China’s Fallout with the Five Eyes: What It Means for Businesses

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On December 11, 2001 China officially became the World Trade Organization (WTO)’s 143rd Member, accelerating its domestic economic reforms, liberalizing its cross-border trade and integrating the economic giant, as we know it, into the global economy.

China’s rapidly growing economic clout also gave the country greater confidence in adopting more assertive foreign policies, as nationalism grew after Beijing successfully hosted the Olympics in 2008 and the country’s gross domestic product (GDP) surpassed that of Japan in 2010. The notorious “Wolf Warrior Diplomacy” is a sharp contrast to the subtle approach— known as taoguang yanghui in Chinese, which means keeping a low profile—championed by the father of China’s modern economic reforms, Deng Xiaoping. 

China, under President Xi Jinping who came into office in 2013, has been relentlessly expanding its influence in Asia and beyond through high profile initiatives like the Belt and Road Initiative (BRI) and the Asian Infrastructure Investment Bank (AIIB). 

BRI is an ambitious global infrastructure development strategy with aims to open new markets and link economies across Asia, Africa and parts of Europe to Beijing. The Council on Foreign Relations reports that more than 60 countries, accounting for two-thirds of the world’s population, have participated in projects or have indicated interest in doing so. Meanwhile, the AIIB currently has 103 members, and 21 prospective members, participating in investment and development activities across Asia. 

Although supported by many countries, both initiatives have been seen as “a disturbing expansion of Chinese power,” particularly in the eyes of the United States (US) that experts say, is struggling to offer a competing vision.

The quest for economic and political balance with China would eventually lead the US to initiate a trade war that began in July 2018 when it imposed a 25 percent tariff on US 34 billion of Chinese imports, the first in a series of tariffs imposed during 2018 and 2019. At that time, the US was already running a huge trade deficit with China, amounting to USD 375.6 billion in 2017, up from USD 103.1 billion in 2002.

By 2019, bilateral trade between the US and China had reached almost USD 559 billion, and the US had imposed tariffs on more than USD 360 billion worth of Chinese goods. China retaliated with import duties on US products worth around USD 110 billion.

As Sino-American ties worsen, the US is rounding up its allies to exert similar pressures on China amidst a growing list of international relations issues over the past two years, from Chinese technology to the South China Sea disputes and the current COVID-19 pandemic.

The Five Eyes and China

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The Five Eyes, a coalition comprising the US, the United Kingdom (UK), Canada, Australia and New Zealand, can be considered the oldest intelligence network founded soon after World War Two to exchange foreign intelligence — first between the US and the UK, and then expanded in 1955 to include the other countries.

The escalating rivalry between the US and China, as well as disagreement over China’s various policies, have forced the other Five Eyes to review their relationships with China. Motivated by their own domestic interests, each country has shown varying degrees of diplomacy when dealing with China, a country they share deep economic ties with.

Dubbed the “Golden Era” since the office of Margaret Thatcher, the UK has supported Chinese investments and growing bilateral trade between the two countries for a good number of years. The UK also risked the wrath of the US by becoming a founding member of the China-led AIIB. However, a more vulnerable post-Brexit UK will need to re-evaluate its support of China, as the US threatens future free trade talks and security co-operation. 

Canada, the northern neighbor of the US, has long depended on the US for security and defence reasons. Its recent cooling relations with the US has prompted Canada to look into a foreign policy that protects its interests, which may not always align with that of the US. Canada even came close to being the first among leading industrial nations to hold formal free trade talks with China before it stalled in late 2017 due to Chinese disagreement of the Canadian trade agenda, according to South China Morning Post. 

China is the top trading partner for both Australia and New Zealand but their relationships with China are founded on different strategic considerations. This has led Australia, despite being called the “ the developed world’s most China-reliant economy” by Bloomberg, to lean towards US policies against China, as it seeks to balance growing Chinese influence in the South China Sea. New Zealand, on the other hand, is more nuanced in dealing with China to protect its economic security. Not so long ago, as reported on Belt and Road News, New Zealand became the first Western nation to participate in both of President Xi’s signature policies — the AIIB and the BRI — and has so far, been relatively unscathed in China’s retaliatory actions.

In spite of pressure from the US, the Five Eyes still mainly collaborate on intelligence rather than share a common China strategy. Nevertheless, there are four main issues where the Five Eyes are mostly in alignment albeit risking China’s hostile reaction.

  1. The ban of Huawei from participating in 5G networks

Australia and New Zealand joined the US in 2018 to ban Huawei’s participation in their countries’ 5G rollout. The UK, which in January only restricted Huawei’s participation to 35 percent market share, has extended it to a complete ban with total removal by 2027. Meanwhile, Canada has not formally announced a ban, toeing its relationship with China cautiously, as it prioritizes the freedom of the two Canadians who have been apprehended for spying, in the wake of Canada’s arrest of Huawei’s executive Meng Wanzhou. 

  1. Opposition to the Hong Kong security law

In May, foreign ministers from the Five Eyes countries, except New Zealand, released a joint statement challenging China’s national security law on Hong Kong, raising concerns that it would erode the freedom and autonomy of the city. New Zealand issued a separate statement that was more nuanced and less offensive. All Five Eyes countries have since then suspended their extradition treaty with Hong Kong, even as Australia and the UK offer long-term residency to the citizens of Hong Kong who want to leave the city. 

  1. Investigation of COVID-19 origins

In April, Australian Prime Minister Scott Morrison proposed an independent probe into the origins of the coronavirus. 130 countries have supported the proposal, which was adopted by WHO on May 19. Due to pushback from China, the investigation will only take place when the disease is “fully contained”, which could take years, and will not specifically name China.

  1. South China Sea disputes

In July, Australia once again bristled China by rejecting its territorial and maritime claims in the South China Sea, aligning itself closer to the US as tensions rose. Analysts observe that this has been a remarkable shift in Australia’s position against China, which previously urged all claimants to fall back on international law to resolve their disputes.

Implications for businesses 

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The fallout between China and the Five Eyes have repercussions on both foreign and Chinese businesses. This could be intensified by growing nationalistic sentiments among Chinese consumers, especially in the wake of the COVID-19 pandemic and amidst successive international criticism and sanctions against Chinese corporations, which resulted in greater consumer support for domestic brands and businesses. 

Likewise, consumers overseas also tend to view China unfavorably. For instance, a poll by the Angus Reid Institute in May showed that almost 85 percent of Canadians blamed China for not being honest about the virus. Overall, more than 65 percent viewed China negatively, up from a little over 50 percent six months ago.

The impact of the fallout is expected to be felt most intently in at least five sectors: trade, manufacturing, technology, travel and finance.

  1. Trade

Of the Five Eyes, Australia and New Zealand are the most reliant on China in terms of trade. Trade data show that 32.6 percent of Australia’s exports, and 23 percent of New Zealand’s, went to China in 2019. 

In May, China imposed an 80.5 percent anti-dumping tariff on Australian barley, as well as a ban on certain Australian beef exports, when Australia proposed an independent inquiry into the origins of the COVID-19 virus without consulting China. AustCham, the Australia-China business chamber, which has polled 87 businesses in Beijing, Southern China and Western China, finds that 70 percent of Australian companies are concerned with deteriorating China-Australia ties, up from just 45 percent two years ago.

Growing public negative views of China could also make it hard for Canada to proceed with free trade talks with China, the country’s second biggest trading partner. The Canadian government is treading its relationship with China carefully after imposing tariffs and suspensions on canola and other Canadian products like pork and beef.

China, which greatly depends on food imports, could suffer dire food shortage if the global supply chain is disrupted by these tit-for-tat sanctions. This has prompted the government to call for a nationwide curb on food wastage, as the country looks to diversify its supplier base outside the Five Eyes, to countries like Argentina, Brazil, Germany, Spain, and more.

  1. Manufacturing

With widespread shutdowns during the COVID-19 pandemic, exacerbated by China’s growing tension with the Five Eyes, businesses are increasingly concerned about being too reliant on Chinese factories for their products. The latest Reshoring Index by consultancy Kearney highlights that manufacturers are increasingly diversifying their supply chains away from China, while large investors and money managers are starting to judge companies by the resilience and diversification of their supply chains. 

According to Tommy Wu, an economist at Oxford Economics in Hong Kong who spoke to CKGSB Knowledge, “Many manufacturing companies have planned to relocate, or have already relocated at least part of their production, from China to other Asian countries.”

Southeast Asia is a clear beneficiary. With lower wages and a massive, young and educated workforce, it is perfect for brands like Apple, which has already begun trial productions of the AirPods in Vietnam. PC makers Dell and HP also plan to move up to 30 percent of their notebook production in China to Southeast Asia. In fact, Southeast Asia’s proximity to China, in distance and culture, also makes it increasingly attractive for Chinese investors who are negotiating potentially shrinking markets in the west.

It is undeniable that China has more sophisticated manufacturing technology with years of experience as the “factory of the world” — it will be interesting to see how businesses in this sector pivot toward higher value manufacturing activities in the future.

  1. Technology

The exclusion of Huawei and ZTE from 5G rollout in the Five Eyes countries, and others like Japan, combined with the US blocking Huawei’s access to key software and components for its products, is a resounding threat to Chinese technology companies in global markets.

The US executive order on TikTok and WeChat could have widespread impact not only on the incumbent firms, but also on consumer brands that rely on both apps for their business activities. The blocking of WeChat as a communication, marketing and payment tool could impair the capabilities of American businesses reaching out to Chinese consumers. China’s new tech export restriction is blocking TikTok’s algorithm, which powers interest-based recommendations based on behavioral analytics, from being included in the sale to American corporations. This would impede the app’s potential to monetize content through creator (or influencer) e-commerce globally, like what its sister app, Douyin, is doing in China.

If other countries were to join the US in the tech war against Chinese firms on the grounds of data security, it could seriously impair the development of truly global artificial intelligence (AI)-enabled products by Chinese brands to compete on the global stage. However, these restrictions also force businesses to innovate. Huawei’s own HarmonyOS, due out next year, could prove to be a viable competitor to Google’s Android. 

If American brands were unable to effectively engage their Chinese customers, they could be losing them to competitor brands from non-US allies, or Chinese brands in certain categories like household appliances or mobile products. This would create an unhealthy environment for Chinese businesses for whom the US is still a key market, such as Alibaba, whose CEO Daniel Zhang reassured that the platform’s policies “support American brands, retailers, small businesses and farmers” during its Q1 earnings announcement in August.

  1. Travel (education, vacation and business)

Australia and the UK, two of the more vocal Five Eyes countries against Chinese policies, are favorite destinations for Chinese students, tourists and business travelers. 

According to Tourism Australia, Chinese visitors made up 15 percent of Australia’s short-term arrivals in 2019 while contributing 27 percent of the total amount spent by all international visitors. About 20 percent of the visitors came for educational purposes. However, retaliatory exchanges between China and Australia on the dangers of travel to both countries may greatly reduce this income source in the future.

Meanwhile, VisitBritain reports that 58 percent of Chinese visited the UK in 2019 for tourism, 9% for education and almost 13 percent for business, with the visits for tourism and education being much higher than all-market averages. Chinese visitors spent a total of GBP 1.7 billion (USD 2.2 billion), up almost 14 percent from 2018. A recent report from The Guardian highlights that UK universities receive a third of their overseas funding from China, whose students now prefer to study in the UK over the US, according to a survey published by one of China’s largest educational firms, New Oriental Education.

China has also been aggressively marketing its domestic destinations to international travelers, and investing in its top-tier cities as global economic hubs. Further exchanges that stir safety concerns among consumers will curb the desire to travel freely even after the borders fully re-open.

  1. Finance

China’s prolonged tension with the US is also having an impact on where Chinese companies, particularly technology companies, are choosing to raise funds. Major US-listed companies like Alibaba, JD.com and NetEase have opted for secondary listings in Hong Kong, as a hedge against further deterioration of China-US relations and the threat of delisting. 

Ant Financial’s high profile initial public offering (IPO) is bypassing American exchanges for a dual listing in Hong Kong and Shanghai, whose one-year-old, tech-focused STAR market is already outperforming other exchanges. Nevertheless, Nasdaq, in a recent interview with KrASIA, says it is confident that Chinese firms will continue to list in the US where they enjoy better liquidity, support services and global visibility — more than 20 Chinese companies have gone public on either Nasdaq or the New York Stock Exchange so far this year.

With rising tensions and the CFIUS (Committee on Foreign Investment in the US) subjecting companies to a lengthy mandatory review process that was once voluntary, Chinese investment in US companies fell to its lowest point last year since 2014, as reported by Yahoo! Finance. Likewise, US investment in China would also plunge to a 6-year low in 2019. Meanwhile, both countries have been diversifying their investments to new markets in Southeast Asia and Europe.

China is also increasingly pushing for the internationalization of the yuan or renminbi (RMB), the world’s fifth most used currency for cross border settlements, to reduce its reliance on the US dollar in trade and promote more RMB-denominated transactions globally. The introduction of the digital yuan is a major step in this direction.

Credit: Foreign Policy

Moving forward, it will be critical for the business community to keep an eye on the development in China’s dynamic relationships with the US and the Five Eyes. According to Foreign Policy, the Trump administration is currently negotiating a concept named the “Economic Prosperity Network” of like-minded countries, organizations and businesses, aimed to convince American companies to detach from China, and partner with members of the new network to reduce US economic reliance on China.

Independent political scientist Chen Daoyin predicts that one of the worst scenarios for China would be the formation of a new bloc of countries alienated by its “Wolf Warrior Diplomacy” approach.

“Due to the coronavirus outbreak, many countries are rethinking the negative effects of globalization and gradually inching closer to the US. If irritated by China’s aggressive stance and actions, countries might form a circle to confront China together, leaving China isolated.”