Saturday, June 26th 2021
For China or against it
New law puts companies’ pistol on the chest
By Marcel Grzanna
For months the USA and China have been making the economic framework of world trade more difficult with mutual punitive measures. A new anti-sanctions law from Beijing is now also drafting a scenario that could drive European and other companies into a dilemma.
Foreign companies in China could inadvertently be pushed to make groundbreaking decisions in their corporate strategy in the future. Namely which market you choose: for China or for the USA and its allies in Europe. The logic behind this derives from the anti-sanctions law that was waved through in Beijing at the beginning of June.
“The People’s Republic basically reserves the right to give companies the choice of whether or not they want to comply with possible sanctions against the country. The Anti-Sanctions Act provides the government with a tool to evade sanctions and a means of exerting pressure on foreign companies To push violations, “says Bernhard Bartsch from the Berlin research institute MERICS, which in turn has been subject to Chinese sanctions.
The consequences for companies would be far-reaching. If you adhere to the sanctions, you must expect to encounter significant problems in China. “The new law now gives Beijing the means to impose painful penalties. Affected companies could lose their access to the entire Chinese market,” said Angela Zhang, an expert on Chinese law at Hong Kong University, ntv.de. If they do not comply with the sanctions, as Chinese law now requires, the consequences on the US market and possibly also in Europe would be virtually impossible to circumvent.
Fundamental decisions have to be made for Europe
Zhang does not expect the Chinese government to immediately resort to the sharpest weapon. “But I believe that there will be a point in the spiral of mutual punitive measures when Beijing will make use of the new opportunities,” says the lawyer. Should the application catch on, it would not only affect retail, but also the entire added value of products and the areas of research and development.
European companies would have to make fundamental decisions about whether they want to forego one of the two markets or set up alternative production: two different value chains that do not cross one another. The challenges of such a development are obvious. The costs of the companies would rise significantly because two supply chains each mean smaller production quantities and thus make the purchase more expensive. New, suitable staff would have to be found in a relatively short time and paid accordingly. Margins and profits would decrease accordingly, and the companies would have to ask themselves whether such a balancing act would still make economic sense for them.
Especially since research and development work would have to take place separately for two different markets. Because a strict separation of added value here and there would result in a step-by-step decoupling of standards and technologies. “Instead of complementing each other at best, there would be ever larger gaps between the markets, which companies would have to pay for if they wanted to dance at two weddings in the long term,” says MERICS researcher Bartsch. Europe as a research location could also foot the bill. For example, if additional capacities for research by companies had to be withdrawn from the home market, because an increase would be necessary in China, for example.
Are emerging economies the laughing third party?
So does that mean a bleak outlook for all companies looking to make American, European and Chinese customers equally happy? At least the new law casts a dark shadow over future prospects. But many companies have already proven in the past that they can survive crises and draw new strength from them. This includes, above all, German companies that have been active abroad for decades. Since the end of the Second World War, industrial companies between Flensburg and Garmisch have experienced a number of geopolitical changes and have adapted their strategies accordingly. Companies will therefore hardly have to complain for a long time, but are already starting to develop solutions and perhaps even discover new opportunities.
Marcin Adamczyk, Head of Emerging Markets Debt at the Dutch asset management company NN Investment Partners locates these opportunities primarily in third countries. He assumes that “the increasing competition between the two superpowers and the development towards a new power structure will benefit the emerging countries, provided that it is properly managed”. For example, countries with trade relations with the USA, but also exporters of raw materials, would benefit from the Americans’ new infrastructure plans, believes Adamczyk. China, on the other hand, “will support other countries with trade, finance, credit, investment and trade opportunities as soon as they become their main economic partner.”
This would also make these third countries more interesting for foreign companies. Because their increasing importance would be expressed, among other things, in growing economic data, which in turn makes them more attractive for foreign investments. A welcome side effect for the German economy would be diversification and thus less dependence on a certain market. This essentially refers to the People’s Republic of China. In the past few years the discussions have become louder and louder as to whether Europe, and especially Germany, is already relying too much on demand and growth in the second largest economy.
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