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A trade war with China would crush multinationals like Apple and Walmart

  • Donald Trump heads to China on Wednesday.
  • As Trump prepares to meet China's president Xi Jinping, they plan to discuss a lightning rod of 2017: trade.
  • The current protectionist policies under consideration risk generating a trade war, which would be disastrous for American multinational companies.
China's President Xi Jinping (L) and US President Donald Trump attend a working session on the first day of the G20 summit in Hamburg, northern Germany, on July 7, 2017.
Patrik Stalloarz | AFP | Getty Images
China's President Xi Jinping (L) and US President Donald Trump attend a working session on the first day of the G20 summit in Hamburg, northern Germany, on July 7, 2017.

As Donald Trump prepares to meet China's president Xi Jinping, a lightning rod of 2017 is on his agenda: trade.

Populist politicians have long opined on how U.S. trade policies with China have hurt certain American constituencies – namely, small businesses and factory workers. While these accusations largely ring true, the current protectionist policies under consideration risk generating blowback for another important economic faction: large American multinational corporations, which play a significant role in driving the U.S. economy.

If a trade war unfolded, this constituency would stand to lose the most. Many of America's biggest brands have considerable investment footprints in China: Nike, Walmart, Apple – the list goes on. These companies would stand at the front of the firing line if China reciprocated against any major trade actions by the U.S. Depending on the nature of the retaliation, expect revenues, profits, and share prices to suffer. Collateral impacts would include company workers in America, local economies where the companies reside, and the pension and retirement fund holdings invested in them.

The risks involved run deeper than reciprocal tariffs and trade restrictions. At the heart of corporate America's concern is future access to the Chinese market. Already, China is heading in the wrong direction here, as its policy environment has become increasingly hostile to the private sector and the foreign investors within it. A trade war could be the final straw that leads Beijing to severely contain American corporate interests in China, if not close off the market altogether. For many U.S. companies, China is their No.2 market and revenue-generator in the world. For some, it is already No.1. Therefore, any new barriers that emerge from a trade war domino effect would devastate American business.

"A trade war could be the final straw that leads Beijing to severely contain American corporate interests in China, if not close off the market altogether."

On both sides, economic hostility has been driven recently by accusations, counter-accusations, and ongoing investigations into China's practice of coercing American companies to hand over advanced technology and other intellectual property as a price for doing business. The U.S. Trade Representative's ongoing investigation into these shenanigans has illuminated the ways China's regulators railroad U.S. corporations. During open hearings in October, voice after voice recounted examples of American firms essentially forced into disadvantageous commercial arrangements with Chinese partners – the localization of customer data, software source codes, core intellectual property rights – because Chinese law often requires such provisions before regulators will grant operating rights.

Why do major American companies allow themselves to be perennially manipulated by the Chinese government into forgoing their hard-earned innovations? Because Beijing is masterful at playing one company against the other, and Chinese leaders know multinational corporations cannot resist the lure of China's consumers. Thus, companies compromise to gain access, for fear if they don't play ball someone else will.

China's government will only change its tune if all the private players team up to reject unfair market-access offers – and withhold their investments en masse. But U.S. firms are legally prohibited from and instinctively disinclined to collaborate with one another in their own defense. Private sector players will almost always seek to steal a march on their competitors, particularly if they can do so in such a way that blocks out rivals.

Back at home in the U.S., multinational corporations are concerned about the U.S. government's ability to address these and other challenges. The Trump administration and many in Congress appear increasingly determined to do something to change the status quo. But Washington pushing too hard could worsen the situation by triggering Chinese retaliation.

Adding to the complications, American multinationals also find themselves dealing with an administration focused more on investments inside the U.S. and less on supporting U.S. industry abroad. For example, negotiations over a U.S.-China Bilateral Investment Treaty (BIT) have gone moribund, despite a U.S.-China BIT arguably ranking as corporate America's top policy priority in the relationship. Moreover, many multinational corporations thought the Trans-Pacific Partnership would be a strong bulwark to help normalize China's trade and investment practices.

Despite the uncertainty on the U.S. side, America has more opportunity to push back on China's leaders than it did a decade ago. The days of China's double-digit growth figures are gone, permanently, making the risk of heightened tensions less dangerous for business than in the past. China is no longer a wonderland of easy growth and easy profits, so some leverage has shifted back to American negotiators. Additionally, China's investments abroad have skyrocketed – particularly in the U.S. – creating a mutual incentive for keeping doors open.

This week in Beijing, some pushing from the Trump side could help in cajoling China into improving market-access conditions for foreign companies. However, if threats and heated rhetoric turn into painful protectionist U.S. policies down the road, "face issues" for China would likely come into play and lead Beijing to institute retaliatory actions – step one towards a trade war. It behooves American business to ensure its voice is heard now and heard clearly, without the mixed messages of the past. In this way, the populist proposals kicking around Washington can be handled moderately, to help bring about positive change rather than a downward spiral.

Commentary by Steve Odland, CEO of the Committee for Economic Development of The Conference Board, and former CEO of Office Depot and AutoZone; and Ethan Cramer-Flood, Associate Director of The Conference Board's China Center.

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