Why the West is turning away from free trade—and how Chinese companies should respond

(Part 1) The End of the Consensus on Trade Liberalization

Part 2 : What’s the next move for Chinese exporters?

After several decades when most Western governments inclined toward freer and more global trade, the mood seems to be changing. In the US, the presidential candidates have agreed on little but the need to keep a closer eye on trade agreements. In the United Kingdom, the new Prime minister, Theresa May, seems determined to fulfill the British public’s wish to leave the European Union, despite the fact that the pound sterling sank recently to a 168-year low.

Whatever the outcome of these recent events, skepticism over trade deals seems likely to remain a stubborn presence in most of the mature economies. “There’s been a convergence of negative forces,” says Peter Kennedy, founding principal of the Futures Strategy Group in Glastonbury, Connecticut.

To some extent, the popular concern may not matter. As the aftermath of the Brexit referendum has already demonstrated, it isn’t easy to unravel decades of cross-border investment and trade. This may be particularly true with respect to China. For all the talk of tightening trade rules, China is now much too integrated into the world economy for the gates to shut very far without triggering a major economic disruption.

Also, the major trade deals being debated now, such as the US-led Trans Pacific Partnership, don’t directly affect China, notes Dr. Tim Summers, a Hong Kong-based senior consulting fellow for Chatham House, a London foreign-policy think tank. If, for instance, the TPP fails, it might not be bad for Chinese companies. “It’s a two-edged sword for Chinese: the demise of TPP may be the result of an anti-globalization backlash, but on balance good for China,” he says. “In that sense, anti-globalization may be no bad thing on a strategic level.”

Cross-border deals with Chinese companies also seem to be facing more scrutiny now. For example, separate bids by two Chinese investors, one of whom was the the respected Hong Kong investor Li Ka-shing, for a 50.4% share of Ausgrid, an electricity provider in New South Wales, was rejected by an Australian government review board in August.

Given the changing climate, Chinese companies that had intended to pursue a strategy of high-profile acquisitions or a strategy that hinged on further liberalization may need a new plan. What should they do? Western strategists offer five suggestions:

Keep your name off the building. High-profile, ego-gratifying deals tend to be more politically difficult to execute, particularly in politically sensitive sectors. Acquisitions in which the Chinese partner takes a minority stake may be easier to execute and yet still offer the experience and exposure you need. Chatham’s Summers suggests exploring more partnerships, joint ventures, and cross-border innovation networks.

Adopt a second hometown. In the 1980s, Japan faced a similar challenge. As Japan’s cheaper and often better cars gained a following in the American market, US carmakers and auto workers’ unions pushed for trade barriers. In response, Washington slapped tariffs on Japanese cars to keep them out until the companies began building factories in the US. The Japanese manufacturers complied — and their foreign political status began to change.

South Korean companies have also made a similar evolution from exporter to direct investor, according to Jagdish Sheth, corporate strategy expert and professor of marketing at Emory University’s Goizueta Business School in Atlanta, Georgia.

“If there’s a way to structure your global supply chain [to] bring more jobs to America, that would be seen as good,” agrees Victor Tan Chen, an assistant professor of sociology at Virginia Commonwealth University in Richmond, Virginia.

And don’t just build a factory: eventually, those Japanese manufacturers were also generous philanthropists. “Almost without exception, all of those investors became really good community citizens,” notes Kennedy.

Be nice to the sheriff. In cowboy movies, the character who ends up having the hardest time is the stranger who crosses the Law. Whether he is in the right or the wrong, the guy who offends the sheriff in the first reel usually finds himself in a showdown by the end. The same holds true in kung fu movies — and in mature economies: companies that don’t respect other countries’ rules end up facing tougher trouble than they would have in their home market. Whether it’s Apple’s tax troubles in Europe or Volkswagen’s emissions disputes with the US Environmental Protection Agency, a variety of cases suggest that it doesn’t pay to underestimate the seriousness of local regulation.

For all the talk of Western business being less relationship-driven than business in Asia, relationships still matter. American guanxi may be somewhat different than the Chinese variety, but it’s still a factor. In the financial crisis, for instance, the firms that weren’t bailed out tended to be the least popular on Wall Street and least politically adroit: Henry Paulson, the US Treasury Secretary in the George W. Bush Administration and former head of Goldman Sachs, notes in his memoir that he called Dick Fuld, CEO of Lehman Brothers, 50 times, begging him to accept a buyout offer from the Korean Development Bank — a fact that was not forgotten when Fuld came begging for help soon after.

Knock on other doors. It pays to take a portfolio approach to investment, pursuing a number of countries at once rather than a single market, Kennedy advises. Chinese companies have a variety of vast opportunities, many closer to home, in Southeast Asia and India. Xiaomi, for instance, recently bought a Nokia factory in Chennai, India, and Sheth for one is bullish on the smartphone maker’s prospects. “They’re going to give Apple a run for their money,” he says. Often, says Chatham’s Summers, the developing markets actually offer better opportunities for Chinese companies because their products were designed initially for the Chinese domestic market.

At the company level, strategic concerns are already leading toward more nuanced portfolios everywhere. After the 2008 financial crisis, Summers says, many Chinese companies decided that they should avoid becoming too dependent on the West. More recently, Sheth says that Western companies have decided that they need to cultivate multiple suppliers to avoid being held hostage by a single entity.

In recent years, open borders and global markets have been treated as a kind of historical inevitability. Certainly, in terms of efficiencies, there is an economic case to be made that they should be. However, the terms of cross-border trade are always a political decision. Recognizing that fact can be a huge advantage.