Analysis

China is feeling the economic effects of US tariffs, amid an already shaky economy. Plans to consolidate banks, slowing consumer spending, and persistent structural issues mean that the external shock of the US trade war is adding to corporate concerns that China may not hold the same market draw that it once did. 

For many multinational companies, the China return is increasingly not worth the investment. The risk of running afoul of increasingly strict US government demands that companies divest from China, not to mention threats to intellectual property, infrastructure, and employee security, mean that companies in a variety of sectors are moving their China operations to other countries. One prominent example is Apple, which is moving some production from China to India after realizing that its faustian pact for cheap, skilled labor and access to China’s vast market traded short-term profits for the irrevocable damage to the company’s revenue. 

Yet as Apple and other companies are discovering, relocating does not solve structural corporate problems in the face of Chinese competition. Indeed, in the case of Apple, creating subsidized competitors in China through the intentional sharing and unintentional theft of corporate IP was not a long-term winning strategy, and will increasingly bolster Apple’s competitors as the company gets outcompeted by state subsidized, lower cost, Chinese players in the smartphone and other tech industries. 

Relocating also comes with its own set of risks, both through factors unique to individual locations and because most markets rely so heavily on Chinese talent and supply chains. This means that companies that move production to India, Vietnam, and elsewhere face both risks stemming from local issues, and from sticky, pervasive Chinese integration into putatively, local production and markets. The majority of India-based tech manufacturing companies, for example, rely heavily on Chinese components and therefore carry over similar risks compared to companies that opted to keep production in the PRC. 

This uncertainty–not to mention the cost–of moving production gives Chinese policymakers a window in which they can try to entice foreign businesses to remain in China, including relaxing visa requirements and offering additional incentives. For some foreign companies in China, these changes will be sufficient to delay decisions to move out of the PRC. However, the current geopolitical environment is uncertain at best, and conditions today are not likely to be the same conditions foreign companies face tomorrow. This adds a layer of complexity to corporate decisions about whether to remain in China or leave; how much of their operation to keep in China; and when to act. Our own view is that PRC state promises are not credible (see Hong Kong as an example), and that Beijing’s incentives are a gambit to buy China time while it weans its economy off of foreign presence, production, and easy technology transfer. Thus, the faster foreign companies can diversify and reduce their China exposure, the safer they will be in the long term.

Analysis

The tens of thousands of US companies that depend on China, as a market, or through partnerships or as part of supply chains, will face a number of challenges as US federal and state lawmakers continue to exert legal pressure against Chinese entities operating in the US. This trend is part of a broad effort to exclude or decouple China from the US economy. 23 state financial officials, for example, recently pressured the US Securities and Exchange Commission to delist Chinese companies from US stock exchanges. Added to measures introduced at state houses across the country to void Chinese ownership of land, to block PRC citizens from attending US universities, or to prevent US companies from engaging with Chinese partners either at home or abroad, and the overall picture highlights how US lawmakers are trying to close multiple loopholes that allow the CCP to exploit open societies. 

Many of these measures are prudent. As 2430 Group Director Glenn Chafetz contends in a recently published article that the main battle between China and the US takes place not on land, sea, air, space, or even cyberspace. It is in the American economy. But the solution is not decoupling. Even the US Treasury Secretary recognizes that a full separation, even if it were possible, is not in the US’s interest. Too many industries rely heavily on Chinese imports and talent, particularly in tech and renewable energy sectors. 

Lawmakers at both the state and federal levels have indicated that they intend to target companies that procure Chinese components in these sectors. While the logic of such moves is defensible–China, after all, does not allow US companies to operate at anywhere near the same level that Chinese companies can in the US–this risks self sabotage of the US economy that will weaken, not strengthen, the US. For starters, it will hinder US companies’ ability to provide competitive products or to innovate effectively using global talent. Culling highly trained Chinese workers from the US labor force, especially after many trained at US institutions, is self-defeating if the US wishes to retrain talent to drive innovation, rather than ceding that talent to China or other competitors.

The challenge for the US is how best to use Chinese talent, expertise, and productive capacity for America’s benefit, while simultaneously protecting against espionage and exploitation. US companies that depend on Chinese talent, particularly in the tech sector and other industries with close ties to government or innovation, therefore need to learn how to protect their employees from China’s state predation. While the overwhelming number of PRC citizens in the US have nothing to do with intelligence operations, and those that do are often victims of coercion, there is intense pressure for China to outcompete the US by poaching talent to spur China’s own innovation at the US’s expense. Maintaining talent here in the US is therefore key to maintain the US’s competitiveness, but it will likely increasingly fall on corporations to continue to make this argument.

Analysis

Following a mid-May meeting in Geneva, the US and China announced that they would reduce their respective tariffs in an effort to restore their domestic economies and stabilize global trade. Per the agreement, US tariffs on Chinese goods dropped from 145% to 30% and Chinese tariffs on US goods dropped from 125% to 10% for the next 90 days. During this time, US and Chinese officials are intended to meet and devise further, long-term solutions. While global stocks rallied on the news and a follow-up call last week between the US and China is a sign for some optimism, caution is required. While the “extra tariffs” that were the result of April’s escalation have been removed, earlier 30% US tariffs on Chinese goods are still in place, as are China’s reciprocal tariffs, both of which continue to dampen global trade and therefore growth. 

Keep in mind as well the remaining tariffs that do not target China, which have fallen out of the limelight due to the recent story. For instance, the 25% automobile tariff remains in place. While the UK managed to make a bilateral agreement reducing that to 10%, Japan has yet to meet with the same success and the global automobile industry, in general, is still suffering. Moreover, Trump threatened the EU with 50% tariffs and Apple with 25% tariffs as trade talks have stalled. In short, tariffs are up for the year globally and even US-China reciprocal tariffs are still up from January of this year, despite the recent reductions. 

The easing of trade restrictions is also a red herring. On one hand, the Geneva agreement resulted in China lifting its rare earth export control countermeasures issued on April 4, restoring global access to necessary links in their supply chains. This move is critical for not just American businesses but businesses globally to ensure their access to processed medium and heavy rare earth products key to both commercial and military products. On the other hand, the US and China remain engaged in a battle to control rare earth resources. On May 12, China’s National Export Control Unit held a meeting to unify the rare-earth sector and emphasize its role in national security, which will likely result in heightened scrutiny for future rare-earth sales to China’s competitors. Chinese company Shenghe also announced its 100% acquisition of an Australian-listed, rare-earth mine in Tanzania just days later. On the same day as Shenghe’s announcement, MP Materials–the only US company operating a rare-earth mine in the US–announced an agreement with the Saudi Arabia Mining Company to explore opportunities to establish a fully integrated, end-to-end rare earth supply chain. Even as the highest US-China tariffs fall, the trade war rages on.

Analysis

A Chinese state-owned enterprise has launched what it calls the world’s first commercial “unhackable” quantum cryptography system. China Telecom Quantum Group, a branch of state-owned China Telecom, worked with scientists at the University of Science and Technology of China to design a system that combines Quantum Key Distribution with Post-Quantum Cryptography. This combination, it claims, securely transmits encryption keys and protects data using complex algorithms that protect it against even quantum decryption. 

As background, quantum computing can much more easily and quickly defeat traditional encryption methods, jeopardizing the security and therefore function of every system in the world dependent on encryption, including banking, finance, and national security. Quantum decryption is not yet here, but it is coming. Development of quantum resistant encryption is therefore a security and economic imperative. China Telecom Quantum Group intends to commercialize its findings beyond the 500 government agencies and 380 state-owned enterprises that it currently serves in China, with encrypted instant messaging and workflow products likely the first to be rolled out. 

As we noted earlier this year with the announcement from DeepSeek, China has shed its image as a skilled copier, rather than an innovator in the tech sector. Quantum encryption is the latest evidence of this trend. Although US innovation isn’t lagging behind China yet, it risks doing so as the US government withdraws from three of the four pillars of R&D: direct government funding, support for university research, and the import of foreign talent. This puts a greater burden on the US commercial sector for R&D, especially as China marshals the full weight of the state as well as its system, SOEs, and its private sectors. US companies would do well to strategize now about how to incorporate future quantum computing advances into existing security and business practices.

Analysis

Europe’s recent overtures towards China–a byproduct of the Trump Administration’s turn away from America’s allies–face a cold reality. Recent reports of extensive Chinese espionage in Europe and in Turkey underscore China’s aggressive and expansive spying, and undermine voices in Europe calling for closer ties with Beijing. In the EU parliament, in particular, news that Huawei bribed five Members of the European Parliament in exchange for lobbying for the state-owned firm’s interests in Brussels underscores the multifaceted nature of Chinese targeting in Europe, which employs state-owned and private sector proxies on a massive scale to collect economic, political, and military secrets. European competitors, particularly in the tech sector, should therefore take particular precautions to ensure that their interests are not being sidelined at national or European levels because of Chinese collection. 

Although Chinese espionage in Europe is hardly new, the discovery of so many new cases shows the immense scale of Beijing’s effort (as the vast majority of spying is never detected) and underscores the risks to European companies and policymakers about becoming too close to China. As US allies increasingly look to alternative partners out of concern that the Trump administration no longer values established partnerships, new revelations of Chinese spying will likely reduce enthusiasm for Chinese trade deals. 

For corporations in Europe, the espionage danger creates more uncertainty as companies–and countries–try to navigate shifting geopolitical winds. As news of Chinese espionage efforts continue to drip feed the news cycle alongside stories of the Trump administration’s recent targeting of foreign visitors to the US and threats against European allies, European corporations will likely seek alternative partners beyond the US and China. For US corporations, European hesitation about pivoting to China does not therefore spell a warmer embrace of American companies; rather, Europe will likely increasingly look to itself at the expense of both the US and China.