American Companies Are Rethinking China

Democracy Examined

Many US companies are moving production to democratic nations, leaving Beijing furious

In February, Apple’s largest manufacturer Foxconn announced that it would open a new factory in India. Apple has manufactured its products almost exclusively in China since 2001, but over the last few years, it has poured nearly $16 billion into moving its factories elsewhere.

Apple’s move to diversify its production from China is part of a broader trend of “friend-shoring,” where American businesses move toward friendlier, more stable environments.

The trend to friend-shore away from China began as early as 2014, when the CCP failed to deliver on promises to liberalize its economy and instead began targeting foreign owned businesses. Over the last decade, a trade war, the destruction of democratic freedoms in Hong Kong, the growing risk of a war with Taiwan, and rampant corporate espionage have all tarnished China’s reputation as a reliable partner.

Many American companies were already losing confidence in China, then the pandemic confirmed their worst suspicions. At the beginning of the COVID-19 outbreak, China’s zero-tolerance policies shut down manufacturers with little warning. As other countries returned to normalcy, China remained locked down. All the while, the CCP’s extremely restrictive travel policies barred foreign business leaders from entering the country almost entirely. Over time, manufacturing in China started to seem less like a straight-forward, cost-saving move and more like a risky gamble. The implications of this shift on global trade, diplomacy, and even a broader conflict between the US and China could prove massive.

Where Americans Are Investing

The worsening diplomatic situation between the US and China is turning into a boon for democratic countries with friendlier ties to America like Mexico, India, and Japan.

In Mexico, industries as varied as automobiles, mining, and nanotechnology are benefiting from American investment in new manufacturing plants. During the first half of 2023, Mexico received nearly $30 billion in foreign investment, $13.6 billion of which came from US companies. In that same year, Mexico overtook China in becoming the largest exporter of goods to the US. According to Susan Golicic, a supply chain professor at Colorado State University, “Many companies are looking at Mexico for production in lieu of Asian countries to be closer for any major supply chain disruptions that often occur in Asia.”

Meanwhile in India, stable relations with the US paired with a booming population are enticing American companies. A recent survey showed that 61 percent of 500 US executives would choose India over China for their manufacturing needs if India had the same services as China. According to the former president of the Confederation of Indian Industry, “China’s internal policies are really deterring foreign investors and making them seek other locations.”

Recent developments in Japan are equally revealing. American businesses are investing in technical components for critical supply chains, nascent artificial intelligence industries, and advanced semiconductors. Just last week Microsoft announced that it would invest $2.9 billion in Japan over two years to help develop the nation’s research, artificial intelligence, and cybersecurity capabilities.

The developments in Mexico, India, and Japan help paint a clear picture: While American companies are not abandoning China entirely, they are certainly exploring other countries that offer similar benefits with substantially fewer political concerns.

China’s Response

For the first time in 40 years, more money is leaving China than is being invested by stakeholders from America, Europe, Japan, and Korea. The CCP is working overtime to win American investors back. Last November, Chinese leader Xi Jinping visited San Francisco in search of reassurances from the Biden administration that the US does not want to cut off economic ties with China. Xi then spent a significant portion of his visit dining with American business leaders to let them know that China is a partner worth keeping.

In diplomacy, China has curtailed its aggressive, “wolf warrior” approach—where Chinese diplomats would heckle foreigners on social media, openly bash Western society, and take offense at even the most insignificant slight. An ascendant China was willing to rile foreigners if it meant appearing tough to a domestic audience. Now, China doesn’t have that luxury.

Even within China, the government in Beijing is showing signs of trying to brighten the image of American investment after spending years kindling anti-American nationalism. During US Treasury Secretary Janet Yellen’s recent trip to China, clips of Yellen eating amassed millions of views across Chinese social media platforms like Weibo. Her proper use of chopsticks was heralded on state-run media channels as a symbol of her apparent pro-Chinese disposition.

Yet despite China’s best efforts to preserve its reputation as a trustworthy partner, the future of its economic and diplomatic relationship with the US remains hazy. With many American companies already shifting investment to more predictable business environments, China is struggling to stave off a bad outcome.

The Bigger Picture

American companies’ interest in moving production away from China is unsurprising, but a major shift away from China could come with its own risks. Over the last few decades, extensive business ties have helped maintain relations between the US and China. If the economic picture starts to change, it could risk aggravating an already tense diplomatic situation.

Chinese officials have been dropping warnings to the US for months on what loosening economic ties would mean for their relationship. In February at the Munich Security Conference the Chinese Foreign Minister Wang Yi said, “Whoever tries de-sinicization in the name of de-risking would be making a historical mistake.” Not long after, Yi once again echoed this sentiment to US Secretary of State Antony Blinken, saying that “making ‘de-risking’ into ‘de-China’, and seeking ‘decoupling from China'” will only backfire on the U.S. itself.”

Yet as China negotiates with American public officials, it will be primarily American companies that determine just how far friend-shoring progresses. China may not like the outcome.

“Foreign direct investment in China fell to its lowest levels in three decades last year, and the government took a series of measures that left foreign businesses feeling that the country is an increasingly hostile place to operate,” writes economic policy reporter Alan Rappeport. “On top of that, concerns about China’s economy have left many companies less willing to tolerate the trade-offs of running a business in the country.”