Since January this year, global companies have been forced to navigate tariff increases, regulatory investigations, export controls, and import bans as the People’s Republic of China and the U.S. have engaged in a trade war that has drawn in many other countries and regions. 

Yet in the face of rapidly changing rules and fluctuating diplomatic relations, many chief executives continue to hedge their bets between the world’s two economic superpowers, running the risk of financial penalties if they are caught out by either regulatory regime. 

This is likely to continue unless like-minded democratic governments are willing to develop clear and consistent guidance and consensual guardrails for their engagement with China, as was the case in the Cold War between the U.S. and the Soviet Union.

The summit last month between Xi Jinping, Vladimir Putin, and Kim Jong-Un was not merely a photo opportunity, but a statement of intent for a new autocratic world order — one which will not respect the rule of law or the democratic principles that have allowed companies to make record profits and prosper. 

Despite this show of autocratic force, few multinational companies have responded publicly by shifting their business interests away from China, other than the U.S.’s artificial intelligence company Anthropic which announced in the same week of the Xi, Putin, and Kim meeting that it would restrict Chinese majority-owned companies, alongside those from Russia and North Korea from accessing its AI models.

Whether it is semiconductor chip manufacturers, automakers, banks or private equity firms, companies focused only on their fiduciary duty to get the highest return for their shareholders are failing to deconflict their interests in China.

This matters as the return of Donald Trump to the U.S. presidency has sparked a renewed trade war between the U.S. and China which has accelerated decoupling on both sides. Take the recent decision by the PRC to restrict the export of rare earth elements. This has sped up efforts by the U.S. to reshore not only its critical minerals supply chain but also semiconductor chips and pharmaceuticals through a mixture of tariffs, tax incentives, and buying stakes in domestic companies such as Intel.

Decoupling is not limited to goods. The news last month that the Nasdaq stock exchange is introducing new requirements that companies based in China will need to raise at least $25 million before they can be considered for an IPO in the U.S., is the latest salvo in the gradual financial decoupling between the two global powers. Yet the response so far from some financial institutions has been to quietly cut internal geopolitical risk units and limit public commentary on the trade war in the hopes that this great power rivalry will disappear.

For those indulging in wishful thinking there is little news on the horizon to bring optimism, as both powers have etched 2027 in as a date by which a further decoupling of supply chains will take place. China has directed financial institutions, telecommunications companies, state-owned enterprises, and companies with links to the People’s Liberation Army to swap out Western technology for domestic providers by 2027. Meanwhile the U.S. has directed its defence contractors to drop all Chinese companies and Chinese-made components from their supply chains by 2027.

During the Cold War the U.S. had clearer guidelines for businesses on permissible investments and exports. The Trading With the Enemies Act (1917) was used to erect the U.S. trade embargo which continues to restrict the ability for businesses to trade with Cuba; the Jackson-Vanick Amendment (1974) restricted U.S. trade to non-market economies by denying them Most Favoured Nation status; and the Coordinating Committee for Multilateral Export Controls (1949-1994) coordinated export controls and limited technology transfer to communist countries across 19 democratic countries.

The collapse of the Soviet Union and with it “the End of History” has led many business executives and policymakers to forget the lessons of the past, and the benefits of establishing such guardrails to protect the democratic world and offer companies clear redlines in an era of geopolitical competition.

Such collective amnesia is not helped by the growing power and influence of asset management and private equity firms, which in some cases now manage more money than the GDP of most nations states.

The only certainty that can be given in a time of a great geopolitical contest between autocratic and democratic states are the kind of guardrails that were previously erected the last time two global powers fought for control of the world order.

This power and influence will only increase as G7 countries seek to increase defence spending and invest heavily in infrastructure projects to derisk their supply chains from China. Every G7 country, bar Germany, has public debt levels that either surpass or are close to one hundred percent of GDP, which means G7 governments will be heavily reliant on private finance and private equity to finance derisking projects.

A further question is the unity and resilience of the democratic governments and their willingness to work collectively together to respond to China’s global challenge. Trump’s tariff policy and tensions between the U.S. and Europe regarding negotiating the end of Russia’s war in Ukraine are putting a strain on traditional alliances. However, the summit of dictators last month should offer a sober reminder to democracies that the alternative model being presented to the world will be far worse, including for the business community.

The democratic world should not be written off. G7 countries and their closest democratic partners continue to have levers to incentivize businesses to support guardrails. First, the developed democratic world continues to make up a significant portion of global demand for goods and products with the U.S., UK, Australia, Canada, and Japan representing around 40 percent of global demand. Second, the developed democratic world continues to account for the majority of the global financial market’s capitalization, with stock exchanges in the USA, Europe, Japan, Australia, and Canada accounting for just over 70 percent of global equities. 

Despite the current tensions between the U.S. and traditional partners in the G7, there is a growing alignment between the U.S., Canada, and the European Union when it comes to imposing tariffs on Chinese steel and Chinese electric vehicles. G7 countries continue to deepen shared initiatives to de-risk their critical minerals supply chains away from China, and the recent UK-USA technology partnership commits both countries to utilise their respective resources and talent to jointly develop emerging technologies. 

Taken together and turned into a formal mechanism which includes coordinated tariffs, joint investments to de-risk supply chains, and jointly developing emerging technologies together and limiting technology transfer, the G7 at its next leaders summit could agree to turn these bilateral measures into a long-term strategy which would offer guardrails to the business community and confront China’s unfair trade practices.

In the last few years, foreign businesses have faced crackdowns in China, restrictions, and seen some of their executives arrested as Xi Jinping has expanded national security to every facet of the economy. While Vladimir Putin has seized the assets of foreign businesses in Russia and used them to fund his war machine in Ukraine.

Businesses talk of the need for certainty. The only certainty that can be given in a time of a great geopolitical contest between autocratic and democratic states are the kind of guardrails that were previously erected the last time two global powers fought for control of the world order.

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