American companies in China prepare to be squeezed

Hong Kong

AMERICAN firms in China could be early civilian casualties in the rising trade war. President Donald Trump sharply escalated tensions with China on Thursday, saying he would consider another US$100 billion round of tariffs.

US companies have spent vast sums building supply chains in China over the past 25 years - assets which are now exposed to regulatory harassment and shifts in trade flows.

Neither the American nor the Chinese threats have been implemented yet, and there is still time for negotiation, but if they do come into force, American companies in China may be the first to feel Beijing's ire.

And if globalisation goes into a more general retreat, their businesses could take harder hits to the bottom line.

US investors pumped more than US$250 billion worth of foreign direct investment into China between 1990 and last year, going by data from Rhodium Group, an economic research consultancy. Factor in exchange rate movements and inflation, and the figure might well be closer to the US$400 billion mark.

That rate of flow has slowed in recent years, but the outstanding stock of American investment, ranging from Starbucks coffee shops to Ford car factories to Intel chip factories, is still huge.

Those assets may be difficult to defend in a full-blown conflict. The Chinese government has no qualms about punishing foreign businesses for the sins of their government.

Lotte Group, a South Korean conglomerate, is a good example. A squabble between Seoul and Beijing over a missile-defence system resulted in officials shuttering most of Lotte's Chinese stores and seizing equipment - alleging fire safety hazards and other issues. The company subsequently abandoned its mainland hypermarket chain.

The government has also blocked cultural imports like music and TV shows.

American brands with lots of Chinese employees may be less affected. But a race to the protectionist bottom could still upend the fundamental cost structure of global trade.

Many China-based investments were carefully designed to optimise costs along long supply chains. They could quickly become uneconomic if barriers rise. American executives who placed long bets on China - and on unstoppable globalisation - may yet come to regret the decision.