Trade war dims outlook for U.S. business operations in China: survey

WASHINGTON (Reuters) - U.S. companies doing business in China are still making profits there, but 81% say escalating trade tensions between the world’s two largest economies have affected their business operations, a survey released Thursday by the US-China Business Council found.

FILE PHOTO: Chinese and U.S. flags flutter near The Bund, before U.S. trade delegation meet their Chinese counterparts for talks in Shanghai, China July 30, 2019. REUTERS/Aly Song

That marks an eight percentage-point increase from 2018, said the group, which represents more than 220 U.S. companies ranging from Boeing Co BA.N to Archer Daniels Midland ADM.N and Hewlett Packard HPE.N.

USCBC President Craig Allen, a former senior U.S. government official and expert on China, urged the United States and China to return to the negotiating table to end damaging tit-for-tat tariffs and avert lasting damage to bilateral ties.The next round of U.S. and Chinese tariffs will take effect on Sunday in a trade war that has roiled global markets and raised the specter of a global recession.

Nearly half the U.S. firms surveyed reported having lost sales and market share, mainly as a result of tariffs imposed by both the United States and China. Many also cited concerns about their ability to compete in China, given advantages that Beijing offers to its domestic firms, and other licensing, investment and administrative barriers facing foreign firms.

U.S. companies say they are also losing sales because their Chinese customers increasingly view U.S. companies as unreliable business partners given the volatility of the bilateral commercial relationship, the survey showed.

Nearly 40% of those surveyed said they lost sales because of Chinese partners’ concerns about doing business with U.S. companies, a seven-fold increase over 2018.

“Over the short term, the trade war is indeed hurting American companies,” Allen said. “Losing market share is easy and gaining it back is very, very difficult. These costs are real and potentially they are long-term.”

He said it was in China’s economic interest to accelerate the pace of reforms aimed at opening its market to foreign companies.

The survey showed that China remained among the top five global markets for U.S. companies because of its comparative size, and 97% of member companies reported increased profitability in China in 2019 despite the trade dispute.

A slight majority of the companies expect an increase in revenue in 2020, a drop of 26% from the previous year, reflecting uncertainty over tariffs, the trade conflict and a deteriorating market environment, the group said.

Allen said U.S. companies mainly operated in China to serve the domestic market, not export to the United States, and there was no sign that they planned to leave, despite U.S. President Donald Trump’s demand that they find alternatives to China.

The survey, taken in June before Trump’s call for companies to quit China, showed a majority of U.S. companies remained committed to the China market and few were divesting existing operations.

However it showed that nearly 30% of the companies reported slowed, delayed or canceled investments in the United States or China because of uncertainty created by the heightened tensions, twice the number reported in 2018.

“While no mass exodus from China is expected, continued tensions in the U.S.-China relationship, an unlevel playing field, and simmering retaliatory actions by Chinese authorities against American companies are creating an increasingly uncertain commercial environment,” the group said.

Rising labor costs in China had already prompted some U.S. companies with operations in China to begin looking for suppliers elsewhere before the trade war broke out in 2018, but experts say reciprocal tariffs have accelerated those moves.

The council noted that 95% of member companies invest in China to access the domestic market, while less than a quarter invest there to export regionally or to the United States.

Reporting by Andrea Shalal; Editing by Steve Orlofsky and Andrea Ricci