Your firm designs, manufactures, and markets children’s toys for sale in the U.S. Almost 90% of your production is done in China. During the 1990s, U.S. relations with China improved. Even though there were many disagreements between the two countries, the United States granted normal trade status to China and supported China’s membership in the WTO in 2001. Your firm invested heavily in China during that time. You have developed close ties to Chinese suppliers and have come to depend greatly on inexpensive Chinese labor and the lower costs of doing business there.
You are now concerned about increasing political tension between China and the United States over a variety of issues: China’s s treatment of the Tibetan people, reports about the use of prison labor to manufacture goods for export, China’s population policies, and differences over relations with communist North Korea. The United States has also accused China of corporate and industrial espionage in the United States to obtain scientific, industrial, and trade secrets, and of hacking into corporate and government computer networks. There are also disagreements over China’s censorship of Internet search providers, and over the protection of U.S. intellectual property rights in China. The United States is also concerned with China’s tax policies, which are said to discriminate against imported goods, and also with China’s state subsidies to domestic industry. The U.S. accuses China of currency manipulations of the yuan, making Chinese goods unfairly cheap in foreign markets and imports into China artificially expensive. Most worrisome is the potential for conflict over Taiwan, with which the United States has had a mutual defense pact for 60 years. China claims Taiwan under its “One China” reunification policy, while accusing the United States of fostering “independence” there. Despite the issues, both countries recognize their deep economic reliance on each other. With that background, consider the following:
Describe the impact that a trade dispute between the U.S. and China would have on your firm.
Describe the impact on your firm if China were to lose its MFN trading status.
What strategic actions might you consider to reduce your firm’s exposure to political risk?