December 3, 2024 • 42 mins
Reading the tea leaves of the US-China relationship is challenging, even in times of relative calm. From anticipating supply chain disruptions and the risk of military conflict... to considering the impact of tariffs and how the US banking sector’s assessment of doing business in China may diverge from the US government's prevailing view.... understanding and managing the risks for US companies doing business in China is no small task.
There is perhaps no more articulate voice on navigating the challenges ahead for US companies operating in China than Isaac Stone Fish. Isaac is a scholar, author, and expert on doing business in China. He's the Founder and CEO of Strategy Risks .... a research and data company focused on reducing US companies’ exposure to China.
Coercive Capital host Elaine Dezenski recently spoke with Isaac on the evolving risks of doing business in China and his Strategy Risks’ index... The SR 250.... that tracks China risk exposure of the top 250 public companies in the U.S.
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Episode Transcript
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Speaker 1 (00:00):
Today's program is supported by K two Integrity. K two
is the premier global risk advisory firm. In an ever
changing world filled with uncertainties and risk. K two helps
its clients with better insights, better solutions, and better decisions.
K two Integrity believe in better for more. Visit K
two integrity dot com. I'm Elaine Tzenski, and this is
(00:32):
coercive capital. From anticipating supply chain disruptions and the risk
of military conflict to considering the impact of tariffs and
how the US banking sector's assessment of doing business in
China may diverge from the US government's prevailing view. Understanding
and managing the risks for US companies doing business in
China is no small task. Isaac Stonefish is a scholar, author,
(00:56):
and expert I'm Doing Business in China. He's the founder
and CEO Strategy Risks, a research and data company focused
on reducing US companies exposure to China. He spent seven
years living and working there, and served as Foreign Policy
Magazines Asia editor and as a Beijing correspondent for Newsweek.
Isaac and I recently spoke on the evolving risks of
(01:18):
doing business in China and his Strategy Risks Index, the
SR two fifty, the tracks China risk exposure of the
top two hundred and fifty public companies in the US.
We also discussed new tariffs, trade and China's approach in Mexico. Well,
I'm really excited to talk to you about how organizations
can better understand and manage their exposure in China. And
(01:42):
we're also going to touch a it on the post
election landscape and dynamics of the US China relationship. So
there's a lot to talk about these days. Congrats on
your recent testimony. You recently appeared in front of the
Senate Judiciary Committee on tech companies and their relationship with China.
It's a good listen for anybody who's interested in what's
(02:06):
happening around that exposure on the tech side. So maybe
just to give our listeners a better sense of you
and how you come into the space of China and
risk assessment. You lived in China for many years. How
does China today look different from the China when you
(02:26):
were first there.
Speaker 2 (02:27):
It's a radically different place. And there's this kind of
old cliche with expats that you know, oh, yeah, it
was cool in my day or back when I was there,
This was the time to be there, But I left
right before Hi Jinping took power. So I left in
December twenty eleventh. And despite the repression under Hu Jintao
(02:51):
and former leaders, it's radically stepped up now. And at
the same time, China is economically a lot more successful
and a lot wealthier. And so you had those two
things happening at the same time, the kind of increased
wealth and arguably increased concentration of wealth, but also increased surveillance, repression,
(03:12):
a really closing space for free speech, but also economic freedom.
Speaker 1 (03:19):
Yeah, and you talked about twenty eighteen as being a
turning point in the US China relationship.
Speaker 2 (03:24):
How so three things happened that year. One was the
symbolic removal of term limits for Chi Jinping's chairmanship of
the country. She has three titles. He's the General Secretary
of the Communist Party, which is the most important one
because the party is the entity that rules China. He's
the chairman of the Central Military Commission, which is the
(03:46):
body that oversees the People's Liberation Army, and he's the
Chairman of the Country. And Chairman of the country is
the position that they removed term limits on and this
was something that sent a strong signal in the United
States that hey Xi Jinping was trying to lay the
groundwork to be a dictator for as long as he could.
(04:07):
The second was we started hearing credible assertions of crimes
against humanity and later genocide in the northwest Chinese region
of shin John where Beijing was trying to exterminate the
culture forced abortions against the weaker people who are mostly
Muslim people in northwest China. And it was also a
(04:30):
time that through a confluence of factors, it really felt
like Beijing was starting to jeopardize US hegemony globally. And
there's a very open debate, and frankly, I'd love to
see more of a debate on this about whether or
not the US should remain the world's hegemon. But if
one doesn't believe in American exceptionalism and believes in Chinese
(04:52):
exceptionalism instead of it, or in a true multipolar world,
this is your moment, not the viewpoints that I spouse,
the few points that many elected US officials as pass
And so this in my mind was the year that
Beijing started to be able to say globally that Hey,
(05:12):
the era of U segemony is over.
Speaker 1 (05:15):
Yeah, that's an excellent segue into what I'd like to
do at this point, which is frame the discussion around
how you're thinking about and quantifying China risks. And I
want to pull a quote from your recent testimony where
you stated that companies with high China exposure often downplay
(05:36):
the risks of Beijing's actions to US interests, move US
jobs overseas, partner with businesses, community, committing human rights abuses,
and even strengthening the Communist Party. So let's start with
trying to get a handle on how companies should get
a handle on their China risk. I know you think
(05:56):
about it from a methodology that includes five vectors. You've
created a really interesting risk index, which I'd love to
talk a little bit more about.
Speaker 2 (06:08):
So we've created something called the SR two fifty, which
ranks the top two hundred and fifty US companies on
their China exposure. And the idea is to use public
information to allow both the companies themselves, but also other
companies in the space, investors, and regulators to have a
much better understanding of China exposure. Because Elaine, you and
(06:32):
I share a dedication here to transparency, and we want
companies in this space to be able to make better
financial and regulatory decisions by understanding what companies China exposure is.
I will say in companies defense, it was US government
(06:53):
policy to strengthen the Communist Party until depending on how
strictly you want to define that, twenty fourteen, twenty sixteen,
twenty eighteen, and even at the tail end of the
Trump administration, the first Trump administration, there were policies that
aim to do capacity building and there was a lot
of legacy programs, and so companies over the last several
(07:16):
years have had to drastically reduce those programs, and some
of those still exist, and it's a good thing for
companies to close. The second point I'd like to make
sort of a broad geopolitical point with the SR two
fifty and with broad relations between the US and China,
both Beijing and Washington want companies to pick sides, and
(07:40):
companies need to understand that that is a imperative in
both Washington and Beijing, and the days when they could
successfully balance between those two sides, I would argue, are
very much over.
Speaker 1 (07:55):
So if I'm sitting at a public company, trying to
get an accurate see of my China risks. And I
know I have exposure in my supply chains, I know
that I have capital at risk. How should I be
thinking about the potential that the US and China may
go to war in the next five to ten years,
(08:15):
So great question.
Speaker 2 (08:17):
I think understanding that there are three scenarios and then
planning out what it means for your business in each
of those three scenarios. So the first, which is arguably
still the base case, is high tensions but not war.
The second is a limited war, limited invasion, and weak
(08:40):
US involvement. So I think Russia Ukraine in twenty fourteen,
perhaps seizing Kamoi and Matsu, small islands off the coast
of China that belong to Taiwan, a couple assassinations of
Taiwanese politicians, major brownouts or blackouts, something like that, or
you know, a grand bargain between the US and China
(09:02):
over Taiwan, which could potentially happen under a Trump administration,
which in my mind is very scary in the Neville
Chamberlain piece in our time type of scary. Or the
third scenario, which is World War three between the US
and China over Taiwan, or over other geopolitical flashpoints. And
(09:22):
while it may not seem likely, and while I, along
with the rest of us humans on this world, cannot
predict the future, there is enough of a possibility that
this happens that companies will need to plan out what
this means for their businesses. And this is an issues
very large and very small. It's about protecting your employees.
(09:43):
It's about ensuring that you can still have access to
critical technologies. It's about making sure that losing access to
say TSMC chips or a part that in your mind
is only made in some small factory in Fujo, doesn't
pose an existential threat to your business. It's a very
long laundry list of items that could prove the difference
(10:06):
between a bumper quarder or a very poor quarter, and
in some businesses case could be the end of business
that they don't plan this correctly.
Speaker 1 (10:15):
So I've often wondered, you know, again, from a corporate perspective,
when you look at emerging challenges like China's National Intelligence Law,
some of the pressure on business executives who've either been
detained or gone through some serious administrative bureaucracy. I mean,
(10:35):
there are some scenarios that you can plan for, and
then a lot of scenarios that you can't plan for.
What do you you know, what do you advise a company?
You know, trying to understand, for example, the implications of
the National Intelligence Law and whether Chinese national is working
for them may be a risk.
Speaker 2 (10:58):
So there's no way of doing business without all businesses risk.
And there's US risk, there's Canada risk, there's risk doing
business in Massachusetts. However you want to strike it. There's
no safe way to do business. That said, our overarching
viewpoint is that businesses have long underplayed and mispriced China risk,
(11:18):
and the risk to them is higher than they think.
And so from a very macro perspective, it's pricing in
all of the possibilities that you talked about, it's pricing
in the hey. I had this partnership with an SOE
stay down Enterprise, a company that is holy or majority
owned by the Communist Party, and the head of the
(11:39):
SOE is now in prison, and so what does that
mean for the safety of my employees? What does that
mean for my business? The former chairman of one of
the major Chinese state banks went to jail for corruption,
and so you'd think about that when you're doing business
in the financial sector in China and you think, oh, great,
I'm going to work with Bank of China ICBC because
they're safe. But when the head of the business that
(12:02):
you were working with is in jail allegedly for corruption,
that is not a safe play. And so understanding that
that can cause real problems for you in China. The
major China risks that companies face is in fact not
US government or US pressure. It's what Beijing does. It's
the strong leftward turn, undershoting ping, it's the closing space
(12:26):
for private businesses, and it's the reason that the wealthiest
and smartest entrepreneurs in China are almost all, without exception,
looking for ways to themselves reduce their China exposure. And
so it's a really important message to deliver because there's
a sense among folks who talk about this or among
(12:46):
the public that the risk for US businesses in China
is the US government. And certainly that's a risk, and
certainly that's something that they need to manage, but a
far bigger risk for them is the Communist Party. And
so understanding that and understanding the difficulties of engaging with
the Communist Party today is a really really important risk
for businesses to understand.
Speaker 1 (13:05):
Yeah, I totally agree with that. And maybe switching to
the angle of what the US government should be doing
to help US companies operating in China, are there aspects
that you know the government isn't considering or should be
doing at this point to either help companies understand that risk,
(13:29):
mitigate that risk, incentives, more incentives, maybe to build out
alternative supply chains. What does that look like from your viewpoint?
Speaker 2 (13:40):
With the caveat that with the Trump election, we might
see some pretty large changes with the way incentives are
structured and with the role that government plays in businesses.
If the Department of Government Efficiency has its way, a
lot of the carots will be cut and then some
of the sticks as well, because there won't be people
(14:02):
to enforce them. That said, this is very much a
developing story. What US businesses need to understand is that
in most cases, the government doesn't want them to be
doing business in China, and it wants to be communicating
to them that hey, you're out of luck here. You
got yourself into this mess and we're not going to
(14:23):
get you out of it, and big US companies have
been trying for years to lobby against that viewpoint. And
we see that especially with companies like Boeing or Apple
or Microsoft, companies that have very influential lobbying arms that
are heavily exposed to China. You know, they want support
for the position there, but frankly, there's not a huge
(14:44):
amount of sympathy from folks in the US government for
the way that these companies are so exposed. And it
was something that was very shocking to a lot of
the business leaders that we talked to several years ago,
just the hey, we're having a really hard time here,
you know, how can I get the US government to help,
and having to explain to them that the US government
(15:06):
wants you to be elsewhere. And so one of the
things that we advise companies on doing is having proactive
plans that they can present to their US government partners
showing how they're reducing their China exposure or showing how
they're not working with problematic entities inside the Chinese system.
Speaker 1 (15:25):
So I want to switch our focus a bit to
talk about the incoming Trump administration, and you know, the
huge discussion underway on tariffs on China, how that will
impact companies that have China exposure, and what that means
in terms of potentially accelerating some of this de risking
(15:49):
or decoupling out of China, or potentially having other impacts.
What do you think about that.
Speaker 2 (15:55):
It's a fascinating interplay between a presidency that will on
the one hand have some very important restrictions and on
the other hand have fewer regulations and perhaps from a
meaningful point of view and perhaps from a meaningful stance,
much weaker regulations. So the big question with regulations in
(16:22):
the Trump administration is what's going to be enforced and
what's not. And frankly, this is true in most administrations.
It's a question of enforcement as opposed to law. Tariffs
are so incredibly important to Trump and to many senior
people in his administration that it almost doesn't matter who
gets senior positions in USTR and Treasury, And I know
(16:44):
by the time this airs, those should be hopefully clear.
But businesses need to understand that the US government under
Trump does not want them to be so entangled with China,
and there's going to be a huge reorienting of supply
chains that's already happening now. Because prices across the board
(17:06):
are shifting, and we're going to see a lot of
issues of companies that supply to major US companies moving
to moving even quicker to Vietnam, to Mexico, to Indonesia,
to Morocco and trying to ship from there to the
United States and depending on the intricacies of the law,
(17:29):
you know, doing that sometimes legally and sometimes not. Yeah.
Speaker 1 (17:33):
I think it's also possible that we may see some
flow of more Chinese capital coming into the US because
with additional restrictions, the operating model for a supply chain
based in the US may look better. So that's kind
of an interesting twist as well.
Speaker 2 (17:53):
That's an excellent point, and I think that's something that
Trump would appreciate and would consider a victory, and many
people as administration would not appreciate.
Speaker 1 (18:03):
Yeah, I see, I see both sides of that. On
the one hand, foreign direct investment that helps to reindustrialize
the US has value. On the other hand, what's the
composition of those deals that capital the intellectual property involved.
Are we actually increasing our exposure versus decreasing it when
(18:27):
it comes to dependency on on on China. I think
we're going to have a lot of interesting questions. And
you know, when you think about how many deals might
actually go through the Committee on Foreign Investment, you know
that threshold that needs to be met. It won't be
all deals. It won't be all foreign direct investment coming
from a place like China or anywhere for that matter.
(18:50):
So I think I think we should underestimate the potential
that we see a lot more Chinese investment in the US.
Speaker 2 (18:59):
I think that's very interesting. I think it very much
is a possibility, and I think it also will depend
on state laws, and I think if it does happen,
I would much. It's fascinating to think about it. I
think right now it expected to come into Blue states,
because I think Red states are going to signal that
they are not friendly to Chinese investment. I think what
(19:22):
we will see is companies with Chinese investment, but minority
Chinese investment, then investing in Red states. You know, one
can imagine joint ventures between golf countries and Chinese entities
investing heavily in Texas, Florida.
Speaker 1 (19:39):
Yeah, Mexico, yeah, yes, and certainly in the Western hemisphere.
When we think about all the plays around critical minerals processing,
I think that's I think that's very likely. Actually, this
confluence of funding from the Middle East and from Asia
coming together to identify the best deals, and again we're
(20:02):
going to be faced with this question. Do we see
these investments as opportunities to rebuild our own industrial base
or do we see them as risks or are they
some combination of both, which I think is why we
have such a dilemma. So what do you think. Is
there a model for the US and China to economically
(20:25):
coexist in peace and meet US national security objectives? No.
Speaker 2 (20:36):
I think there's a model for the US and China
to co exist in peace, but it doesn't meet US
national security objectives. I think the model for the US
and China to co exist in peace is either predicated
on a massive realignment of the Communist Party's priorities or
the US removing or drastically reducing its presence in Asia.
(21:00):
So the easiest way to prevent a war between the
US and China is to give up Taiwan, is to
move troops out of Japan and move troops out of
South Korea and say China, Asia is your backyard, and
we're going to focus on the Western hemisphere. In Europe.
To be clear, do not advocate for this position, but
that is the way to prevent war. And I think
(21:24):
it's very difficult to say, because you know, one doesn't
want to allow for a cataclysmic conflict between the two sides.
It's hard to imagine World War three without tens, if
not hundreds of millions of people dying. It could be
a very different type of war. But you know, when
(21:45):
the world goes to war, there's massive, massive cost for
human life. I think we need to have a national
debate about the goals of the US globally. You know,
with America first is you know, one could interpret America
first as America needs to be first globally and in
(22:07):
the United States. But for Trump and for many people
in his team, it seems to be much more of
we have to focus on home, and we have to
prioritize American interests domestically to American interests globally. The you know,
there's been quite a fall of the neocons, and this
is not, in many cases an expansionist administration. It's the opposite.
(22:28):
And depending on how the US engages with China on that,
you know, it could be a great opportunity for China
to expand globally. China is of course facing economic crisis
and possibly a political crisis of its own. I like
to see the Chinese governance model as a series of
crises constantly erupting. So it's very difficult to say, but
(22:51):
it's my firm belief that these issues are way too
important to just be in the podcast sphere and need
to be debated across the country.
Speaker 1 (23:02):
Yeah, I agree. I agree, there's really too much at risk,
and I think it's almost impossible to pull domestic policy
away from foreign policy around these issues. And it's because
supply chains run from end to end. I don't know
how we would have a conversation about reindustrializing this country
without rethinking or at least considering foreign policy decisions and
(23:29):
discussions around China. There's really no way to do that.
And you know, one question that I think we need
to be able to answer is what do we mean
by economic security? What does that actually mean? Are we
talking about economic prosperity? Because if that's the lens, then
we might look at foreign direct investment in a certain way.
(23:51):
Is it protection from authoritarian influence and trying to push
back on that in a more meaningful way that might
lead us to a difference set of policies. So yeah,
I agree there's much to be discussed. From the financial perspective,
it would be interesting to get your thinking on how
(24:14):
banks and their financial institutions should be thinking about China
risks and whether you think there's any sort of disconnect
with how politicians view own China risk and how the
banking community might view that.
Speaker 2 (24:26):
So a massive disconnect between politicians and the banking community
because the politicians are much more hawkish on China than
the banking community is, and politicians do not see the
financial opportunity with engaging with China. That's not their interests,
and the banking community does. I'd say from a compliance perspective,
(24:49):
we strongly encourage banks to better screen for China exposure
and China risks, and to better screen not only for
what is the sanctions ofviolation today and what is a
violation of the Weaker Force Cyber Prevention Act, which restricts
exports from Shin Jong into the United States, but things
that very easily could be a sanctions violation tomorrow because
(25:13):
it's much harder it's usually for these transactions. As folks
in the financial community. Know it's not a oh, we
invested in a sanctioned entity or an entity that later
became sanctioned. I'm just going to flip a switch and
this investment is going to be unwound. It's oh, this
is weeks, months, possibly even longer, of careful paperwork and
(25:35):
negotiations and many stakeholders and very complex deals and transactions.
And we strongly encourage financial institutions, especially those the people
in those institutions and compliance to understand that there is
today a real risk with investing in or partnering with
the People's Liberation Army, that is the army in China.
(25:57):
But there's a really important point to be made about
the army. And it sounds crazy to say, but it's
the reality of China today. China does not have an army.
The Communist Party has an army. The PLA is the
armed wing of the Communist Party. It is not the
army of the nation. It's similar to Vietnam, North Korea LAOS.
It's a communist legacy. Imagine if the Ohio National Guard
(26:21):
was the standing army of the Republican Party or the
Democratic Party in Ohio. And that's a way of understanding
how the PLA operates. So the PLA is a lot
more entangled in businesses and has in some ways its
own business interests and entities that are either part of
the PLA or have close ties to the PLA could
(26:41):
very well be on the future sanctions lists, and banks
need to price in the risk of that. And again
it's not saying hey, don't invest in anything the PLA touches.
It's saying you need to price in this risk now
because these companies have a higher than average chance of
being sanctioned in the future.
Speaker 1 (27:01):
Today's program is supported by K two Integrity, the premier
global risk advisory firm. In today's world, threats can arise anywhere,
at any time, threats to your organization's operations, financial stability,
or reputation. K two offers a better way to counter
the threats facing your organization. K two provides critical intelligence
(27:22):
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ever changing world filled with uncertainties and risk. By providing
(27:45):
better insights, better solutions, and better decisions. K two Integrity
believe in better for more. Visit K two integrity dot com.
So look about some of the dynamics around the the
domestic economy in China. What do you see in terms
(28:05):
of the I mean there there have now been some Uh, well,
there's some shock therapy right from Beijing trying to kickstart
the Chinese economy. They have some structural issues, they have
demographic issues, they have you know, problems in terms of
(28:29):
global growth and global demand for their products. Uh does
all of this lead them more quickly, like in the
next few years towards that transition from being an exports
riven economy to strengthening domestic demand and domestic consumption.
Speaker 2 (28:48):
The real purpose to strengthen domestic demand domestic consumption is
to decouple from reliance on unfriendly countries, mostly the United States,
And so it's less of an economic comparative when we
talk about economic security in the United States. It's so
much more of a priority for Bidging because these issues
(29:09):
are so much more important to them, and they're far
more worried about the United States at a high level
than the US appears to be on China. So we
need to understand the domination of politics and national security
in communist party thinking. The second thing I'll say about
China's economy is it's always been an information or environment,
(29:31):
and that has gotten much worse. And so we're in
this very funny situation where the economic numbers don't really
reflect reality. And so, you know, we have senses and
we have ways of guessing at China's economic growth or
the lack of it, but the numbers are so much
(29:51):
less trusted even among the bureaucrats who put out the numbers,
and so we're in this funny situation where we have
all this data. You know, it's never a question of
scarcity of data. That there's so much data. It's just
very difficult to know what to trust and what not
to and so talking about China's economy is much more
difficult because of that. The final thing I'll say, and
(30:12):
I think this is especially true on demography, is that
I do feel like there's a real chance of a
major major shock, you know, whether that be war or
something else, that will make it very difficult to predict
where things are going. I have a lot of conversations
with people who say, I'm really worried about China's demographic
decline in the twenty thirties, and I'd say, well, I'm
(30:34):
really worried about today and the next couple of years.
And so businesses like to predict far out in the future.
That's very difficult because they need to price in the
possibility of war. The final thing I'll say about this
is there's this very annoying oriental as a viewpoint in
America that Chinese people think in decades or they think
in centuries. They don't. They think like human beings that
(30:57):
they think about the near term, and sometimes they think
about the long term. I would encourage folks who disagree
with me to read a Chinese five year plan and
then look at how the economy developed, and we'll find
how radically different they are. Chinese economy would be so
much smaller and the country would be so much less
successful they actually followed their plans. We all know what
(31:18):
happened to the Soviet Union when they tried to follow
their five year plans. It's a really poor way to
run an economy. And so people will listen to chijin
pain saying things like, oh, you know, here's our carbon
targets in twenty sixty and think that's a reality or
a reality he can create as opposed to something that
is just artful misdirection.
Speaker 1 (31:38):
Yeah. Yeah, thanks for pointing that out. It's an interesting angle,
and actually it's a little bit well. I feel a
little bit better about our capacity for short term thinking
in this country versus long term and that maybe it's
human nature to move more towards short term thinking. But
(31:58):
you know, we also have to factor or in the
pace of innovation, which is also fueling right, a lot
of these longer term plans and ways of thinking about
economic security and over the long haul. I mean, so
much of that is technology driven, and that's moving pretty quickly.
I want to go back to the issue of transparency
(32:19):
because it's a favorite topic. So you mentioned the Weiager
Force Labor Prevention Act. We have a lot of opacity
when it comes to the Chinese market, whether we're talking
about trade data, deeper supply chain data of all kinds,
what's coming in and out of ports, what might be
(32:42):
re labeled transhipments to avoid certain kinds of tariffs. I
think we have a huge problem here, but we also
have a huge opportunity, and no matter what we do
on tariffs, expert controls, some of these other kind of
hard hitting, blunt force instruments, there is a lot more
(33:03):
that we could be doing to drive transparency across supply chains.
How do you think we should exploit that opportunity with
more pro transparency laws or regulations or is it really
an issue of enforcement that we really need to ramp
up in that regard?
Speaker 2 (33:18):
So great question. First, I'll say we find this to
be so important that we make opacity one of the
five categories in our SR two fifty, so that we
can reward companies for being open about how they break
out revenue and other details about their China business and
then penalize companies that don't want to talk about it.
I think one major issue of financial transparency as it
(33:41):
comes to China is companies are often coy about what
is China, what is Hong Kong, and what is Taiwan,
because they will they'll lump their Taiwan business in and
then that'll upset people in the States, or they'll break
it out and then it'll upset people in China and
especially upset the Communist Party there's this very silly financial
(34:03):
term of you know, Asia extrapan, which is most of
the world, and so you use that and you say, hey,
here's our business in Asia extrapan and you just think
that's so incredibly broad. And then, as you know, there's
so many ways to you know, not book profits in
certain areas, so that you have say a bv I holding,
(34:23):
a British Origin Islands holding company that does business in
China but earns profits elsewhere, or earns profits in Ireland,
and that allows you to say, hey, we're not you know,
the business, We're not making money in China, We're making
money in Ireland or in the Caymans or another jurisdiction.
I'd say from a regulatory perspective, it's requiring, it's creating
(34:46):
a sea change. The goal is to create a sea
change that companies feel like details around their China exposure
are things that they need to expose. And we've seen
this with DEI, We've seen this with climate change, and
we'd love to see this with geopolitical risk, and we'd
love to see this with China, where companies understand that
if they don't disclose these things, they're going to face
(35:07):
shareholder lawsuits. They're going to face uncomfortable questions from US
senatorial committees, and they're going to face frustrations from their
customers and from their shareholders.
Speaker 1 (35:21):
So we know Elon Musk has a lot of China
exposure through Tesla and other interests, and we also know
that Chinese companies are ramping up their lobbying efforts in
Washington DC. Are there vulnerabilities in the system that you
think China will aim to exploit further in the next
few years.
Speaker 2 (35:41):
I don't envy the position that Elon Musk is in.
He is atop the world's most difficult balancing act. How
does he manage Trump's ego, manage his own ego, manage
his relationship at the top of the Communist Party, and
manage one of the world's most important weapons company SpaceX
(36:03):
will at the same time manage a business that's heavily
exposed to China and the Chinese Communist Party. And for
a long time, you know, people have been predicting that
something has to give with the various business interests that
Musk has run, and so far, you got to hand
it to the guy. Like him or not, He's done
a fantastic job of growing and of working his way
(36:25):
to the top of US power. I think there's a
broad consensus that at some point his relationship with Trump
will fray, that there's just too much ego in that partnership,
and one person will have to win, and you just
assume it will be the President of the United States
and not the world's for just man. We'll see. We'll
(36:46):
be watching with popcorn avidly. I think from what Beijing
is doing and can do, they love to leverage their
interests and relationships with US business community to push for
their interests in Washington. And so we'll see that not
just with Tesla, but with Apple, with Microsoft, with Boeing.
(37:08):
Stephen Schwartzman, who is the head of Blackstone and the
founder of Shortsman scholars which is a Rhodes Scholar like
program out of chin Hua, the Party of University, that
is the school where hu Jinpeng went. He is going
to be probably a potent lever of influence from Beijing
(37:32):
to Washington. And so that's another one that we should
watch very carefully. Fascinating.
Speaker 1 (37:37):
Thank you. Final question, what do you think about some
of the emerging China risks for North America. We have
a revision on the US Mexico Canada Agreement coming up
in twenty twenty six. Already a lot of discussion about
that and whether that review process will be just a
review or whether it make it opened up in light
(38:02):
of some of the other national security risks, border challenges, fentyl,
supply chain issues, and more specifically China's investment into Mexico.
And we know, for instance, on the EV side, there's
plenty of Chinese EV's coming into Mexico. They're not coming
(38:25):
across the border to the US. That part we've managed,
But Mexico's industrial base could look very different in a
decade if there is a huge influx of Chinese investment.
What are your thoughts on North America.
Speaker 2 (38:43):
So it's an excellent time for Chinese companies to invest
in Mexico because the top three policy priorities for the
Trump administration in Mexico are immigration, immigration, and immigration. Four
is fentatyl and anything related to China, it cannot be
in the top And so if the Mexico administration plays
(39:05):
ball on immigration and really helps Trump deliver a win
on immigration policy and removing illegal immigrants from the United
States and does it in a way that doesn't cause
a massive distracting upheaval, in a way that the Republicans
don't want. They like some of that, but there's a
degree to which they would find unacceptable. If Mexico does that,
(39:26):
I think they'll have a lot of opportunity to take
in a lot of Chinese investment, and that'll be a
real issue for US businesses, both those that are going
to compete with Mexican businesses or Chinese businesses in Mexico,
but also for US policymakers who are worried about goods
made with forced labor in chin jong being shipped into
(39:49):
Mexico as a way into the United States, or also
those who worry about jobs in the United States from
competition in Mexico. Canada is surprisingly some ways more hawkish
on China than the United States, and frankly it's been
more hawkish on TikTok, which has been heartening to see,
and so we don't expect that to change. We feel
(40:10):
like Canada might in some ways outshine the United States
on their way of putting up restrictions. The issue for
Canada is going to be a lot of liberalization in
US laws towards environmental policy, which could change the US
Canada energy relationship and could change the costs of drilling
(40:32):
and of exploiting minerals. It's also going to have a
major impact on the global mineral trade because the environmental
laws in the United States, for better or for worse,
might be weakened enough that it becomes more cost effective
to drill or to process various rare earths. Here, one
(40:54):
of the major reasons, and perhaps the main reason why
China dominates the global market for minerals processing and for
rare earths is because they care a lot less about
the environmental degradation and the cost of, say processing thallium
and other pollutants that come out from a mining from
(41:15):
a mining work, and so we might see a really
big change with that as well.
Speaker 1 (41:21):
Yeah. Great, Thank you Isaac. This has been super interesting
and hope to have you back on the show again.
Speaker 2 (41:28):
Thank you. Thank you for the great questions and the
great conversation. I appreciate it.
Speaker 1 (41:31):
Thanks so much. Reading the tea leaves of the US
China relationship is challenging even in times of relative calm,
but of course the present moment is anything but certain,
and companies can't afford to treat geopolitical risks as outliers.
I can't think of a more articulate voice on navigating
the challenges ahead for US companies operating in China than
(41:52):
Isaac Stonefish. Isaac lays out some of the major considerations
for companies looking to reduce uncertainty and better prepare for
a rulent period ahead. For more on his expertise on
the matter, I highly recommend his book America's Second How
America's Elites Are making China Stronger. Thanks for joining me.
I'm Elaine Tazinski. And this is coercive capital on the
(42:15):
Illicit Edge Network
Today's program is supported by K two Integrity. K two
is the premier global risk advisory firm. In an ever
changing world filled with uncertainties and risk. K two helps
its clients with better insights, better solutions, and better decisions.
K two Integrity believe in better for more. Visit K
two integrity dot com. I'm Elaine Tzenski, and this is
(00:32):
coercive capital. From anticipating supply chain disruptions and the risk
of military conflict to considering the impact of tariffs and
how the US banking sector's assessment of doing business in
China may diverge from the US government's prevailing view. Understanding
and managing the risks for US companies doing business in
China is no small task. Isaac Stonefish is a scholar, author,
(00:56):
and expert I'm Doing Business in China. He's the founder
and CEO Strategy Risks, a research and data company focused
on reducing US companies exposure to China. He spent seven
years living and working there, and served as Foreign Policy
Magazines Asia editor and as a Beijing correspondent for Newsweek.
Isaac and I recently spoke on the evolving risks of
(01:18):
doing business in China and his Strategy Risks Index, the
SR two fifty, the tracks China risk exposure of the
top two hundred and fifty public companies in the US.
We also discussed new tariffs, trade and China's approach in Mexico. Well,
I'm really excited to talk to you about how organizations
can better understand and manage their exposure in China. And
(01:42):
we're also going to touch a it on the post
election landscape and dynamics of the US China relationship. So
there's a lot to talk about these days. Congrats on
your recent testimony. You recently appeared in front of the
Senate Judiciary Committee on tech companies and their relationship with China.
It's a good listen for anybody who's interested in what's
(02:06):
happening around that exposure on the tech side. So maybe
just to give our listeners a better sense of you
and how you come into the space of China and
risk assessment. You lived in China for many years. How
does China today look different from the China when you
(02:26):
were first there.
Speaker 2 (02:27):
It's a radically different place. And there's this kind of
old cliche with expats that you know, oh, yeah, it
was cool in my day or back when I was there,
This was the time to be there, But I left
right before Hi Jinping took power. So I left in
December twenty eleventh. And despite the repression under Hu Jintao
(02:51):
and former leaders, it's radically stepped up now. And at
the same time, China is economically a lot more successful
and a lot wealthier. And so you had those two
things happening at the same time, the kind of increased
wealth and arguably increased concentration of wealth, but also increased surveillance, repression,
(03:12):
a really closing space for free speech, but also economic freedom.
Speaker 1 (03:19):
Yeah, and you talked about twenty eighteen as being a
turning point in the US China relationship.
Speaker 2 (03:24):
How so three things happened that year. One was the
symbolic removal of term limits for Chi Jinping's chairmanship of
the country. She has three titles. He's the General Secretary
of the Communist Party, which is the most important one
because the party is the entity that rules China. He's
the chairman of the Central Military Commission, which is the
(03:46):
body that oversees the People's Liberation Army, and he's the
Chairman of the Country. And Chairman of the country is
the position that they removed term limits on and this
was something that sent a strong signal in the United
States that hey Xi Jinping was trying to lay the
groundwork to be a dictator for as long as he could.
(04:07):
The second was we started hearing credible assertions of crimes
against humanity and later genocide in the northwest Chinese region
of shin John where Beijing was trying to exterminate the
culture forced abortions against the weaker people who are mostly
Muslim people in northwest China. And it was also a
(04:30):
time that through a confluence of factors, it really felt
like Beijing was starting to jeopardize US hegemony globally. And
there's a very open debate, and frankly, I'd love to
see more of a debate on this about whether or
not the US should remain the world's hegemon. But if
one doesn't believe in American exceptionalism and believes in Chinese
(04:52):
exceptionalism instead of it, or in a true multipolar world,
this is your moment, not the viewpoints that I spouse,
the few points that many elected US officials as pass
And so this in my mind was the year that
Beijing started to be able to say globally that Hey,
(05:12):
the era of U segemony is over.
Speaker 1 (05:15):
Yeah, that's an excellent segue into what I'd like to
do at this point, which is frame the discussion around
how you're thinking about and quantifying China risks. And I
want to pull a quote from your recent testimony where
you stated that companies with high China exposure often downplay
(05:36):
the risks of Beijing's actions to US interests, move US
jobs overseas, partner with businesses, community, committing human rights abuses,
and even strengthening the Communist Party. So let's start with
trying to get a handle on how companies should get
a handle on their China risk. I know you think
(05:56):
about it from a methodology that includes five vectors. You've
created a really interesting risk index, which I'd love to
talk a little bit more about.
Speaker 2 (06:08):
So we've created something called the SR two fifty, which
ranks the top two hundred and fifty US companies on
their China exposure. And the idea is to use public
information to allow both the companies themselves, but also other
companies in the space, investors, and regulators to have a
much better understanding of China exposure. Because Elaine, you and
(06:32):
I share a dedication here to transparency, and we want
companies in this space to be able to make better
financial and regulatory decisions by understanding what companies China exposure is.
I will say in companies defense, it was US government
(06:53):
policy to strengthen the Communist Party until depending on how
strictly you want to define that, twenty fourteen, twenty sixteen,
twenty eighteen, and even at the tail end of the
Trump administration, the first Trump administration, there were policies that
aim to do capacity building and there was a lot
of legacy programs, and so companies over the last several
(07:16):
years have had to drastically reduce those programs, and some
of those still exist, and it's a good thing for
companies to close. The second point I'd like to make
sort of a broad geopolitical point with the SR two
fifty and with broad relations between the US and China,
both Beijing and Washington want companies to pick sides, and
(07:40):
companies need to understand that that is a imperative in
both Washington and Beijing, and the days when they could
successfully balance between those two sides, I would argue, are
very much over.
Speaker 1 (07:55):
So if I'm sitting at a public company, trying to
get an accurate see of my China risks. And I
know I have exposure in my supply chains, I know
that I have capital at risk. How should I be
thinking about the potential that the US and China may
go to war in the next five to ten years,
(08:15):
So great question.
Speaker 2 (08:17):
I think understanding that there are three scenarios and then
planning out what it means for your business in each
of those three scenarios. So the first, which is arguably
still the base case, is high tensions but not war.
The second is a limited war, limited invasion, and weak
(08:40):
US involvement. So I think Russia Ukraine in twenty fourteen,
perhaps seizing Kamoi and Matsu, small islands off the coast
of China that belong to Taiwan, a couple assassinations of
Taiwanese politicians, major brownouts or blackouts, something like that, or
you know, a grand bargain between the US and China
(09:02):
over Taiwan, which could potentially happen under a Trump administration,
which in my mind is very scary in the Neville
Chamberlain piece in our time type of scary. Or the
third scenario, which is World War three between the US
and China over Taiwan, or over other geopolitical flashpoints. And
(09:22):
while it may not seem likely, and while I, along
with the rest of us humans on this world, cannot
predict the future, there is enough of a possibility that
this happens that companies will need to plan out what
this means for their businesses. And this is an issues
very large and very small. It's about protecting your employees.
(09:43):
It's about ensuring that you can still have access to
critical technologies. It's about making sure that losing access to
say TSMC chips or a part that in your mind
is only made in some small factory in Fujo, doesn't
pose an existential threat to your business. It's a very
long laundry list of items that could prove the difference
(10:06):
between a bumper quarder or a very poor quarter, and
in some businesses case could be the end of business
that they don't plan this correctly.
Speaker 1 (10:15):
So I've often wondered, you know, again, from a corporate perspective,
when you look at emerging challenges like China's National Intelligence Law,
some of the pressure on business executives who've either been
detained or gone through some serious administrative bureaucracy. I mean,
(10:35):
there are some scenarios that you can plan for, and
then a lot of scenarios that you can't plan for.
What do you you know, what do you advise a company?
You know, trying to understand, for example, the implications of
the National Intelligence Law and whether Chinese national is working
for them may be a risk.
Speaker 2 (10:58):
So there's no way of doing business without all businesses risk.
And there's US risk, there's Canada risk, there's risk doing
business in Massachusetts. However you want to strike it. There's
no safe way to do business. That said, our overarching
viewpoint is that businesses have long underplayed and mispriced China risk,
(11:18):
and the risk to them is higher than they think.
And so from a very macro perspective, it's pricing in
all of the possibilities that you talked about, it's pricing
in the hey. I had this partnership with an SOE
stay down Enterprise, a company that is holy or majority
owned by the Communist Party, and the head of the
(11:39):
SOE is now in prison, and so what does that
mean for the safety of my employees? What does that
mean for my business? The former chairman of one of
the major Chinese state banks went to jail for corruption,
and so you'd think about that when you're doing business
in the financial sector in China and you think, oh, great,
I'm going to work with Bank of China ICBC because
they're safe. But when the head of the business that
(12:02):
you were working with is in jail allegedly for corruption,
that is not a safe play. And so understanding that
that can cause real problems for you in China. The
major China risks that companies face is in fact not
US government or US pressure. It's what Beijing does. It's
the strong leftward turn, undershoting ping, it's the closing space
(12:26):
for private businesses, and it's the reason that the wealthiest
and smartest entrepreneurs in China are almost all, without exception,
looking for ways to themselves reduce their China exposure. And
so it's a really important message to deliver because there's
a sense among folks who talk about this or among
(12:46):
the public that the risk for US businesses in China
is the US government. And certainly that's a risk, and
certainly that's something that they need to manage, but a
far bigger risk for them is the Communist Party. And
so understanding that and understanding the difficulties of engaging with
the Communist Party today is a really really important risk
for businesses to understand.
Speaker 1 (13:05):
Yeah, I totally agree with that. And maybe switching to
the angle of what the US government should be doing
to help US companies operating in China, are there aspects
that you know the government isn't considering or should be
doing at this point to either help companies understand that risk,
(13:29):
mitigate that risk, incentives, more incentives, maybe to build out
alternative supply chains. What does that look like from your viewpoint?
Speaker 2 (13:40):
With the caveat that with the Trump election, we might
see some pretty large changes with the way incentives are
structured and with the role that government plays in businesses.
If the Department of Government Efficiency has its way, a
lot of the carots will be cut and then some
of the sticks as well, because there won't be people
(14:02):
to enforce them. That said, this is very much a
developing story. What US businesses need to understand is that
in most cases, the government doesn't want them to be
doing business in China, and it wants to be communicating
to them that hey, you're out of luck here. You
got yourself into this mess and we're not going to
(14:23):
get you out of it, and big US companies have
been trying for years to lobby against that viewpoint. And
we see that especially with companies like Boeing or Apple
or Microsoft, companies that have very influential lobbying arms that
are heavily exposed to China. You know, they want support
for the position there, but frankly, there's not a huge
(14:44):
amount of sympathy from folks in the US government for
the way that these companies are so exposed. And it
was something that was very shocking to a lot of
the business leaders that we talked to several years ago,
just the hey, we're having a really hard time here,
you know, how can I get the US government to help,
and having to explain to them that the US government
(15:06):
wants you to be elsewhere. And so one of the
things that we advise companies on doing is having proactive
plans that they can present to their US government partners
showing how they're reducing their China exposure or showing how
they're not working with problematic entities inside the Chinese system.
Speaker 1 (15:25):
So I want to switch our focus a bit to
talk about the incoming Trump administration, and you know, the
huge discussion underway on tariffs on China, how that will
impact companies that have China exposure, and what that means
in terms of potentially accelerating some of this de risking
(15:49):
or decoupling out of China, or potentially having other impacts.
What do you think about that.
Speaker 2 (15:55):
It's a fascinating interplay between a presidency that will on
the one hand have some very important restrictions and on
the other hand have fewer regulations and perhaps from a
meaningful point of view and perhaps from a meaningful stance,
much weaker regulations. So the big question with regulations in
(16:22):
the Trump administration is what's going to be enforced and
what's not. And frankly, this is true in most administrations.
It's a question of enforcement as opposed to law. Tariffs
are so incredibly important to Trump and to many senior
people in his administration that it almost doesn't matter who
gets senior positions in USTR and Treasury, And I know
(16:44):
by the time this airs, those should be hopefully clear.
But businesses need to understand that the US government under
Trump does not want them to be so entangled with China,
and there's going to be a huge reorienting of supply
chains that's already happening now. Because prices across the board
(17:06):
are shifting, and we're going to see a lot of
issues of companies that supply to major US companies moving
to moving even quicker to Vietnam, to Mexico, to Indonesia,
to Morocco and trying to ship from there to the
United States and depending on the intricacies of the law,
(17:29):
you know, doing that sometimes legally and sometimes not. Yeah.
Speaker 1 (17:33):
I think it's also possible that we may see some
flow of more Chinese capital coming into the US because
with additional restrictions, the operating model for a supply chain
based in the US may look better. So that's kind
of an interesting twist as well.
Speaker 2 (17:53):
That's an excellent point, and I think that's something that
Trump would appreciate and would consider a victory, and many
people as administration would not appreciate.
Speaker 1 (18:03):
Yeah, I see, I see both sides of that. On
the one hand, foreign direct investment that helps to reindustrialize
the US has value. On the other hand, what's the
composition of those deals that capital the intellectual property involved.
Are we actually increasing our exposure versus decreasing it when
(18:27):
it comes to dependency on on on China. I think
we're going to have a lot of interesting questions. And
you know, when you think about how many deals might
actually go through the Committee on Foreign Investment, you know
that threshold that needs to be met. It won't be
all deals. It won't be all foreign direct investment coming
from a place like China or anywhere for that matter.
(18:50):
So I think I think we should underestimate the potential
that we see a lot more Chinese investment in the US.
Speaker 2 (18:59):
I think that's very interesting. I think it very much
is a possibility, and I think it also will depend
on state laws, and I think if it does happen,
I would much. It's fascinating to think about it. I
think right now it expected to come into Blue states,
because I think Red states are going to signal that
they are not friendly to Chinese investment. I think what
(19:22):
we will see is companies with Chinese investment, but minority
Chinese investment, then investing in Red states. You know, one
can imagine joint ventures between golf countries and Chinese entities
investing heavily in Texas, Florida.
Speaker 1 (19:39):
Yeah, Mexico, yeah, yes, and certainly in the Western hemisphere.
When we think about all the plays around critical minerals processing,
I think that's I think that's very likely. Actually, this
confluence of funding from the Middle East and from Asia
coming together to identify the best deals, and again we're
(20:02):
going to be faced with this question. Do we see
these investments as opportunities to rebuild our own industrial base
or do we see them as risks or are they
some combination of both, which I think is why we
have such a dilemma. So what do you think. Is
there a model for the US and China to economically
(20:25):
coexist in peace and meet US national security objectives? No.
Speaker 2 (20:36):
I think there's a model for the US and China
to co exist in peace, but it doesn't meet US
national security objectives. I think the model for the US
and China to co exist in peace is either predicated
on a massive realignment of the Communist Party's priorities or
the US removing or drastically reducing its presence in Asia.
(21:00):
So the easiest way to prevent a war between the
US and China is to give up Taiwan, is to
move troops out of Japan and move troops out of
South Korea and say China, Asia is your backyard, and
we're going to focus on the Western hemisphere. In Europe.
To be clear, do not advocate for this position, but
that is the way to prevent war. And I think
(21:24):
it's very difficult to say, because you know, one doesn't
want to allow for a cataclysmic conflict between the two sides.
It's hard to imagine World War three without tens, if
not hundreds of millions of people dying. It could be
a very different type of war. But you know, when
(21:45):
the world goes to war, there's massive, massive cost for
human life. I think we need to have a national
debate about the goals of the US globally. You know,
with America first is you know, one could interpret America
first as America needs to be first globally and in
(22:07):
the United States. But for Trump and for many people
in his team, it seems to be much more of
we have to focus on home, and we have to
prioritize American interests domestically to American interests globally. The you know,
there's been quite a fall of the neocons, and this
is not, in many cases an expansionist administration. It's the opposite.
(22:28):
And depending on how the US engages with China on that,
you know, it could be a great opportunity for China
to expand globally. China is of course facing economic crisis
and possibly a political crisis of its own. I like
to see the Chinese governance model as a series of
crises constantly erupting. So it's very difficult to say, but
(22:51):
it's my firm belief that these issues are way too
important to just be in the podcast sphere and need
to be debated across the country.
Speaker 1 (23:02):
Yeah, I agree. I agree, there's really too much at risk,
and I think it's almost impossible to pull domestic policy
away from foreign policy around these issues. And it's because
supply chains run from end to end. I don't know
how we would have a conversation about reindustrializing this country
without rethinking or at least considering foreign policy decisions and
(23:29):
discussions around China. There's really no way to do that.
And you know, one question that I think we need
to be able to answer is what do we mean
by economic security? What does that actually mean? Are we
talking about economic prosperity? Because if that's the lens, then
we might look at foreign direct investment in a certain way.
(23:51):
Is it protection from authoritarian influence and trying to push
back on that in a more meaningful way that might
lead us to a difference set of policies. So yeah,
I agree there's much to be discussed. From the financial perspective,
it would be interesting to get your thinking on how
(24:14):
banks and their financial institutions should be thinking about China
risks and whether you think there's any sort of disconnect
with how politicians view own China risk and how the
banking community might view that.
Speaker 2 (24:26):
So a massive disconnect between politicians and the banking community
because the politicians are much more hawkish on China than
the banking community is, and politicians do not see the
financial opportunity with engaging with China. That's not their interests,
and the banking community does. I'd say from a compliance perspective,
(24:49):
we strongly encourage banks to better screen for China exposure
and China risks, and to better screen not only for
what is the sanctions ofviolation today and what is a
violation of the Weaker Force Cyber Prevention Act, which restricts
exports from Shin Jong into the United States, but things
that very easily could be a sanctions violation tomorrow because
(25:13):
it's much harder it's usually for these transactions. As folks
in the financial community. Know it's not a oh, we
invested in a sanctioned entity or an entity that later
became sanctioned. I'm just going to flip a switch and
this investment is going to be unwound. It's oh, this
is weeks, months, possibly even longer, of careful paperwork and
(25:35):
negotiations and many stakeholders and very complex deals and transactions.
And we strongly encourage financial institutions, especially those the people
in those institutions and compliance to understand that there is
today a real risk with investing in or partnering with
the People's Liberation Army, that is the army in China.
(25:57):
But there's a really important point to be made about
the army. And it sounds crazy to say, but it's
the reality of China today. China does not have an army.
The Communist Party has an army. The PLA is the
armed wing of the Communist Party. It is not the
army of the nation. It's similar to Vietnam, North Korea LAOS.
It's a communist legacy. Imagine if the Ohio National Guard
(26:21):
was the standing army of the Republican Party or the
Democratic Party in Ohio. And that's a way of understanding
how the PLA operates. So the PLA is a lot
more entangled in businesses and has in some ways its
own business interests and entities that are either part of
the PLA or have close ties to the PLA could
(26:41):
very well be on the future sanctions lists, and banks
need to price in the risk of that. And again
it's not saying hey, don't invest in anything the PLA touches.
It's saying you need to price in this risk now
because these companies have a higher than average chance of
being sanctioned in the future.
Speaker 1 (27:01):
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So look about some of the dynamics around the the
domestic economy in China. What do you see in terms
(28:05):
of the I mean there there have now been some Uh, well,
there's some shock therapy right from Beijing trying to kickstart
the Chinese economy. They have some structural issues, they have
demographic issues, they have you know, problems in terms of
(28:29):
global growth and global demand for their products. Uh does
all of this lead them more quickly, like in the
next few years towards that transition from being an exports
riven economy to strengthening domestic demand and domestic consumption.
Speaker 2 (28:48):
The real purpose to strengthen domestic demand domestic consumption is
to decouple from reliance on unfriendly countries, mostly the United States,
And so it's less of an economic comparative when we
talk about economic security in the United States. It's so
much more of a priority for Bidging because these issues
(29:09):
are so much more important to them, and they're far
more worried about the United States at a high level
than the US appears to be on China. So we
need to understand the domination of politics and national security
in communist party thinking. The second thing I'll say about
China's economy is it's always been an information or environment,
(29:31):
and that has gotten much worse. And so we're in
this very funny situation where the economic numbers don't really
reflect reality. And so, you know, we have senses and
we have ways of guessing at China's economic growth or
the lack of it, but the numbers are so much
(29:51):
less trusted even among the bureaucrats who put out the numbers,
and so we're in this funny situation where we have
all this data. You know, it's never a question of
scarcity of data. That there's so much data. It's just
very difficult to know what to trust and what not
to and so talking about China's economy is much more
difficult because of that. The final thing I'll say, and
(30:12):
I think this is especially true on demography, is that
I do feel like there's a real chance of a
major major shock, you know, whether that be war or
something else, that will make it very difficult to predict
where things are going. I have a lot of conversations
with people who say, I'm really worried about China's demographic
decline in the twenty thirties, and I'd say, well, I'm
(30:34):
really worried about today and the next couple of years.
And so businesses like to predict far out in the future.
That's very difficult because they need to price in the
possibility of war. The final thing I'll say about this
is there's this very annoying oriental as a viewpoint in
America that Chinese people think in decades or they think
in centuries. They don't. They think like human beings that
(30:57):
they think about the near term, and sometimes they think
about the long term. I would encourage folks who disagree
with me to read a Chinese five year plan and
then look at how the economy developed, and we'll find
how radically different they are. Chinese economy would be so
much smaller and the country would be so much less
successful they actually followed their plans. We all know what
(31:18):
happened to the Soviet Union when they tried to follow
their five year plans. It's a really poor way to
run an economy. And so people will listen to chijin
pain saying things like, oh, you know, here's our carbon
targets in twenty sixty and think that's a reality or
a reality he can create as opposed to something that
is just artful misdirection.
Speaker 1 (31:38):
Yeah. Yeah, thanks for pointing that out. It's an interesting angle,
and actually it's a little bit well. I feel a
little bit better about our capacity for short term thinking
in this country versus long term and that maybe it's
human nature to move more towards short term thinking. But
(31:58):
you know, we also have to factor or in the
pace of innovation, which is also fueling right, a lot
of these longer term plans and ways of thinking about
economic security and over the long haul. I mean, so
much of that is technology driven, and that's moving pretty quickly.
I want to go back to the issue of transparency
(32:19):
because it's a favorite topic. So you mentioned the Weiager
Force Labor Prevention Act. We have a lot of opacity
when it comes to the Chinese market, whether we're talking
about trade data, deeper supply chain data of all kinds,
what's coming in and out of ports, what might be
(32:42):
re labeled transhipments to avoid certain kinds of tariffs. I
think we have a huge problem here, but we also
have a huge opportunity, and no matter what we do
on tariffs, expert controls, some of these other kind of
hard hitting, blunt force instruments, there is a lot more
(33:03):
that we could be doing to drive transparency across supply chains.
How do you think we should exploit that opportunity with
more pro transparency laws or regulations or is it really
an issue of enforcement that we really need to ramp
up in that regard?
Speaker 2 (33:18):
So great question. First, I'll say we find this to
be so important that we make opacity one of the
five categories in our SR two fifty, so that we
can reward companies for being open about how they break
out revenue and other details about their China business and
then penalize companies that don't want to talk about it.
I think one major issue of financial transparency as it
(33:41):
comes to China is companies are often coy about what
is China, what is Hong Kong, and what is Taiwan,
because they will they'll lump their Taiwan business in and
then that'll upset people in the States, or they'll break
it out and then it'll upset people in China and
especially upset the Communist Party there's this very silly financial
(34:03):
term of you know, Asia extrapan, which is most of
the world, and so you use that and you say, hey,
here's our business in Asia extrapan and you just think
that's so incredibly broad. And then, as you know, there's
so many ways to you know, not book profits in
certain areas, so that you have say a bv I holding,
(34:23):
a British Origin Islands holding company that does business in
China but earns profits elsewhere, or earns profits in Ireland,
and that allows you to say, hey, we're not you know,
the business, We're not making money in China, We're making
money in Ireland or in the Caymans or another jurisdiction.
I'd say from a regulatory perspective, it's requiring, it's creating
(34:46):
a sea change. The goal is to create a sea
change that companies feel like details around their China exposure
are things that they need to expose. And we've seen
this with DEI, We've seen this with climate change, and
we'd love to see this with geopolitical risk, and we'd
love to see this with China, where companies understand that
if they don't disclose these things, they're going to face
(35:07):
shareholder lawsuits. They're going to face uncomfortable questions from US
senatorial committees, and they're going to face frustrations from their
customers and from their shareholders.
Speaker 1 (35:21):
So we know Elon Musk has a lot of China
exposure through Tesla and other interests, and we also know
that Chinese companies are ramping up their lobbying efforts in
Washington DC. Are there vulnerabilities in the system that you
think China will aim to exploit further in the next
few years.
Speaker 2 (35:41):
I don't envy the position that Elon Musk is in.
He is atop the world's most difficult balancing act. How
does he manage Trump's ego, manage his own ego, manage
his relationship at the top of the Communist Party, and
manage one of the world's most important weapons company SpaceX
(36:03):
will at the same time manage a business that's heavily
exposed to China and the Chinese Communist Party. And for
a long time, you know, people have been predicting that
something has to give with the various business interests that
Musk has run, and so far, you got to hand
it to the guy. Like him or not, He's done
a fantastic job of growing and of working his way
(36:25):
to the top of US power. I think there's a
broad consensus that at some point his relationship with Trump
will fray, that there's just too much ego in that partnership,
and one person will have to win, and you just
assume it will be the President of the United States
and not the world's for just man. We'll see. We'll
(36:46):
be watching with popcorn avidly. I think from what Beijing
is doing and can do, they love to leverage their
interests and relationships with US business community to push for
their interests in Washington. And so we'll see that not
just with Tesla, but with Apple, with Microsoft, with Boeing.
(37:08):
Stephen Schwartzman, who is the head of Blackstone and the
founder of Shortsman scholars which is a Rhodes Scholar like
program out of chin Hua, the Party of University, that
is the school where hu Jinpeng went. He is going
to be probably a potent lever of influence from Beijing
(37:32):
to Washington. And so that's another one that we should
watch very carefully. Fascinating.
Speaker 1 (37:37):
Thank you. Final question, what do you think about some
of the emerging China risks for North America. We have
a revision on the US Mexico Canada Agreement coming up
in twenty twenty six. Already a lot of discussion about
that and whether that review process will be just a
review or whether it make it opened up in light
(38:02):
of some of the other national security risks, border challenges, fentyl,
supply chain issues, and more specifically China's investment into Mexico.
And we know, for instance, on the EV side, there's
plenty of Chinese EV's coming into Mexico. They're not coming
(38:25):
across the border to the US. That part we've managed,
But Mexico's industrial base could look very different in a
decade if there is a huge influx of Chinese investment.
What are your thoughts on North America.
Speaker 2 (38:43):
So it's an excellent time for Chinese companies to invest
in Mexico because the top three policy priorities for the
Trump administration in Mexico are immigration, immigration, and immigration. Four
is fentatyl and anything related to China, it cannot be
in the top And so if the Mexico administration plays
(39:05):
ball on immigration and really helps Trump deliver a win
on immigration policy and removing illegal immigrants from the United
States and does it in a way that doesn't cause
a massive distracting upheaval, in a way that the Republicans
don't want. They like some of that, but there's a
degree to which they would find unacceptable. If Mexico does that,
(39:26):
I think they'll have a lot of opportunity to take
in a lot of Chinese investment, and that'll be a
real issue for US businesses, both those that are going
to compete with Mexican businesses or Chinese businesses in Mexico,
but also for US policymakers who are worried about goods
made with forced labor in chin jong being shipped into
(39:49):
Mexico as a way into the United States, or also
those who worry about jobs in the United States from
competition in Mexico. Canada is surprisingly some ways more hawkish
on China than the United States, and frankly it's been
more hawkish on TikTok, which has been heartening to see,
and so we don't expect that to change. We feel
(40:10):
like Canada might in some ways outshine the United States
on their way of putting up restrictions. The issue for
Canada is going to be a lot of liberalization in
US laws towards environmental policy, which could change the US
Canada energy relationship and could change the costs of drilling
(40:32):
and of exploiting minerals. It's also going to have a
major impact on the global mineral trade because the environmental
laws in the United States, for better or for worse,
might be weakened enough that it becomes more cost effective
to drill or to process various rare earths. Here, one
(40:54):
of the major reasons, and perhaps the main reason why
China dominates the global market for minerals processing and for
rare earths is because they care a lot less about
the environmental degradation and the cost of, say processing thallium
and other pollutants that come out from a mining from
(41:15):
a mining work, and so we might see a really
big change with that as well.
Speaker 1 (41:21):
Yeah. Great, Thank you Isaac. This has been super interesting
and hope to have you back on the show again.
Speaker 2 (41:28):
Thank you. Thank you for the great questions and the
great conversation. I appreciate it.
Speaker 1 (41:31):
Thanks so much. Reading the tea leaves of the US
China relationship is challenging even in times of relative calm,
but of course the present moment is anything but certain,
and companies can't afford to treat geopolitical risks as outliers.
I can't think of a more articulate voice on navigating
the challenges ahead for US companies operating in China than
(41:52):
Isaac Stonefish. Isaac lays out some of the major considerations
for companies looking to reduce uncertainty and better prepare for
a rulent period ahead. For more on his expertise on
the matter, I highly recommend his book America's Second How
America's Elites Are making China Stronger. Thanks for joining me.
I'm Elaine Tazinski. And this is coercive capital on the
(42:15):
Illicit Edge Network
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