Unstoppable Force Meets Immovable Object: U.S. Multinational Firms in China and the Decoupling Debate

This analysis draws from Jack Zhang’s recent coauthored article, ‘In the Middle: American Multinationals in China and Trade War Politics,’ in the peer-reviewed journal Business & Politics, accessible here. Zhang is an Assistant Professor of Political Science at the University of Kansas and Director of the KU Trade War Lab. His personal website can be found here.

Since 2018, the U.S. and China have waged the largest trade war in era of global supply chains. Average U.S. tariff levels on Chinese goods increased over six-fold after 2018 and cover two thirds of imports. Most of these new tariffs remain in place even after the signing of the Phase One deal in 2020 and despite mounting evidence of their harm to the U.S. economy and failure to achieve the original policy objectives outlined by the Trump administration. The Biden administration has not only kept all of the Trump-era tariffs but also widened the scope of the trade war by using export controls to block Chinese access to advanced semiconductors, prompting China to file a WTO complaint against the U.S.

U.S. multinational corporations (MNCs) have been caught in the middle of this conflict between the world’s two largest economies. For decades, China has consistently ranked as one of the most favored investment destinations for U.S. MNCs. It remains a crucial hub for many supply chains and has also grown into a critical consumer market. Despite intensifying political hostility between Beijing and Washington and the mounting economic cost of tariffs, American businesses have had a hard time letting go of China.

Studying how the trade war affect MNCs in China is a bit like trying to figure out what happens when an unstoppable force meets an immovable object. The fact that policymakers in Washington and Beijing are increasingly embracing the idea of economic decoupling poses unprecedented political risks for MNCs. At the same time, China has continued to attract record volumes of foreign investment and make up a greater share of the global sales of foreign businesses than before the trade war.  

So how are U.S. MNCs and the global supply chains that link them to China adjusting to the heightened political risks in this era of decoupling? American MNCs with subsidiaries in China are the most vulnerable to the effects of the trade war. Recent scholarship has examined whether and when U.S. MNCs seek tariff exclusions, take a public stance against tariffs, circumvent tariffs, pass-through costs, or divest from China but a systematic accounting of how MNCs choose among these various courses of action was missing.

How are American MNCs responding to the trade war?

In my recent article co-authored with Samantha Vortherms (UCI) and Rigao Liu (KU), we examine how American MNCs have responded to the trade war both economically and politically. We draw a sample of 500 subsidiaries of US MNCs in China from the Foreign-Invested Enterprises in China (FIEC) dataset and match these to the political behavior of their parent companies in the United States. We include variables for both U.S. and Chinese tariffs because tariffs from either side could be affecting business costs for U.S. MNCs operating in China. We estimate that 63 percent of MNCs in our sample were exposed to tariffs, which were concentrated in manufacturing. Just under half explicitly mention ‘import and export’ in their business description, and are therefore the most likely to be affected by tariffs. We identify three broad sets of strategies available to American MNCs: Exit, Voice, and Loyalty.  

First, there’s Exit. MNCs in China are required to report annually to the Ministry of Commerce. An MNC is defined as exiting if they report in one year but do not report in the subsequent year. Between 2018 and 2019, more than 11 percent of U.S. firms exited China. U.S. firms were about as likely to exit as MNCs from other countries, but the overall rate of MNC exit during the trade war was elevated compared to around 7 percent exit observed in 2016-2017. In our sample of U.S. MNCs, we identified around thirty-four firms (6.8 percent) that exited. The rate is somewhat lower than the overall exit rate for U.S. firms because our sample includes more large firms, which are less likely to exit. Also, because we are working with a sample, we were able to evaluate every identified exit to ensure it measured subsidiary closure rather than restructuring, name changes, or delinquent reporting. 

Second, there’s exercising Voice. In our main analysis, we define voice as engaging in any political advocacy in Washington, D.C. including USTR lobbying, USTR testifying, submitting public comments, and requesting tariff exclusions. We define a company as exercising voice if the MNC belongs to the US–China Business Council (USCBC) and this peak association engaged in voice activities on behalf of their members. We found that 115 MNCs (23 percent) engaged in voice. The USCBC participated in the testimony, submitted public comment, and lobbied the USTR. Forty-seven MNCs in our sample were identified as USCBC members. Another sixty-eight MNCs individually engaged in some form of voice. Some voice activities are financially costlier than others. Comments and testifying are nearly costless: anyone can submit an online comment on behalf of a firm and be invited to testify by the USTR. Eighty-nine MNCs participated in public comments or testimonies in our sample. Tariff exclusion requests are somewhat costlier; there is no filing fee but many MNCs retained the services of specialist law firms to submit the requisite documentation. Fifty-six MNCs submitted tariff exclusion requests. Individual lobbying is costlier still because a firm would need to retain a registered lobbyist. Eighteen MNCs lobbied the USTR independently. Lobbying through the USCBC is the costliest option financially because this option is only available to prominent businesses and annual membership fees are $30,000. Twelve MNCs lobbied passively through USCBC and thirty-five lobbied both through USCBC and individually. These are fixed costs of entry and tend to be available for larger MNCs but not to smaller ones, once you pay for a lobbyist or join the USCBC, the marginal cost of lobbying on tariffs become negligible.

Third there’s Loyalty. A firm expresses loyalty when they neither exit China nor participate in any voice activities. Loyalty is overwhelmingly the modal response for MNCs, it was adopted by 351 MNCs (70 percent) in our sample. Loyalty is the baseline category for the quantitative analysis but we further unpack the concept in our case studies where we investigate actions available to firms beyond political activism and exiting China. This too is a heterogeneous category consisting of many ways to reduce the bite of tariffs. Large MNCs with extensive global networks may prefer loyalty because of the availability of apolitical tariff avoidance schemes such as foreign trade zones, country of origin adjustments, or value reduction through using the first-sale rule. Small MNCs may not have the resources or capacity to engage in voice and default to paying the cost of tariffs or passing them along the supply chain to customers.  

The figure below shows a Sankey diagram for the number of firms in our sample categorized by size and tariff exposure. The modal response among the MNCs observed is loyalty; this holds true for firms in tariff-impacted industries as well as those in non-tariff impacted industries. Exit is rare and voice is more common among large firms. Large MNCs, defined as those in the top 10 percent by registered capital make up approximately 77 percent of all firms that voice.

Our multivariate analysis confirms some of the patterns observable in this descriptive view of the data. We find that exporters exposed to U.S. tariffs are more likely to voice but are no more likely to exit. Firms with older subsidiaries in China are more likely to voice and less likely to exit. Larger firms are more likely to voice but no more likely to exit. We supplement the quantitative analysis with process-tracing case studies of four U.S. MNCs.

A Closer Look at Four US MNCs

Since voice and loyalty are heterogenous categories of response, we conduct deep dives into the economic and political behaviors of four U.S. MNCs: Deere & Company, Twin City Fans, Abbott Laboratories, and Sorrento Therapeutics. As Table 4 shows, two were in tariff-intensive manufacturing sectors and two were in pharmaceuticals where tariffs were least disruptive. Two are large Fortune 500 companies and two are smaller players in the same industry. We queried SEC filings, firm databases, and firm websites to determine selected firms’ share of employees in China, number of subsidiaries in China, and amount of capital in China.

The 2021 annual reports of all four firms specifically cite the U.S.-China Trade War as posing risks to their business operations and profitability. All four are coded in the quantitative analysis as voice rather than loyalty, but our analysis shows that our measure of loyalty is likely a conservative one and that actual political opposition to the trade war is lower than our measure of voice suggest. This is because none of the firms took a public stance against tariffs. Deere and Abbott lobbied privately and made oblique comments through peak associations such as AmCham China and the USCBC while Twin City, likely lacking the government relations resources of larger firms, submitted a tariff exclusion request (which was ultimately denied).  The case studies also revealed that larger MNCs like Deere and Abbott enjoyed access to tariff avoidance measures such as use of foreign-trade zones that are not available to smaller rivals and may explain why they did not file for tariff exclusion.

The case studies also reveal how U.S. MNCs were adjusting their businesses to the realities of the protracted trade war. Though none of the four MNCs were coded as exiting China, Deere did ultimately shutdown one of its three production sites at the end of 2020. This decision was likely motivated in part by China’s COVID-19 lockdowns but also in part by the fact that this facility was producing mostly for export to the U.S. market. However, Deere did not exit the China market and continued to enjoy strong sales at its other subsidiaries. Abbott similarly experienced healthy sales growth in China despite the headwinds of the trade war and neither opened new or closed existing subsidiaries. Despite getting its tariff exclusion request denied, Twin City continues to operate in China and is likely to have found alternative markets for the output of its Chinese subsidiary, which was mostly producing for the U.S.-based parent, as well as alternative suppliers for its US business. Finally, Sorrento was not impacted by tariffs and continued to expand in China, acquiring a new manufacturing facility in 2021.

Policy Implications

The findings of this study hint at why the U.S.-China Trade War deadlocked into an economic war of attrition – businesses and consumers continue to pay higher tariffs but without much of the anticipated policy adjustments to show for their sacrifice. Policymakers in both Beijing and Washington misjudged how MNCs would react to new tariffs. Although Beijing counted on strong corporate lobbying to put pressure on the Trump administration to back down, we instead observed a scramble for individual exclusions and relatively little political opposition to the trade war. Washington expected tariffs to push MNCs to voluntarily exit from China and, if not ‘reshore’ production back to the US, then at least ‘friendshore’ to countries that share US values. Instead, China’s attractiveness to MNCs has not diminished and exits remain rare. More importantly, tariffs do not appear to be a significant driver of the MNC exits (not even among the subsample of exporters that are most exposed).

It is possible that the long-term impact of the trade war looks different than the short-term impact documented by this study. Afterall, finding new suppliers and alternative sites for investment takes time and anecdotal evidence about waning foreign business confidence in China abound. However, this view risks misattributing the effects of more salient factors behind China’s diminishing attractiveness to foreign investors – such as the supply chain challenges caused by the COVID-19 pandemic and the drag on Chinese economic growth caused by the overextended real estate sector – to tariffs.

Due to the global nature of their operations and interests, MNCs neither view the world in nationalistic binaries nor behave in accordance to government wishes. They also hedge their bets. In fact, our study shows that larger foreign investors in China are also paradoxically more diversified and less reliant on China than their smaller peers. Caught in the middle of a historic trade war, most U.S. MNCs took a middle path of moderation rather than taking sides. Looking ahead, this pattern of corporate ambivalence is likely to continue to perplex efforts for the complete decoupling of the two economies.