The Trump administration’s rapid escalation of a trade war with China has forced many companies to rethink their dependence on Chinese goods and access to the Chinese market—and face the prospect that the world’s two largest economies might be breaking up. Now that the administration has signaled that its working on a deal with significant reductions in tariffs, corporate leaders may be hoping for a return to some version of business as usual.
But what if focusing too much on the trade war is a mistake? What if the real crux of the economic power struggle between the U.S. and China is happening elsewhere?
To make sense of this moment—and whatever is coming next—I reached out to HBR contributor Allen J. Morrison, professor of global management at Arizona State University’s Thunderbird School of Global Management. He co-authored the 2021 HBR article “The Strategic Challenges of Decoupling,” as well as the book Enterprise China. (Note: This conversation has been edited for clarity and length.)
Recently, commentators have claimed that the trade war between China and the U.S. is leading towards a “decoupling” of the two countries. What does this term really mean and is that the right way to frame what we’re seeing?
Many use the term “decoupling” to mean that a country seeks to make itself more independent, unconnected, separate, and isolated from others. As my co-author Professor Stewart Black and I explain in our book Enterprise China, this is not what China is seeking—either now or before this latest trade war. Rather, it seeks to reverse its dependence on foreign countries and firms, and to create an era in which foreign countries and companies ultimately become dependent on China.
Let’s talk about what exactly China’s leadership is trying to accomplish. When you wrote about the U.S.-China relationship in 2021, you explained that China was pursuing three key objectives: 1) eliminating its dependence on foreign countries and corporations for critical technology and products; 2) facilitating the domestic dominance of indigenous firms; and 3) leveraging that dominance into global competitiveness. Technology is a core piece of this, and the focus of the government’s strategic “Made In China 2025” (MIC25) initiative, which aimed to rapidly develop 10 high-tech industries. Obviously, we’re now in 2025. How successful has this effort been?
The MIC25 was spread across 10 broad sectors and encompassed more than 250 specific goals. Given that, we should not expect uniform results. Some goals were hit, others missed, and some were overachieved. The best way to evaluate MIC25 is to frame its success or shortfalls in the context of those three objectives.
On the first objective, lowering external dependence from 70% to 30%, China achieved or exceeded this threshold for eight out of 10 targeted sectors. The two exceptions are high-end semiconductors and commercial planes, where its dependent primarily on the U.S. and Taiwan.
On the second, dominating the domestic market in the targeted areas, China has achieved or is close to achieving this across most of the targeted areas. For example, domestic firms have a majority of the domestic market in medical devices, pharmaceuticals, industrial robots, industrial 3D printing, advanced composites, wind turbines, and smart appliances. In some sectors, Chinese firms don’t just dominate, they rule the domestic market, such as 5G and EVs.
On the final objective, Chinese firms have been less successful in leveraging domestic dominance into global competitiveness. However, there are notable exceptions, including lithium batteries, high-speed rail, solar panels, drones, and shipbuilding. It’s worth noting that in most of these cases, the Chinese firms don’t just dominate the domestic market, they rule it.
Why has it been hard for Chinese firms—notable exceptions aside—to translate their domestic dominance into global competitiveness?
There are two main reasons that Chinese firms have not been able to consistently leverage domestic dominance into global competitiveness.
First, while the Chinese government can put its finger on the scale at home and tip business toward Chinese firms, such as encouraging or even mandating Chinese hospitals to buy Chinese medical devices, it cannot do that in other countries and markets. So, what got them “here” at home, may not get them “there” abroad.
Second, for Chinese firms to be competitive in global markets, they need executives who have deep understanding of those markets because those markets are different from China’s domestic market. For this you need experienced, global executives. However, virtually all large, multinational Chinese firms are dominated by Chinese top executives—many without international experience—and most of their senior leaders abroad are Chinese expatriates.
In your 2021 article, you argued that many Western corporate leaders were making a mistake: Basically, they were paying too much attention to what the U.S. government was doing and not enough to what the Chinese government was up to. What they were missing is that China had been working to assert more control over its economic future since the George W. Bush administration. How do you think global business leaders should be thinking about the U.S.–China relationship right now? Does that critique still track?
Let me provide an analogy: If a large volcano erupts, of course you notice it. You also take action—as best you can—to avoid being harmed by the smoke, ash, and lava flows. The problem is, if you wait to react until there’s an eruption, you might discover too late that you’re in dangerous spot with no good escape routes. But an expert—in this case, vulcanologists—knows that what’s happening on the surface isn’t the whole story, which is why they monitor both the visible external activity and hidden internal dynamics. That way they can predict when an eruption might happen and not be caught by surprise.
The same is true for the relationship between the U.S. and China. Given the magnitude and scope of the current trade eruptions, virtually all executives will pay close attention to the actions of both governments. However, executives who focus primarily on the external actions and then simply try to respond risk missing what is going on below the surface—especially in China. As a consequence, they may find themselves in a spot of danger with limited or perhaps no escape routes.
How has China’s general success in these objectives changed the nature of its relationship with the West?
Put very simply, we can frame the change in terms of general power dynamics between any two parties.
To start, suppose one party moved from being 70% dependent on the other party to being only 30% dependent. What would the change bequeath to the first party? You would reasonably expect it to bequeath more confidence and boldness in action. With the exceptions of high-end semiconductors and commercial airplanes, China has moved from 70% dependence to 30%. On this dimension, the West can therefore reasonably expect more confidence and boldness from China going forward.
Further, suppose that you dominate your domestic market and in so doing create a profit sanctuary. If threatened, what would you do? Protect your profit sanctuary. What if you were using the profits to fund another critical objective, and both the profit sanctuary and by consequence the other objective were threatened? What would you do? Fervently protect it. With few exceptions, China has created domestic profit sanctuaries with which to fund its global competitiveness. We should not be at all surprised if it reacts strongly to perceived threats.
Finally, what actions might we expect if someone had been successful in leveraging domestic success into global competitiveness in some targeted sectors but fallen short of this mark in others? Would we expect them to take their winnings and quit or have patience and work even harder to shore up and surpass their shortfalls? Some might take their winnings and quit, but China will likely continue to try to leverage dominance at home into competitiveness aboard. As evidence consider that according to UNCTAD data, China FDI stock increased from $2.1 trillion in 2019 to $2.9 trillion in 2023.
What are the implications for business executives?
For business executives, I see five big implications:
First, the strategies and tactics of MIC25 had virtually nothing to do with tariffs. They focused on non-tariff actions such as forcing joint-ventures and technology transfers. Consequently, if and when the trade volcano quiets down, U.S. and other foreign companies should not conclude that all is calm. China still wants to reduce its foreign dependence, dominate its domestic market, and thereby become globally competitive. That reality should guide executives’ strategies and tactical actions.
Second, CEOs whose firms compete in the targeted sectors should assume that China won’t create a window of reentry or resurgence for foreign products. For CEOs in an area where China has not yet escaped its dependence on foreign firms—such as advanced semiconductors or commercial aircraft—perhaps Andy Grove’s admonition that “only the paranoid survive” applies. China will continue to battle in these areas.
Third, that admonition probably also applies to CEOs who compete in sectors outside of those targeted by MIC25 and have their eye on the Chinese market. China’s desire to reduce its foreign dependence is likely to spread to new areas as time goes on.
Fourth, while CEOs with an “In China, For China” (ICFC) strategy have largely been insulated from past and current trade eruptions by having both their upstream and downstream value chains primarily contained within China, that insulation may not last. Even if 90% of a foreign firm’s upstream value chain is inside China, if the 10% imported into China is critical, China could target it and inflict serious damage. It might even threaten the viability of a foreign firm’s ICFC strategy. But China doesn’t need to use tariffs to limit the success of any ICFC strategy; it has an array of nontariff actions, such as sanctions, unreliable entity lists, arbitrary enforcement, and more.
Fifth, for big firms, such as Apple, that have taken full advantage of this ecosystem, no single country can replace China now or in the near future. China achieved its status as the “world’s factory” with a share of global production double the #2 country (the U.S.) not just through cheap labor, but by 1) building world-class ports, 2) constructing more kilometers of roads and rail in the last 10 years than the rest of the world combined, and 3) integrating thousands of suppliers into an unmatched upstream ecosystem (not just assembly).
India has the labor but has nothing close to the infrastructure and ecosystem of China. Vietnam and Malaysia have better infrastructure but nothing close to the labor pool of China. Spreading one’s large upstream value chain across multiple countries is viable, but will take time. As such, these firms have little choice but to try to influence the U.S. policy makers for exceptions and time.
From your perspective, how have Western companies adapted their strategies for operating in China over the last four years? Has there been a lot of action, or have companies kind of said, “Well, some tariffs are the new normal, but we can live with this” and settled into a new groove?
In scores of interviews, CEOs and senior executives have all told me that over a 10 or 20-year span they can’t predict who will sit in the White House or control Congress or what specific policies the U.S. government will or won’t enact toward China. But they don’t need to. Long term, China’s three fundamental objectives have been in place for a decade or more, and there is scant evidence that they will somehow disappear over the next 10. Executives who understand China’s these objectives—and the strategies and tactics used to achieve them—take trade movements of the moment into account, but they are not driven by them.
For example, insightful executives who had upstream parts of their value chain in China started hedging their bets with what is typically referred to as “China +1” (i.e., China plus at least one other country for upstream insurance) more than a decade ago. For those with downstream parts of their value chain in China, they started hedging their revenue bets by emphasizing new growth in countries other than China long before the current eruption of trade tensions.
We can see more and more U.S. executives hopping on this hedging bandwagon. As evidence, based on to World Bank data, foreign direct investment net inflows by U.S. firms into China declined by about 14% in 2022 and another 14% in 2023, and preliminary data suggest that it dropped by nearly double that in 2024.
Why did U.S. and other multinational corporate executives not fully appreciate China’s three fundamental objectives 10 years ago? And do they more clearly see it now?
From scores of interviews, I believe three factors kept executives from fully appreciating the three objectives and their implications.
First, many U.S. executives simply doubted that China could succeed in reducing its external dependence. They believed that the gap between where China was and where it wanted to be was just too large of a span to bridge in 10 years. They further believed that if China forced this and ensured that its domestic market was dominated by indigenous firms that those firms would not have the technology and capabilities necessary to be globally competitive. Many foreign executives believed the gap between their firms and indigenous Chinese firms was just too big to bridge in a decade—especially since they envisioned their firms continuing to advance their knowledge, technology, and general capabilities. How could the Chinese advance fast enough to catch up to a speeding train that was already far ahead of them?
Some might accuse these U.S. executives of hubris. Perhaps there’s some of that. But much more significant was an underappreciation of how strong and interconnected “Enterprise China” was compared to “Japan Inc.” or “Korea Inc.”—both of which executives cited as reference points. Although both the Japanese and Korean governments sought to influence industrial policy, those governments never owned firms that controlled roughly a third of the industrial economy as China’s government has and does. In addition to direct ownership, Japan and Korea never had the level of influence over private firms that China had and has. We only need to hold out Jack Ma and Alibaba as an example of the level of influence, if not control, that the Chinese government could exercise over private firms.
Second, U.S. executives had all the incentives in the world to believe that the gaps were unbridgeable, certainly within 10 years. As long as China remained dependent on foreign countries and firms for key imports, or as long as indigenous firms could not dominate the domestic market, the revenue promise of China was enormous.
Third, in many cases, for many U.S. and other foreign executives, China was just not big enough in terms of their upstream or downstream value chain to justify spending tons of time and energy diving deep below the surface and really understanding the internal dynamics. Obviously, this was not true for firms such as Apple, Nike, Tesla, Qualcomm, Western Digital, Broadcom, Applied Materials, and others. But for the majority of U.S. Fortune 500 CEOs, there just wasn’t enough of their upstream and downstream value chains in China to justify the time and effort required to deeply understand China.
How should we think about the current trade war and the tariffs in this context?
To view the current tariff conflict between the U.S. and China as the sum and substance of the relationship is both too narrow and too short-sighted. It is easy to understand the focus on the tariff eruption between the two countries because it is perhaps the biggest in history. However, if executives overly focus on it, they run the risk of mistakenly concluding that if the trade volcano quiets down that their China problems are solved.
Consider how Apple has adapted its approach. On the one hand, Apple could not and did not ignore China’s upstream potential. Until recently, virtually all iPhones were assembled in China. In addition, it worked hard to capture significant revenues from distributing and selling iPhones there. However, it started hedging some of its China bets and trying to influence policy and policy makers before the current tariff eruption.
So, in light of all this, what are CEOs and other top executives to do?
First, spend time understanding China’s three fundamental objectives, the strategies and tactics they have formally and explicitly endorsed to achieve them, and where and why they have succeeded or fallen short.
Second, rather than trying to predict discrete outcomes like elections or tariff levels, plan out strategies informed by the first recommendation and then stress-test those plans against a mix of best case, worst case, and likely case scenarios.
Finally, don’t wait for policy announcements and then try to deftly react; that leaves too much to chance. In addition to recommendation #2, have a plan for what aspects of policy you want to influence and how that might be done.