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As the threat of a trade war between the US and China still looms, foreign companies operating on the mainland are profoundly ambivalent.

In public, chief executives usually repeat clichés about how there are “ no winners” in a trade war and that disputes should be settled through negotiation. 

But in private, foreign companies have grown increasingly discouraged by the formal and informal barriers that hinder not only their operations within China but also their exports into the country.

So while foreign businesses fear the short-term impact of a possible trade war on their bottom lines, many believe the trade and investment relationship between China and the west is broken. They also lament that a decade of polite dialogue has produced few results, and feel that a tougher approach is warranted. 

“Many companies . . . have been talking about the need to level the playing field, though in general they don’t think the way to do it is through tariffs”, says William Zarit, chairman of the American Chamber of Commerce in China. “It’s a blunt instrument.”

With companies mostly unwilling to express complaints publicly, industry associations like the American Chamber and its EU counterpart, increasingly play the role of bad cop. The latest surveys of foreign companies by the two organisations show that frustration is increasing, even as corporate revenues and profits also rise. 

“Revenues and earnings before interest and taxes improved, without any marked increase in optimism about the long-term business outlook,” according to the EU chamber’s summary of its survey. Half of companies say they feel less welcome in China than when they first arrived. 

While these complaints focus on conditions for foreign businesses attempting to serve China’s domestic market, the most immediate threat from a looming trade war is that foreign companies’ own exports from China will be hit by US tariffs.

Foreign groups accounted for 43 per cent of all Chinese exports last year according to Chinese customs data.

China-based, US-owned manufacturers of niche products like beer brewing and medical equipment or chemicals have told the FT that they would suffer under the proposed US tariffs.

Analysts say the outcome would be felt gradually. “The uncertainty that has now been reintroduced into US-China trade relations is, however, likely to have a much bigger impact on future investment decisions.” says Andrew Batson, Chinese research director of Gavekal, a Beijing-based macroeconomic research group.

Even more than the threat to exports, however, US companies are worried about the impact of a trade war on their domestically-focused China operations. On the surface, Donald Trump’s tough talk has apparently yielded some results on this front. 

In early April, central bank governor Yi Gang announced a specific timeline for relaxing caps on foreign-ownership ratios in financial services including securities, futures, asset management, and insurance. 

The following week, China’s state planning agency revealed similar market opening measures for the auto and shipbuilding sectors, where foreign companies have also been limited to minority stakes in joint ventures with local players. 

But these concessions may offer less than meets the eye. 

Foreign industry associations have for years said they want wider access to financial services. But after such a long delay, the impact will be limited. Chinese financial institutions benefited from years of protection from foreign competition and now occupy strong positions from which they will not be easily dislodged. 

In the auto sector, new rules ostensibly free foreign players from the joint ventures through which they have been forced to operate. 

But for passenger vehicles, most foreign companies signed 30-year contracts with their Chinese partners, of which 10 or 20 years still remain. Moreover, in the newly emerging electric vehicles sector, foreign groups may face fresh barriers even if ownership caps are phased out.

Beyond explicit regulatory barriers, what foreign companies fear is informal harassment and arbitrary enforcement of local laws and regulation. There is already precedent for such political retaliation, as when South Korean carmakers, supermarkets, and tourist destinations suffered as the result of Chinese objections to the deployment in Seoul of a US-led missile defence system last year.

US companies have a lot to lose. Total sales by China-based affiliates of US companies reached $481bn in 2015, according to US commerce department data, almost the same as China’s $483bn in exports that year. 

As Zhengsheng Zhong, chief economist at CEBM, a Beijing consultancy puts it: “These (US) multinationals have a strong profit base in China and remain an important bargaining chip that China can use as a check and balance against the United States.”

Copyright The Financial Times Limited 2018. All rights reserved.
About this Special Report

As President Trump seeks to cut the US trade deficit with China, Martin Wolf explains what it will take for the Chinese to build a mass consumer market. Shenzhen’s tech trailblazers are anxious about rising property prices. Foreign manufacturers welcome the crackdown on copycats but are ambivalent about Trump’s trade bluster