comes after severely restricting the use of Chinese components in good produced by Western companies. Compared to the Trump Administration, which effectively started a trade war with China, the Biden Administration has taken a more comprehensive, targeted and systematic approach to protect “vital US interests.” In short, the focus on ring-fencing access to advanced technologies represents a new type of deglobalization against a “strategic rival.” Declining investment in China The sharp acceleration of this US policy is already impacting the willingness of multinational companies to expand or initiate new investments in China. Surveys from the American Chamber of Commerce in China and the JETRO, a Japanese government agency to promote international trade and investment 12 , show that only 45% of US firms intend to expand operations in China, down from 54% in 2017. Just 33% of Japanese firms said they intend to expand in China, down from 48% in 2017 ( FIGURE 1 ). Interestingly, European Union (EU) multinationals are heading in the other direction, with 62% intending to expand operations in China, up from 51% in 2017. More US firms have also reported an intention to move out of China, with 21% saying they intend to move in 2022, up from 11% in 2017. Japanese firms didn’t show the same inclination to leave, while EU firms are signaling an intention to stay, with just 21% saying they intend to leave, down from 28% in 2017.