The New Rules of Doing Business With China

Geopolitical tensions between the West and China are deepening. As a result, Western governments, especially in the U.S. and Europe, are hardening their rules toward Chinese companies. Although many Western executives see these policies as moving in a common direction — toward an economic decoupling — this view is too limiting. Instead, by learning to classify the policies into three distinct buckets — techno-nationalistic, techno-localistic, and protectionist — Western executives can better understand not only the risks but also the opportunities they present and respond more strategically.

Western governments have placed Chinese businesses in their crosshairs for three reasons. The first is that Chinese companies are becoming increasingly competitive globally. Once dismissive, U.S. business leaders and policy makers have come to more fully recognize Chinese companies’ innovation capabilities. Similarly, in Europe, 60% of surveyed executives said that Chinese companies’ innovations are already on par or will soon catch up with those of their own organizations. These concerns are not relegated to consumer products and business model innovations. For example, 65% of German automotive companies believe that their Chinese competitors already lead or will soon surpass them in technological innovation.

Second, many of these innovative Chinese companies are perceived as having links to China’s Communist Party and serving as extensions of the Chinese state by supplying it with dual-use technologies (having both civil and military applications) and/or complying with laws requiring cooperation with state intelligence efforts. These close ties, combined with Western policy makers’ concerns about the Chinese Communist Party’s governance model and its recent geopolitical expansionism, have fueled concerns that Chinese companies pose national security and espionage risks. In parallel, many U.S. and European policy makers seek to penalize Chinese companies because of the sizable financial and regulatory support they’ve received from the Chinese government to the disadvantage of Western businesses.

Third, there is the growing realization of the West’s own declining competitiveness. Decades of globalization have allowed Western multinationals to disperse their value chains around the world, especially to lower-cost China, often hollowing out manufacturing and R&D capabilities in their home markets. Western advantages in innovation, especially in Europe, appear to be waning.

This loss of Western production and innovation advantages has sparked concerns about economic dependence on overseas actors, driving governments to assert greater control over local industries.