American companies that do business in or with China may be on the verge of the ultimate “black swan” event, an international crisis that threatens assets, shipping and supply chains, as well as the safety of employees.
Reuters reports that China’s military, finding humiliation in the Hague’s recent ruling that its expansion into the South China Sea violates Filipino sovereignty, is pushing President Xi Jinping to give the United States and its allies “a bloody nose.”
The dispute over the South China Sea has become a risk that must now be addressed by boards and leaders of global enterprises, as well as by generals and admirals. Seventy percent of world trade passes through the South China Sea, about $5 trillion in goods a year in shipborne trade. “Restricting or managing shipping in the South China Sea would be a huge setback to a world still struggling to recover economically,” reports Xeneta, which benchmarks pricing for shipping and logistics.
The financial stakes of an economic, diplomatic or limited military conflict make it essential that any business operating in China or shipping through these sea lanes prepare now to protect their people, capital and investments in the case of conflict.
China and the United States are escalating toward an aggressive military posture. China has installed surface-to-air missiles in the Paracel island chain and is reported to have built hangers for fighter jets in the Spratlys. The United States dispatched a naval strike group into those disputed waters, led by the supercarrier John C. Stennis.
Dogged along the way by Chinese war ships, the Stennis rendezvoused in June with another supercarrier, the Ronald Reagan, in the Philippine Sea for joint exercises. While U.S. officials are quick to characterize these as routine drills, other observers see them as a deliberate show of US force.
It is tempting to downplay the potential for conflict by pointing to the intimacy between the two largest economies. By this line of reasoning, both sides will realize there is simply too much at stake to risk destroying decades of mutual growth over a few tiny atolls. The United States imported $482 billion of goods and services from China in 2015. China controlled $1.2 trillion of American debt last year.
This sanguine view, however, fails to recognize that human leaders are capable of catastrophic mistakes. The argument that economic interdependence rules out war between industrial nations was first and famously put forward in Norman Angell’s 1909 book The Great Illusion. Of course, Angell was proven wrong five years later when the First World War broke out.
It wouldn’t take a shooting war between the two powers to pose a severe challenge for those who do business in China. Both sides state diametrically opposed goals, and ostentatiously display determination to protect those goals with force. “Let us face squarely the paradox,” a chastened Angell wrote years later, “that the world which goes to war is a world, usually, genuinely desiring peace.” Despite a desire for peace from both sides, some confrontation at some level seems inevitable. Even a diplomatic standoff could entail serious consequences for those with assets in China.
While such a clash is not inevitable, it would be irresponsible for any US company with substantial holdings or business in China to be unprepared for a spectrum of scenarios, and to have a strategy at the ready to manage them.
Companies must foresee the wide-ranging effects this dispute might have on brand, asset and equity value, as well as supply chains. At the forefront, of course, is protection of human capital, from the need to move people out of harm’s way, to scenario planning for repatriating employees stranded under belligerent regimes.
While there is time for cooler heads to prevail, now is the time for responsible business leaders to discreetly address these scenarios. Detailed, well thought-out plans and likely effects must be mapped. To some, this may seem like overkill, but the current world instability requires such planning as an urgent priority.
Richard Torrenzano is a former New York Stock Exchange senior officer who organized and was part of the U.S. delegation sent by President Reagan to open exchanges in China. Mark Davis is a former White House speechwriter and has drafted foreign policy and arms control addresses for President George H.W. Bush.
For article on Journal of Commerce, visit: http://www.joc.com/maritime-news/industry-must-prepare-worst-south-china-sea_20160908.html