Multinational corporations weigh ‘de-risking’ strategies for navigating political unpredictability in China

LAWRENCE — Globalization has blurred the lines between politics and business. Now multinational corporations must navigate all manner of diplomatic disruptions.

This has become a major source of tension when doing business with China in particular.

“If political relations between the U.S. and China or another country and China are risky, we wondered what happens if those relations are cut off?” asked Timothy Cichanowicz, a doctoral candidate in political science at the University of Kansas.

His article titled “Decoupling or Business as Usual? How Japanese Multinational Corporations Adapt to Political Risk in China” introduces an analysis of de-risking strategies. These include assessing the benefits of decoupling (exit from China), diversifying (investment outside China) and diverting (both exit from China and investment in friendly countries), contrasted with inaction. The article appears in International Relations of the Asia-Pacific.

“Japan’s been managing political risk in China for years. To Japan, the United States is late to the party. So our idea was to see what strategies Japan has used to deal with it,” said Cichanowicz, who co-wrote the article with Jack Zhang of KU and Samantha Vortherms of the University of California, Irvine.

Following the U.S.-China trade war, COVID-19 supply chain shocks and the Russian invasion of Ukraine, governments have encouraged multinational corporations to divert investment from an increasingly authoritarian China toward politically reliable allies. But that strategy comes with a list of pros and cons.

“The pro is if you de-risk or find some way to move away from the Chinas and Russias of the world to somewhere more reliable like Japan or Canada, you can be better assured that you’re safe in times of conflict. The big con is that business as usual is less expensive. Goods made in China are often significantly cheaper,” Cichanowicz said.

If pressed to suggest the best strategy, Cichanowicz leans toward de-risking, which focuses on reducing strategic vulnerabilities in critical supply chains and technology sectors.

“With de-risking, you’re reducing the size of your risk in China or elsewhere because you have multiple eggs in multiple baskets,” he said. “Whereas if decoupling, you lose your investment but don’t replace it with anything. Friend-shoring is potentially good since you can replace China with an ally. But the difficulty there is it’s not always clear who really is a friend.”

Cichanowicz said he chose to focus on how Japan dealt with China because those countries have experienced a tenuous relationship for a longer time. 

He said, “This idea that we need to de-risk from China goes back to COVID and the U.S.-China trade war. But for Japan, it goes back to 2012 when Toyota sales outlets caught fire because people were angry about land disputes. Japanese companies have had a much longer time to consider this and evaluate what de-risking looks like.”

Since then, most Japanese multinational corporations have avoided decoupling. Most have also employed some type of de-risking.

“If you look under the hood at thousands of pages of company data, you’ll find Japan has national security restrictions on who’s allowed to invest in their companies, like strategic sectors. The ones that are de-risking tend to have these national security-inspired restrictions,” Cichanowicz said.

What further complicates any of these strategies is that globalization is far more intertwined than it used to be.

“A lot of companies might not even realize how dependent they are on another country,” he said.

“But if a government is selective and can determine ‘this area is important or this company is important,’ then those efforts will bear fruits. Like you can’t just say, ‘Let’s de-risk.’ You must be very specific. It’s ‘these’ products; it’s ‘those’ companies. And if you lean into that approach, then perhaps you’ll see more efforts in the long run.”

Fluent in Japanese, Cichanowicz spent three years teaching English in Aichi, Japan. The Ohio native’s research focuses on the securitization of trade.

“More dollars and cents cross borders than soldiers,” he said.

“Japan and China have all these historical issues, and the U.S. and China have all their issues — but we’re not at war. We have extensive trading ties despite these profound political differences. If you are bound together by enough economic ties, you can’t go to war. You have to find other release valves or arenas for conflict.”