China risks becoming isolated in the world after the invasion of Ukraine

Since the invasion of Ukraine by Russia, the author has exchanged views with China experts and others in the United States, Europe and Japan about China’s inclination toward Russia each day.

The following is a summary of the important points in the views exchanged and the opinions the author offers mainly from an economic perspective based thereon.

1. Provocation by the U.S. as it supports Taiwan in becoming independent

On March 3, Mr. Mike Pompeo, who served as Secretary of State during the Donald Trump administration, visited Taiwan to meet with President Tsai Ing-wen.

On the following day, Mr. Pompeo gave a lecture at a hotel in Taipei, insisting that the U.S. government, which has acknowledged China’s position that Taiwan was a part of the People’s Republic of China, should change such a stance and officially approve Taiwan as a sovereign country.

The U.S. government has consistently held its position it defined in the Shanghai Communiqué of 1972, in which it declared that it acknowledged the Chinese position that “Taiwan is a part of China” and that “the United States government does not challenge that position.”

This is a major premise that realized a restoration of diplomatic relations between the U.S. and China in 1979, and the past U.S. administrations from Richard Nixon to Barak Obama have all respected this bilateral agreement.

Mr. Pompeo’s recent remark came as a clear denial of the major premise, indicating that the U.S. would drastically change its previous position.

The Chinese government immediately criticized his remark in a sharp tone.

In the U.S., however, anti-China sentiments are widespread and shared among over 70% of Americans, making it easy to garner popular support for a hard line toward China.

At the moment, China’s move to support Russia is not confirmed as it joins Western countries in financial sanctions against Russia.

If China continues to criticize the U.S. harshly over its stance on the invasion of Ukraine by Russia and starts to provide military or economic support to Russia, Americans are likely to oppose China even more deeply, prompting the U.S. government to impose sanctions on China.

If so, many of the congressional Republicans are expected to align themselves with Mr. Pompeo’s argument.

If China’s attack on the U.S. continues, Republican candidates are highly likely to cite this argument repeatedly and obtain broad-based backing in the campaigns for this autumn’s mid-term elections.

If this proves to be the case, Democratic candidates will find it difficult to deny.

2. China’s risk of becoming isolated

If it continues to consider its relationship with Russia as important and criticize the U.S., China is more likely to become isolated in the world together with Russia.

Despite the absence of conspicuous leadership displayed by particular persons or states, all EU countries, large and small, became united in their denunciation of Russia’s recent advance upon Ukraine.

The unity between the U.S. and Europe has also been reinforced.

Although there had been various frictions within the EU and between the U.S. and Europe until last year (2021), a sense of crisis toward the military conflicts launched by President Vladimir Putin in Europe has brought about the strongest postwar unity among Western countries.

If China continues to take a stance inclined toward Russia, Western countries, strongly united, would grow increasingly hostile to China, driving it to isolation together with Russia.

3. Pessimistic scenario of the U.S. heading for armed conflict with China

A look at the future political situation in the U.S. suggests a pessimistic scenario as described below.

It is reported that in the mid-term elections this autumn, the Democratic Party will be outplayed in the House of Representatives.

If the ruling Democratic Party fails to secure a majority of seats in the House of Representatives or the Senate or in both, President Joe Biden and his team will face even greater difficulties in policy administration, which will make it more difficult to bring satisfactory results when they implement their policy, and this will cause the approval rate to further decline.

If, as a result, the Republican Party wins the presidential election in 2024 with Mr. Donald Trump, Mike Pompeo or another person hawkish against China elected as the next president, the U.S. government might support Taiwan in becoming independent, prompting Taiwan to take action toward independence.

It is estimated that there are two conditions under which China would move to unify Taiwan using military force.

One is military intervention by the U.S. and its allies in Taiwan, and the other is Taiwan’s own move toward independence.

If Taiwan moves toward independence, China will be more likely to decide to move toward military unification.

If the U.S. initiates military intervention to defend Taiwan, there would be an armed conflict between the U.S. and China.

Major U.S. military bases around Taiwan are located in Okinawa and mainland Japan, and if China aimed at them, Japan would be a battlefield.

This is the pessimistic scenario mentioned above.

If this scenario is expected, Japan has no extra time to discuss economic security now, and it is necessary to start immediately to review Japan’s defensive strength drastically, including cyberattack capabilities, defense capabilities in outer space, and substantial intelligence capacity buildup.

This is a move aligned with those which have become prominent in Europe since Russia invaded Ukraine, and examples include the sudden, substantial increase in Germany’s and other European countries’ defense budgets, arms exports to Ukraine, and the moves of Finland and Sweden to join the North Atlantic Treaty Organization (NATO).

4. Effects on Japanese enterprises’ China business

Recognition of the necessity of thinking about the pessimistic scenario described above reminds us of the issue of whether Japanese enterprises should consider shrinking their China business or withdrawing from the Chinese market immediately.

The answer is no. Japanese businesses do not need to withdraw from the Chinese market for the time being. It is necessary, however, to always keep in mind the need to prepare for an emergency.

Japanese businesses need to respond to an emergency on the assumption that not only their China business but also their economic activities in Japan may be exposed to the greatest risk ever experienced.

Currently, European and North American businesses are continuing to expand their investments in China actively even as they are concerned about the same risks as is their Japanese counterparts.

This is because they predict that under the present circumstances, China is unlikely to move toward an armed conflict with the U.S.

If businesses downscaled their China business despite the unlikeliness of armed clashes, they would drop out of the competition with rival businesses in the Chinese market, the principal battleground in the global market, and see their competitiveness decline.

As far as the author understands, most global corporations believe that it is not necessary to adopt that option for the time being.

Therefore, it is important for highly competitive Japanese businesses in the global market to retain their policy of continuing to invest actively in the Chinese market and survive in the competition with their European and North American counterparts.

On the other hand, it is also necessary to watch trends in European and North American businesses and the governments of their countries and respond swiftly if there are signs of them reducing their presence in China or withdrawing altogether from the Chinese market.

5. Adverse effects of reputation risk aversion

Even in China, a scholar of a public research institute published the opinion that China should sever its relationship with Russia and cooperate with the Western camp of the U.S., Europe and Japan and that that would serve the national interests of the country.

This opinion is attracting considerable attention even among Western China experts.

It can be gathered from this fact that in China as well, serious discussions are continuing about actions China should take regarding the invasion of Ukraine.

It is favorable that such discussions are under way.

What the author is concerned about, however, is the outcome of such discussions and the timing of the Chinese government showing its policy shift based thereon.

Whatever the result of the invasion of Ukraine by the Russian armed forces may be, Western countries will certainly be united in continuing sanctions against Russia.

A look at the current moves of Western countries indicates that the withdrawal from the Russian market of Japanese, North American, and European businesses wishing to avert a reputation risk is swifter, more widespread, and more thoroughgoing than the economic sanctions imposed by the governments of their countries.

If China continues to take the stance of supporting Russia and criticizing the U.S. as it does now, private enterprises are likely to start thinking that they will assume a reputation risk if they continue to expand their China business.

It is clear of course that in terms of scale and profitability, the Chinese market is overwhelmingly more important than the Russian one if the two are compared.

For this reason, it is extremely difficult for businesses that have decided to discontinue their Russia business or withdraw from the Russian market to make the same decision for the Chinese market.

In the worst case, they must be prepared even for bankruptcy or a crash in their share price.

If China nonetheless continues its pro-Russian and anti-American stance, global corporations in Western countries are highly likely to have a keener awareness of a reputation risk and review their China business, including a downward revision of investment plans, even if they do not go as far as withdrawal or discontinuation of business.

If such a move spreads among major foreign-affiliated businesses, it would have adverse effects on the willingness of Chinese businesses to invest.

As the National Congress of the Communist Party is scheduled for this fall, preventing superior foreign-affiliated businesses from becoming negative toward investments in China is an important challenge to be addressed by the Xi Jinping administration as it considers it as important to maintain economic stability.

Even if there are serious discussions in China, failure to calm down the causes of such a risk would result in making it real.

Once that trend develops among global corporations, it would be no easy task to change it. It would inevitably damage the Chinese economy.

6. Importance of the Xi administration understanding the circumstances in the U.S.

As described above, China is racking its brains over how it should strike a balance between Russia and Western countries, and this view seems to be very widely shared within Japan.

But the U.S., which is continuing to undergo harsh criticism from the Chinese government now, sees that China is sticking to its stance of supporting Russia, and it seems that only a limited number of China experts understand that China is agonizing over how to strike a balance between Russia and the West.

This prevailing view in the U.S. is quite different from that of American businesses that operate actively in China.

The impression the author gets when exchanging opinions with his friends in Europe and North America is that the majority of experts and specialists who work for universities, think tanks, government-related organizations, and other institutions widely believe that the Chinese government is trying to suppress even the free economic activities of domestic and overseas businesses in an effort to protect its authoritarianism.

This is a misunderstanding, but the fact is that Americans believe that such a misunderstanding is true owing to divided media reports and online information.

In fact, similar misunderstandings are shared by Americans in various areas that involve China. Even if they are sheer misunderstandings, America’s China policy is determined based thereon.

China needs to strive to ascertain the views of experts in government agencies, Congress, universities and think tanks, and other institutions as well as the media and the general public in the U.S. about China accurately.

If China takes an optimistic view of them, its action might be delayed and insufficient, risking bringing upon itself irrecoverable consequences, and China should bear this in mind.