Fraser Cameron, Senior Adviser, Cambre Associates

The imposition of Western sanctions against China for its behaviour in Xinjiang and Hong Kong has resulted in a predictable backlash from Beijing that has had serious implications for many companies, including top brands such as Nike, H&M, Burberry, Uniqlo, Zara and Adidas. The Finnish paper giant, Stora Enso, has also decided to pull out of China after reports that it was a major supplier of the pulp being used in Xinjiang’s textile industry.

The Chinese counter sanctions were wider than expected and have impacted parliamentarians, think tanks and even leading law firms such as Essex Chambers in London, some of whose members penned a report on alleged genocide in Xianjiang. Genocide is a serious allegation and states do not take kindly to others pinning the label around their neck. Turkey, for example, has constantly sought to defend itself from allegations of genocide against Armenians dating back over a century.

Surprisingly, several companies were caught unaware by the sanctions war. But it should have been clear that all major powers retaliate when they are hit by sanctions, which are increasingly used for political purposes. Norwegian exports to China dropped dramatically after the Nobel Peace Prize was awarded in 2010 to Liu Xiaobo, a Chinese human rights activist. Australian exports to China in 2020 were also hit after Canberra called for an independent enquiry into the origins of Covid-19.

The US has also been prolific in its use of sanctions, which have affected companies doing business with Iran, Cuba, Russia, Venezuela, North Korea and many more countries. It was thought that the change from Trump to Biden would lead to a change in US sanctions policy. But recently the new administration confirmed its readiness to sanction German and other companies involved in the completion of the Nord Stream 2 pipeline. American tariffs on European steel and aluminium, introduced by Trump on the grounds of ‘national security’, also remain in place.

But it is China which is likely to remain the focus of attention as the Biden team has placed its behaviour at the top of the agenda. The recent Alaska meeting of the top foreign policy officials from both sides showed the extent to which relations have deteriorated.

The EU has toughened its overall stance towards China which is still based on the three principles of ‘partner, competitor and rival’. But as with most foreign policy issues, there are significant differences between the member states on how these principles should impact on policy and China is skilful at exploiting these divisions.

The UK has also moved from the ‘golden age’ of Sino-UK relations under David Cameron to a much more critical attitude. The UK has pulled the plug on Huawei’s participation in the 5G rollout there and banned CGTN, the Chinese broadcaster. Yet the recent foreign policy review suggests the UK wants to have its cake and eat it as regards China. It could line up with the US on security matters but pursue a win-win bilateral economic relationship.

Companies hate being caught up in these political disputes – and even more being forced to take sides. On the one hand, companies want to demonstrate their compliance with OECD guidelines as regards labour standards and human rights. They also do not wish to run foul of increasingly influential and active NGOs such as the Better Cotton Initiative, based in Geneva, which monitors the conditions of cotton workers around the world. On the other hand, they cannot ignore the fastest growing major economy in the world, soon to overtake the US in GDP, and where many make most of their profits. According to a recent report, Chinese consumers account for roughly 40% of the €300bn global luxury goods market.

Despite much talk of decoupling, few companies on either side of the Atlantic have pulled back from China. The bottom line would appear to be the likely drop in revenues. Whether manufacturing in China or selling into China, few companies can foresee alternative markets. But companies also have to factor in potential damage to their reputation and risk of government intervention.

While China is the number one focus just now, the operating conditions for companies in many other parts of the world require sound political analysis and assessment. Who foresaw the rapid deterioration of the situation in Mozambique? What would happen if a rebel group took over the cobalt mines in the DRC? What might change if the Greens came to power in Germany later this year? How do you deal with products from Israel that have been produced in the occupied territories? What if there was a return to violence in Northern Ireland? What if Turkey starts drilling in disputed waters in the Eastern Mediterranean? What if Brexit continues to sour EU-UK relations? There are many other issues related to climate change, health and data protection that have widespread political ramifications. Companies, therefore, would be wise to invest more in political risk assessment.