Background

U.S. companies operating in China reported some new challenges in 2019 but expressed hope that the phase one trade agreement will improve the bilateral trade and investment environment in 2020, according to the U.S.-China Business Council’s most recent annual survey of its members.

 

Challenges

 

The top challenge cited by respondent companies, for the third consecutive year, was trade tensions between the U.S. and China. Returning to a stable and constructive relationship “is of the utmost importance” to these companies, the report said, as 86 percent said the current situation has impacted their business with China, 48 percent said they had lost sales due to customer uncertainty about continued supply from the U.S., and 52 percent said they had reduced or halted planned investment in China in the last year due to increased costs or uncertainties.

 

Newly cited as challenges this year were COVID-19 impacts (2) and tariffs (4). Others included competition with Chinese companies (3), cost increases (5), licenses and approvals (6), intellectual property rights enforcement (7), data flows (8), innovation policies (9), and investment restrictions on foreign companies (10).

 

At the same time, 83 percent of respondents counted China as either the top or among the top five priorities for their global strategies, and nearly 70 percent said they are optimistic about the five-year business outlook in China. More than half saw an increase in revenue from their China business in 2019 and 91 percent said their China operations were profitable.

 

As a result, the report stated, 87 percent of respondents reported no plans to shift production out of China. Four percent said they have moved or plan to move operations to the U.S., while the rest reported recent or planned production shifts to other parts of the world, with Thailand and Mexico the leading destinations.

 

Phase One Trade Deal

 

A significant majority of respondents said they remain positive (40 percent) or somewhat positive (48 percent) about the phase one trade agreement. However, only 13 percent were positive and 34 percent were somewhat positive about how the agreement has been implemented, with another 35 percent remaining neutral. Of those responding positively, half said it was because implementation makes the bilateral relationship more stable and decreases the chances for further tariff escalation, while only 21 percent said implementation has resolved or taken steps toward resolving a specific challenge they are facing in the Chinese market.

 

The report noted that only seven percent of respondents said the benefits of the agreement outweigh the costs of the Section 301 tariffs incurred along the way, while 37 percent said the costs outweigh the benefits and 56 percent said it was too soon to tell. More than a third (39 percent) said they have lost sales due to the U.S. tariffs and/or the retaliatory tariffs implemented by China.

 

A week later than originally scheduled, U.S. and Chinese officials reviewed the trade agreement in an Aug. 24 phone call. The Office of the U.S. Trade Representative said the two sides discussed steps China has taken toward the structural changes called for by the agreement on protecting intellectual property rights, improving market access for financial services and agriculture, and eliminating forced technology transfer. Other topics included China’s increases in purchases of U.S. products (although press reports note that China is not on track to meet its purchase requirements under the agreement) and future actions needed to implement the agreement. China’s Ministry of Commerce called the dialogue “constructive” and said the two sides “agreed to create conditions and atmosphere to continue pushing forward the implementation of the trade deal.”

Copyright © 2020 Sandler, Travis & Rosenberg, P.A.; WorldTrade Interactive, Inc. All rights reserved.

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