Trade tension between Washington and Beijing raise the threat of Chinese authorities targeting US companies operating in China. A spat with South Korea over Seoul’s agreement to deploy a US anti-missile system in 2016 demonstrated how the Chinese government can apply pressure.

China is important for leading US brands such as Nike, not only as a centre for manufacturing but also because of Chinese consumer demand. Disrupting the Chinese operations of US companies would be high-profile but limited in scope, sending a strong message to Washington without threatening broader trade flows and avoiding steps that carry the risk of instability, such as currency devaluation or a fire sale of US Treasury bonds.

Previous moves against South Korean businesses show how this could happen. Over several months starting in 2016, the operations of Lotte Group and Hyundai in China were disrupted and forced in effect to suspend business. Hyundai was unable to buy the parts it needed from local suppliers to assemble its cars, while nearly 100 Lotte supermarkets were forced to close by authorities citing code violations, such as those related to fire safety. These were accompanied by embargoes of K-pop artists, South Korean television shows and the suspension of packaged tours to Korea from China. Media calls for a consumer goods boycott were less successful; Korean cosmetics are too popular with Chinese shoppers. 

But China’s actions were also measured. Beijing wanted to express its displeasure while recognising Korea’s centrality to global manufacturing supply chains and the risk that broader disruption would pose to domestic economic stability. Integrated circuits are Korea’s biggest export, of which more than 70 per cent head to China and Hong Kong as components of electronic goods that are then exported to global markets. Some imports from Korea were disrupted as cosmetics and food shipments were forbidden from entering but the flow of semiconductors was largely unhindered. The growth of imports from South Korea to China lagged behind those of the rest of the world in the second half of 2016 but has caught up as relations between Beijing and Seoul have warmed. 

President Donald Trump is threatening to apply tariffs to $150bn of imports from China, exceeding the amount China bought from the US last year by $20bn. If China were to follow a tit-for-tat strategy against the US, the government would explore the use of actions such as those taken against South Korea. Despite speculation that China could dump its US Treasury bond holdings or devalue the renminbi, neither of these steps make economic or political sense (although the latter would be welcomed by exporting companies). 

Face-saving compromises may be reached, and a trade war averted, but economic nationalism on both sides makes the likelihood of action very real. Although President Xi Jinping’s speech this week at the Boao forum helped defuse some tension, it contained few surprises and fewer details. 

Complaints about Chinese trade practices have been building in the US for a decade and a half and it is unlikely that the Communist party will be willing to revise or abandon tenets of an industrial strategy that it believes necessary to ensure the country’s economic future. As temperatures rise, Beijing will want to reach for tried and tested, but limited, measures to make its displeasure known.

— David Wilder, Head of China Research, and Frank Zhang, Senior Researcher, FT Confidential Research

FT Confidential Research is an independent research service from the Financial Times, providing in-depth analysis of and statistical insight into China and south-east Asia. Our team of researchers in these key markets combine findings from our proprietary surveys with on-the-ground research to provide predictive analysis for investors.