---

Craig Allen is president of the U.S.-China Business Council, a non-profit organization with 260 member companies that aims to help expand the commercial relationship between the two countries. Prior to taking on the role in 2018 Craig served in various diplomatic roles including three postings in Beijing and stints in Taipei, Tokyo and South Africa. He was U.S. ambassador to Brunei from December 2014. The following is a lightly edited transcript of a recent interview. 

Q: Can you start by setting out the level of confidence your members have in their businesses in China right now? 

A: We conduct annual surveys, and the latest data that we have was collected about a year ago. It shows that 95 percent of our businesses are profitable, and 43 percent are increasing their investments in China; 6 percent are reducing their commitments, while the remaining 50 percent-ish are maintaining current levels. So more than two-thirds of our members express optimism over a five-year time horizon. In a vacuum, that’s pretty high. But when you look back over 10 years, there’s been a marked deterioration of sentiment: It used to be almost universal optimism.

One of the reasons is that we recognize China’s growth is slowing. But we also know that that’s off of a very large base. And we see a great deal of difference sector by sector: Those companies that are directly selling to China’s 400 million-plus middle class are pretty happy.

Other companies and other industries look at it differently. So overall, confidence in the market is strong, but not as strong as it used to be. It’s very interesting. 

As you say, a few years ago, optimism was almost universal. We often heard it said that we’ve got to remain engaged with China, in large part because there is still a huge market opportunity. But is that still true? What level of export growth is now realistic? 

Well, last year, we had 11 percent growth. But it’s not that useful to be looking at averages here, because when you break it down, you see enormous discrepancies. For example, we had 35 percent agricultural export growth. Even within one sector, it really does depend. Under the Phase One agreement, we opened up 26 new species of fish for export, but many of them have seen zero exports. In some areas, there have been strong exports: of commodity products, really great exports, specialty products, not so much. It is complex, different companies in different sectors look at it very differently.

When you step back from all the issues the U.S. has with China over Xinjiang, Hong Kong and so on, what is your case for continuing economic engagement?

There are a few things to note here. And the first is that the United States has been trading with China since 1784. And we are a trading nation; we are a proud commercial nation. That’s who we are, that is our history. So are we going to turn our backs on our own history, our own tradition, our own heritage?

We need to recognize the complexity of China, and acknowledge the calls out there that decoupling is the right thing to do. But we have to, first and foremost, take care of American citizens. And there are over a million American citizens that are directly employed by exports to China. And if you apply the multiplier effect of indirect employment, then that’s up to three or four million. That’s just as a result of exports: Another 200,000 are employed as a direct result of investment. 

We also have to recognize that the Chinese economy has produced about 30 percent of global growth. So what are we going to do, hand that over to the Europeans and Japanese? No, we’re not going to. 

So there’s an employment part here. There’s a historic part here. But perhaps the most important part is that for American companies to be globally competitive, they must be competitive in China. China is 20 percent of the world’s population; it is the most dynamic part of the global economy. And it has a scale that all businesses need to respect and be a part of. In other words, if your competitors have the scale of selling into China, but you don’t; if your competitors are able to purchase from China, but you don’t; if your competitors are allowed to have ventures in China, but you don’t; you are systemically at a disadvantage not only to Europeans, Japanese, Korean, and others, but also to Chinese companies. No country, including the United States, has the privilege of closing itself off, or trading with only those that they like. 

There’s another element here. And that is the talent pool. China has, according to Chas Freeman, eight times as many STEM workers as the United States today, and will have, by the end of this decade, 15 times as many STEM workers as America today. We need access to those STEM workers, who are either here — many of the best ones are going through our university system — but also in China. And if German companies or British companies are allowed to access that for their engineering, but we’re not, then that puts us at a systemic disadvantage. 

We cannot be competitive, unless we are coupled with China appropriately. I would define national security as being prosperous, integrated in the global economy, and leading a rules based order. And I’m happy to debate that with anybody. 

But even if you think that engagement is valuable, aren’t companies increasingly going to be forced into choosing between their markets in the U.S. and the West, and China? 

It behooves both governments to try to reduce the urge to impose loyalty tests on companies that are inherently multinational. To the extent that governments demand a loyalty test, then everyone loses — it’s not in anyone’s interest, particularly when those loyalty tests are extra-legal, if you will. I would have to agree that there’s a troubling increase of that type of pressure coming from both countries. It’s something that companies wish to avoid.

It’s not just governments, and by extension the people that vote for them, though — it’s increasingly company shareholders who are concerned, particularly with the rise of ESG investing? 

Well, as I noted at the top, some 95 percent of our companies report that they’re profitable in China, and shareholders definitely look at that as an important criteria. In some national security-relevant industries, this is more of an issue. There, the legal restraints are much tighter than in, say, the fashion industry or whatever.

The issues are probably becoming more complex and more difficult. [But] one of the problems that a lot of analysts have is that they are looking at, say, the high tech industry or the National Security-intensive industries, and then imputing that this is true across the board. It’s not. If you’re in the food industry, or the movie industry, or the fashion industry or a general equipment or energy industry, it’s not an issue. We need to be careful not to take the problems of one sector and impute that that’s true across the board. What percentage of American exports are governed by U.S. export controls? I don’t have an exact answer, but I would imagine it’s probably around 85 percent that are not governed by export controls at all. And that’s pretty normal business. 

What about the situations that we’ve seen cropping up pretty often, where companies end up apologizing to people in China for not, say, sourcing from Xinjiang, because of a stance that they’ve taken. Is it right for American companies to have to make these sorts of apologies, and to have this need for accommodation with Chinese sensitivities? Is that a price worth paying for doing business there? 

I’m not going to comment on any particular member of ours or any particular company. And it’s really not for me to dissect the etiology of the word regret, or the word apology, those are different words and they have a different meaning, as we bloviating pensioners from the diplomatic corps are happy to lecture you on. 

Underlying your question is the fact that we have a tsunami of nationalism, ideology, and indeed nativism. It’s very high in China. And I would argue, we have similar problems in the United States. This certainly creates challenges where a company is asked to apologize for this or that, even though what they’re doing is strictly in accordance with the law. At the end of the day, we want to do business and produce on a level playing field. At the same time, companies aren’t in the business of offending anyone.

The main problem, where the rubber meets the road, is with a conflict of law. If we reach a conflict of law, then we will need to make decisions. And I would agree with the sentiment behind your question, that that day may be coming closer. Harmful decoupling that’s going to hurt everyone is much more likely if governments demand loyalty tests that are antithetical to the WTO or common sense. And it does feel like those days are getting closer. 

We’ve seen many Western businesses having to divest their operations in Russia, or stop doing business in Russia following its invasion of Ukraine. Shouldn’t there be a fear that something similar is going to happen in China, and that’s something that companies need to get out ahead of?

All of our companies are very well aware of the risks that they face in China. They’re not simpletons. Now, the risks change over time. And their investment plans reflect that changing risk. We discussed how people are less bullish on the China market. But preemptively judging that there’s going to be some conflict is probably wrong and antithetical to our interests. 

Now, it’s not to say that it’s impossible. Each company has got to judge. But just take the food or the energy area — of course, they’re going to be in China. Many brands have a large percentage of their sales in China; again, it’s taking the national security argument, and kind of spreading it over all sorts of industries where it’s not appropriate, or necessary or suitable. 

As regards Ukraine, already the U.S. government is implementing a new series of export control measures associated with China and associated with Russia, and all of our companies will comply with those measures. I don’t think that we should anticipate doom with regard to the U.S.-China relations. It’s always been difficult, it will always be difficult, but we have always managed our way through this. And I expect that we’ll be able to manage our way through it in the future because the two countries are so big and so important to each other.

So let’s not overstate our anxiety about this. Rather, let’s be pragmatic. 

It’s also true that U.S. companies in China, and indeed I would argue Chinese companies in America, play a very important role in providing balance and sustainability — and channels of understanding between the two sides, without which we would have a really unstable, and perhaps untenable situation. So American companies in China, and Chinese companies in America, contribute greatly to the bilateral relationship, and in my view, that should be celebrated. 

On Ukraine, do you think China’s apparent support for Russia is going to make all of this harder? 

Yes. 

Is there any message that you’re giving to your counterparts in China? 

I would remind them of the Confucian virtue of 正名 (zheng ming). Call a thing what it is by its proper name. And this is an invasion of a sovereign country: Call it by its name. And I’m going to say that you just need to be a lot more honest about this. 

And if they aren’t, is that going to affect the business environment? 

It’s early days. And if the Chinese are going to comply with sanctions, that’s a good thing. But if they formally comply with sanctions, but allow a lot of non-compliant behavior, that’s a different thing. Actually, the EU is going to be a very important player here, because U.S.-China relations are so poor, but EU-China relations are much better. So I’m hopeful that the U.S.-EU-Japan collaboration here will be able to encourage the Chinese to do the right thing on Russia. I’m not confident about that. But we must try.

A lot of American businesses have vital parts of their supply chains based in China. Do you see your member companies increasingly looking at the option of shifting those supply chains elsewhere, or even reshoring back to the U.S.? 

According to our recent survey, 80 percent of our members report not moving any segment of their supply chains from China in the last 12 months; 85 percent of our members have not paused investments in China in the last 12 months. And this data is basically consistent over the last decade, and It’s particularly remarkable given the fact that we have the Trump tariffs, which have been imposed and have not apparently had that much impact. 

Again, I don’t want to comment on any particular company. But we have to acknowledge that China has developed a robust manufacturing ecosystem of suppliers, raw materials, favorable policies, educated and skilled talent, and advanced infrastructure over many, many decades. They have a pretty efficient bureaucracy that is not corrupt anymore — it used to be, but it is not anymore. And many countries have comparative advantages in some of these areas, but few in all of them, so China remains a formidable part of the global supply chain. It’s not practical to pick up your supply chain and just carry it over like you would a cup of coffee; it doesn’t work like that.

…[W]e have to acknowledge that China has developed a robust manufacturing ecosystem of suppliers, raw materials, favorable policies, educated and skilled talent, and advanced infrastructure over many, many decades. They have a pretty efficient bureaucracy that is not corrupt anymore — it used to be, but it is not anymore. 

Moreover, and perhaps most important, China has its own enormous domestic market, which primarily our companies are interested in servicing. There have been lots of issues, using WTO definitions, with subsidies and other preferential treatments that the Chinese have used to boost their own supply chains; almost certainly, there have been WTO violations along the way, particularly when you look at the local governments. USTR has taken the Chinese to court in the WTO many times and has won, I believe, every time over many of these issues. 

On supply chains, I would say obviously it’s a company by company, product by product decision. Companies need both supply chain resilience and supply chain efficiency. If you’re resilient, but not efficient, you’re going to go out of business. And if you’re efficient, but not resilient, and there is a shock, you’re going to go out of business. So you need to combine both of those, and that is a remarkably complex thing. Supply chains are always in flux, they’re never static. It’s silly to think that this is on or off — it’s not. It’s remarkably complex. And you might move part of your supply chain, the labor intensive part of your supply chain, out of China, because of labor prices, but keep other parts of your supply chain in China. Thinking that ‘Oh, well, let’s just take our supply chain and move it back to the United States’ — it’s just utter nonsense, for a lot of different reasons. Now, the White House is not happy to hear that. But the fact of the matter is, it’s very hard to move supply chains. 

That said, wages are increasing rapidly, costs are increasing rapidly in China. And thus there are a few cases of reshoring, but those are few and they’re partial, i.e. just a few components or final assembly or whatever. The United States has a labor shortage, and it’s a pipe dream to think that we can reshore labor intensive manufacturing to this country. 

We’ve seen some sectors, for example, financial services, where some of the big U.S. firms are getting more access into China, despite all the tensions in the last few years. Why do you think that is? 

The main reason for the increased access for financial services firms is that the Chinese government realizes that they’re poor at the allocation of capital, and judging risks within their own financial services system, mostly because it’s state run, right? Because they’re poor at allocating financial capital, particularly for the longer duration, they recognize that they need to allow in foreign companies. They also recognize, and it’s quite wise, that they can’t do so on a JV [joint venture] basis, they did that in 2000. Now it has to be on a wholly owned basis. And so this should lead to an improvement in capital allocation, it should lead to more capital allocated to the private sector in China, rather than the state owned sector. 

More broadly: A German company might say, ‘We’re able to hire Chinese engineers, and you’re not, and that’s our competitive advantage’. Well, that’s not really true. Positions at American companies are very highly sought after in China. And many of our companies have been there 30, 40, 50 years. So they’re run by Chinese people, effectively, they are part of that environment, and doing very well within that ecosystem. And that’s a good thing, it’s good for everyone. And we should recognize the benefits of that, and the hard work that has gone into that over decades. It has brought a little bit of ballast and a little bit more stability to what is otherwise a very unstable relationship at the current time.

When you survey your members, what’s top of their list of concerns and complaints about the operating environment in China now? And how has that shifted in the last few years? 

By far and away, the biggest concern is the bilateral government-to-government relationship, and how that has created an environment where it’s very difficult to do business. And there have also been just a crazy parade of sanctions and prosecutions and lists like the Entity List. And one needs to be completely compliant with the law. But that’s not easy to do. So that is a concern. 

A concern rapidly rising to the top is being in compliance with Chinese data law, which is certainly the most strict in the world — untested, really, and sometimes vague and or contradictory. Sometimes it’s very difficult to know that you’re in full compliance of your data law. People need to be compliant with the law in both countries. And that is not a simple thing. 

On data, is there a concern that effectively we’re moving to two worlds for data privacy and the tech environment, and that that’s just going to drive up costs for businesses? 

I would say three worlds. We’re moving to a European data regime, an American data regime and a Chinese data regime, all with different requirements. And there are some similarities between the European and the Chinese data regime. But there are big differences as well. I would think that the data regulators in China are much more complicated to work with; the Cyber Administration of China has become a 1,000-pound gorilla here. And it’s not easy to comply with all their legitimate requirements. 

Also, the Chinese are trying to be at the cutting edge of data regulation, cross border data flows, privacy concerns, and there’s an interesting interplay between different Chinese bureaucracies on who’s in control, and who gets to moderate. And that type of thing is stressful for all companies, including Chinese companies, who of course, also need to be compliant. And it’s not obvious that being compliant is actually in line with international best practice, or the way to best protect your data. 

What do you make of China’s increasing tendency towards economic self-reliance? Are we kidding ourselves if we think that foreign businesses have a long term role in China’s plans in anything more than a ‘We’ll have you if you’re useful, but that’s it’ kind of way.

I ask this question of the Chinese a lot, and it’s a very good question to ask. In my view, [policies such as] dual circulation and self-reliance are WTO incompatible. And indeed, it violates the ethos and the fundamental principles of the WTO. We can simplify that a little bit by saying that an imported product should be treated the same as a domestically produced product. And do we see that in China? No. 

In my view, [policies such as] dual circulation and self-reliance are WTO incompatible. And indeed, it violates the ethos and the fundamental principles of the WTO. 

Now, the Chinese that I talk to recognize our concerns, and are actually working in some cases to try to clean up their own regulatory system. I would say the Ministry of Finance, for example, is concerned about provincial protectionism and things like that. The Ministry of Commerce is kind of the keeper of the WTO disciplines, if you will, and I would say that their record is mixed. But oftentimes one can get support. 

Look at the IPR [intellectual property] system. IPR used to be our number one priority for years and years, and now it’s down to around seven. And that reflects a quite big improvement in the court system and the protection of IPR in China. 

My job is to demand a level playing field. And I enjoy doing that. And many Chinese agree, at least in the abstract, that that is an important principle, and that they fail to meet it. And it’s my job to remind them of that and to demand for my companies, and indeed, all foreign companies, and I would say Chinese private companies, a level playing field, to enhance fair and free competition under the protections offered to us by the WTO.

Critics would say President Biden’s administration hasn’t yet come up with a coherent strategy towards China, and that there’s a lot of continuity with the Trump administration. Do you think that’s a fair comment? And what do you want to see from the Biden administration in terms of its economic and business approach to China?

I would say that the Biden trade policy is still being made. Overall, in U.S. trade policy globally, there has not been a dramatic shift at all. The Biden administration has accomplished shifting the 232 steel tariffs to tariff rate quotas for a few select partners and allies. But that’s not really helpful if you’re a steel user. And it’s not objectionable if you’re an American steel producer. I would say that the Boeing-Airbus [deal between the U.S. and EU over tariffs and subsidies] is also an accomplishment. But that’s a temporary agreement. We’ve set up a trading Technology Council with the EU, but that’s really a process thing, and I’m not sure that I’ve seen anything real out of that. 

On the Asia side, we’re going to host APEC, that’s great. And the administration has announced its Indo Pacific strategy but has not filled in the details. So I would say that this is very much a work in progress. I would also say from the baseline of the Trump administration, that we are much better off. Under the Trump administration, we had completely ad hoc imposition of tariffs and in a manner that nobody could understand. 

But the fact is that even after a year in office, they have not articulated what they wish to do vis-à-vis China. They have articulated that the Chinese have not met all their commitments under the Phase One agreement. The Chinese agree with that, they know that — but now what? [U.S. Trade Representative] Katherine Tai has said that they would be looking at new tools — but what does that mean? They said that there would be further articulation of the Indo Pacific strategy early in the new year. Well, we’re near the end of the first quarter, and I have no idea. 

So while we need to give them time, the Biden trade policy looks a lot like the Trump trade policy, minus the ad hoc and unpredictable use of tariffs. And that’s a surprise. Candidate Biden spoke very eloquently about how negative and unproductive the tariffs were. And in the meantime, the tariffs have done what we said that they would do, inflation is now higher than it was a year ago, in part as a result of the tariffs. And so there’s a lot of reasons to draw them down. But I wouldn’t expect that to happen, I don’t think it’s politically palatable. And so we aren’t waiting with baited breath to hear what the Biden administration might do.

As an ex-diplomat, would you say there are better ways for the U.S. to push for the things that it wants to see in China, such as a more level playing field for businesses? 

In my view, you need both carrots and sticks, and a diplomat lacking either one is not going to be very successful. So there’s another fallacy here. And the fallacy is that it’s binary, we either win or we lose. And that’s just bullshit. It’s not adult. 

What is in fact true, is that we had been making a lot of incremental progress. And that we had been winning cases in the WTO. And the Chinese market had become more open. And the Europeans, the Japanese, and everyone else is taking advantage of that relative market opening. Look at RCEP, look at CPTPP. Look at the percentage share of foreign companies in industries in China, and you come out with really interesting data.

There are a million Americans who make a living out of exporting to China. It could be many more, it could be 2 million if we took less of a binary approach. ‘Win-lose’ is a terrible way to do this. Rather, we need to go in there and enforce our WTO rights. We need to work with the Europeans and the Japanese on the difficult technology and subsidy issues. We should be aware that we are losing market share throughout all of Asia because of the U.S.-China trade conflict. And so, in my view anyway, looking at this as binary leads you to the wrong conclusions; rather, look at incremental progress, and where you want to be in five or 10 years. If you look at it as ‘I’m not getting everything I deserve, and therefore, I don’t want to trade’, well, you’re doing American citizens, American workers, American farmers and American ranchers a grave disservice. 

Have you been taken aback by how quickly it’s become so difficult to argue for engagement with China, even at the business level?

I agree that it has changed dramatically. But when you look at U.S.-China relations over 40 years, or even 250 years, that you see similar patterns, and that China has changed. And that has precipitated changes in the response. Both parties, both houses of Congress, generally support a more robust attitude towards China. And we accept the challenge that it is becoming more difficult to do business. 

What I really regret, though, is that there are thousands of American companies who are not even attempting to go to China, because of the overblown rhetoric and the extreme nationalism in both countries, and the lack of clarity and predictability here. At the end of the day, capital is a coward, and it won’t go anywhere that it doesn’t feel welcome. And it’s hard for a Chinese company to feel welcome in the United States, for an American company to feel welcome in China right now. But I don’t think that’s cause to give up. Rather, we need to build more bridges, and establish more relationships to try to get over this rough patch. The United States and China are going to have to deal with each other for the next 100 years. How are we going to do that?

You’ve been in the center of this engagement for a number of years, and we’re talking 50 years after Nixon went to China. Are we set for a long winter in relations now? Or are there reasons to be more optimistic?

Given the invasion of Ukraine, it’s much more difficult to be cheerful, that’s for sure. I do know that a million American jobs depend on exports to China, I do know that this relationship is important. And I believe that both countries are capable of cooperation and that collaboration on climate change, on pandemic control, and on many other subjects is absolutely essential. 

By the way, business is delivering the technical changes, the scientific advancements that are needed for climate change and pandemic control. And collaboration between American and Chinese scientists, American and Chinese companies, is absolutely essential for the well being of not only the U.S. and China, but of the world. When you look at the percentage of scientific papers that are co authored by Americans and Chinese, it’s astonishing the degree of collaboration that we have between the two countries. When I talk to our CEOs, I’m surprised how often they are importing technology from China. So it’s a two-way street here. And closing off this two-way street just makes no sense at all if we are to live together in this one world.

---