FREE Trademark Search Report:
How To Do A Trademark Search

Get this FREE report now to: Perform a trademark search quickly and easily; Protect your brand—legally!; Save time and money with a trademark public search; Avoid potential legal conflicts

Upgrade to Premium Membership NOW for Just $147!
Get 3 Months of Full Premium Membership Access
Includes Our Monthly Newsletter, Licensing News, Deals, and Contacts
And MUCH MORE!

Analysis: Is Licensing Industry Prepared For a Cold War With China?

US Sanctions Loom As China Continues Alliance With Russia During War in Ukraine

By Gary Symons

TLL Editor in Chief

Much has been written about the impact of the Ukraine War on the global economy, but little on the potential impact on the licensing and consumer products industry in the event that China is sanctioned by Western nations. 

However, that is a very real possibility, and could have long-lasting implications for those industries and the entire world economy. 

The fear being discussed in China right now is that the Xi government will not only continue its tacit approval of the Russian invasion of Ukraine, but that it will act to aid the Putin regime in resisting Western sanctions. 

If that happens the US will take action against China, says White House security advisor Jake Sullivan.

“We are communicating directly, privately, to Beijing, that there will absolutely be consequences for large-scale sanction evasion efforts or support to Russia to backfill them,” Sullivan said. “We will not allow that to go forward and allow there to be a lifeline to Russia from these economic sanctions from any country, anywhere in the world.”

Those consequences will almost certainly be economic in nature. And, if that does happen, it is almost that China will retaliate, raising the current trade war between the US and China to new and dangerous levels. It is also becoming apparent that sanctions against China would include the European Union and other supporters of Ukraine around the world, comprising at least half of global GDP. 

On that point, the EU’s Ambassador to China Nicolas Chapuis called on China to support Ukraine and help in the effort to force Russia to withdraw. “There can be no ‘so-called’ neutrality,” said Chapuis. 

THE ROAD TO ROME

Russia’s Vladimir Putin and China’s Xi Jinping declared an “alliance without limits” just days before Russia’s unprovoked invasion of Ukraine.

The potential for a massive trade war with China had become obvious during the Winter Olympics in Beijing, when presidents Xi Jinping and Vladimir Putin announced on opening day a “No Limits Partnership.”

Specifically, this partnership included a promise to support each other in their conflicts over Taiwan and Ukraine, standing together against the US and Western governments. 

Russia launched its invasion against Ukraine immediately after the Olympics, raising concerns that Xi had been informed of the plan, but did nothing to stop it.

Beijing supported Russia’s demand that Ukraine should not be admitted into NATO, while Moscow opposed any form of independence for Taiwan.

“Friendship between the two States has no limits, there are no ‘forbidden’ areas of cooperation,” the two countries said in a joint statement. Putin also announced a new gas deal with China worth an estimated $117.5 billion, which at the time was not heavily remarked upon, but now appears as a means to help support the Russian economy in the event of Western sanctions over Ukraine. 

The timing, seen through the lens of the subsequent invasion, has made NATO leaders highly suspicious of China’s actions, leading to Sullivan’s warning to the Chinese negotiating team in Rome on Monday.

Unfortunately, that warning was met with counter-threats by China. 

CHINA DEFIANT AFTER NEGOTIATIONS IN ROME 

For China, the Western economies represent, by far, its largest export market, while Russia is a relatively small source of revenue. However, China has other ambitions that are more territorial than economic, and Russia is one of its key allies. For example, it is among the very few countries in the world that supports China’s ambition to take Taiwan by force.

So, while China may be very uncomfortable with the brutality inflicted by Russian troops in Ukraine, it has angrily warned off the US and its allies. 

Sullivan met with Yang Jiechi, director of the Office of Foreign Affairs Commission and a politburo member of the Communist Party of China, in a discussion on Russia’s war against Ukraine. He also demanded to know whether Russia had asked China for military aid, and whether that aid would be granted.

China denied it, and on Tuesday accused the US of spreading disinformation, adding China does not agree with resolving political issues using economic sanctions.

“The world economy is already struggling due to the impact of COVID-19. Sanctions will only create shocks to world economic recovery and do no good to any parties,” Zhao said.

“We strongly urge the US not to undermine China’s legitimate rights ainterests when handling the relations with Russia. China and Russia will continue to conduct normal economic and trade cooperation in the spirit of mutual respect, equality and mutual benefits.”

HOW CHINA MAY HELP RUSSIA, AND INVITE SANCTIONS

China’s tight relationship with Russia has invited close scrutiny from the US and NATO.

More worrying is the fact China refused to condemn Russia’s actions, although it has called for peace and has sent some aid to Ukraine. As well, a number of publications from Russia and allied Central Asian republics reported the unsettling news that the Eurasian Economic Union (EAEU) and China are developing an “independent international monetary and financial system.” (Source: 24.kg from Kyrgistan and Zakon.kz from Kazakhstan)

The EAEU is a body that supports economic cooperation between Russia and former satellites, similar to the EU in Europe.

“The Eurasian Economic Commission (EEC) reported that the system will presumably be based on a new international currency, which will be taken as an index of the national currencies of the member countries and the prices of exchange-traded commodities. The first draft is expected to be presented for discussion by the end of March,” the media outlets added.  

Sergei Glazyev, Minister in Charge of Integration and Macroeconomics of the EEC, was quoted as saying, “Given the common challenges and risks associated with the global economic slowdown and restrictive measures against the EAEU and Chinese states, our countries should step up practical cooperation both at the level of regular expert dialogues and in form of joint measures and projects.”

China has also discussed using the Rinminbi (its secondary, internal currency) as a way to facilitate trade between Russia and China as sanctions take hold. 

It’s hard to say whether those types of actions will trigger a Western response, but if they go ahead, China would be taking a huge risk, and a risk that will be passed on to all of China’s trade partners.

Even within China, policy experts are warning of a conflict that could roil the global economy, and permanently cripple China’s export industry.

Hu Wei, the vice-chair of China’s Public Policy Research Center and an advisor to China’s state council, warned that China must give up on its neutrality and help end the war in Ukraine. Hu argues that China only gains if Russia quickly and easily defeats Ukraine, and can withstand Western sanctions. Since neither of those things have happened, he urged the government to cut its ties with the Putin regime.

“China cannot be tied to Putin and (he) needs to be cut off as soon as possible,” Hu argues. “Being in the same boat with Putin will impact China should he lose power.

“This position does not meet Russia’s needs, and it has infuriated Ukraine and its supporters as well as sympathizers, putting China on the wrong side of much of the world. In some cases, apparent neutrality is a sensible choice, but it does not apply to this war, where China has nothing to gain.”

Wang Huiyao, president of the Beijing-based think tank Center for China and Globalization, went even further in an op-ed piece in the New York Times, showing there is no solidarity on this issue within the country.

“The longer the war lasts, the more it will reinvigorate the Western alliance around the idea of a values-based confrontation between East and West, bringing the United States and the European Union into even closer alignment,” Wang wrote. “That is not good for China.” 

Unfortunately, it’s also not good for the Western economy, as China holds a major portion of Western debt, and is also the largest manufacturer of goods destined for European and American markets.

WESTERN INDUSTRY’S UNEASY RELATIONSHIP WITH CHINA

The political situation with China didn’t come out of nowhere. Under the Xi regime, China has been far more aggressive politically than before, with many of its neighbors being threatened over territorial disputes in the South China Sea and in the Himalayan border with India. In fact, 20 Indian soldiers and an unknown number of Chinese soldiers were killed in a vicious border skirmish in 2020 in the border state of Ladakh. China has escalated its provocations and threats against Taiwan, cracked down on democracy in Hong Kong, and engaged in mass arrest and slave labor policies affecting the Uighur people in Jinjiang provice. 

All of those issues have created an extremely uncertain situation for Western companies working in China, and particularly for apparel companies that get their fabrics or clothing made in Jinjiang. 

Exactly one year ago, The Licensing Letter reported on China’s backlash against Western fashion brands over criticism of the country’s treatment of the Uighur people. 

China has been lashing out at European and North American luxury brands over the past few years, and in March 2021 took another shot at British fashion firm Burberry.

The company, like H&M, Nike, and others, had suggested that cotton from the Xingiang region is problematic, and took a public stance to ban Xingiang cotton from any of its products. 

That did not go over well in Beijing, where the government has vowed to hit back against its critics. As a result, Burberry was removed as a licensed partner from the popular Chinese video game Honor of Kings.

Similar actions have been taken against several Western companies and countries that have been critical of Beijing.

Of particular concern for Western companies doing business in China, Beijing and its state media have been the targeting of luxury brands. The dispute between China and Western companies stems specifically from criticism of the cotton industry, particularly by clothing and footwear brands like H&M, Burberry, Adidas, Nike, New Balance, and Zara. All of those companies have expressed concerns for the past two years over reports of forced labor in the cotton industry involving the country’s minority Uyghur community.

The move against Burberry followed close on the heels of state media calling for a boycott of H&M by Chinese citizens, and its expected other companies will come under fire in a pattern clearly laid out by China’s prior treatment of Australia and Canada. 

In the case of Australia, the Chinese government applied massive tariffs to Australian wine, a devastating blow considering China is by far the largest consumer of Australian wines in the world. Canada earned the ire of China after it detained Meng Wanzhou, the CFO of Chinese telecom giant Huawei, on a US warrant. Two Canadian citizens were promptly detained and languished in prison for years, until Wanzhou was released after a guilty plea. 

THE IMPETUS FOR A SHIFT AWAY FROM CHINA

Image from Ukraine’s Ministry of Defence, showing a Ukrainian tank opening fire.

Ironically, the COVID-19 pandemic has simultaneously compelled some companies to move production out of China, while others have moved back to China. As reported in our November 2021 Special Report “COVID CREATES CHAOS: How a Global Logistics Bottleneck Will Impact Licensing,” shipping and production bottlenecks in China created long delays in goods being shipped to Western consumers, and also increased container prices. 

Those bottlenecks were exacerbated by a typhoon and by energy shortages last year that shut down several factories that negatively impacted some of the world’s largest companies. Even mighty Apple suffered a $6 billion loss in sales in Q4 last year because of a shortage of computer chips and “COVID-related manufacturing disruptions in Asia.”

The footwear giant NIKE had earlier moved its production out of China to Vietnam because of the issue with slave labor in Jinjiang, but when the pandemic hit Vietnam, the company was forced to move its production back to China, at least temporarily. 

By late September of 2021 NIKE had lost 10 weeks of production because of plant closures, equating to roughly 100 million pairs of sneakers. As a result, NIKE’s supply was expected to lag behind demand for eight months. 

The most important result, however, is one China is not going to like. Because of these political issues and the lingering bottlenecks in the global logistics network, big companies are covering their bets by spreading out their production in many countries, including Vietnam, India, Mexico and Indonesia. 

“Continuous diversification is basically the name of the game,” said Andrew Rees, the CEO of Crocs Inc., as he explained why Crocs is adding manufacturing capacity in both India and Indonesia.

Now, however, simmering political and trade tensions have many companies fearing a new Cold War with China that would make it difficult or even impossible to have any products produced in that country for export to the US and its NATO allies. For that reason, despite the shorter term impact of COVID-19, a lot of companies large and small began moving at least some of their production out of China.

As we reported in November last year, that list includes Apple, Samsung, LG Electronics, Adidas, Puma, Sharp, Hasbro, Hyundai, Kia, GoPro, Intel, Sony, Uniqlo, Levi’s, Crocs, Calvin Klein, Tommy Hilfiger and Benetton, among many others. In Germany, an estimated 25% of the largest importers were said to be moving some or all of their production out of China, and that was before the invasion of Ukraine.

CHINA IS ALSO LOSING ITS PRICE ADVANTAGE

While some of that is political, some of it is because production in China is getting more expensive at the same time logistics delays are getting worse. The average wage in China has risen sharply, putting it much higher than many other countries, and much closer to what can be achieved closer to home, such as in Mexico, North Africa or Eastern Europe.

Benetton’s CEO Massimo Renon said his company will have moved half of their production out of China by the end of this year. “It’s a strategic decision to have more control on the production process and also on transport costs,” he said. ”Today a shipping container that used to cost $1,200-1,500 can cost $10,000-15,000, with no certainty of a delivery date.”

Benetton is moving much of its production to Mediterranean countries like Egypt and Croatia, where costs are 20% higher, but product arrives in four weeks rather than four months. 

McKinsey Report Studies Changing Face of China’s Retail Market

In the licensing industry, where partnerships and products are put together very quickly, those delays are even more deadly. 

As a result, the logistics firm Thomas Insights says companies now see logistics rather than production cost as the most important factor in choosing a supplier, a sea change in the way companies look at their supply chains. 

In the past, the primary factor was simply the total cost of production and shipping. Now, with supply chains in tatters and billions of dollars in inventory floating around offshore, US executives now see availability of their goods in a timely fashion as the most important single factor.

In other words, the idea of saving money on manufacturing has been trumped by the fear of losing money through logistics delays.

“The supply chain disruptions brought on by the pandemic have become a wake-up call for businesses to look beyond cost-saving and just-in-time inventory management,” the report summary says. “94% of the manufacturers surveyed listed ‘Availability’ and ‘Lead Times’ as the most important factors when vetting new suppliers, instead of the generally anticipated answer ‘Price per Unit.’ One of our respondents commented, ‘We need more U.S. manufacturers and the supply chain needs to be strengthened. Just-in-time does not work in a boom’.”

POLITICAL PRICE TO HIGH TO PAY

All of which brings us to what could become the final straw for the licensing and consumer products industries: the threat of an all-out sanctions war with China. 

Anyone who thought the US and NATO were kidding when they warned of sanctions against Russia have now learned the West is in no mood to kid around anymore. Slow to anger, democracies tend to let things slide for a while, but when they act, they act together and in a show of massive force. 

Through its show of belligerence and its ill-conceived alliance with Russia—a country whose actions are now being compared to the aggression of Hitler’s Germany—the NATO countries now consider any Russian ally to be an existential threat, and one they are willing to combat by any means. 

For example, even Germany has vowed to end its reliance on Russian oil and gas, and EU countries are massively rearming in preparation for any further threat from Russian forces. While sanctions against China would certainly hurt the Western economy in the short to medium term, it’s worth remembering that there are many other countries that would be only too happy to take China’s business away from them, including the emerging powerhouse of India, or the growing economies of Latin America. 

The cost to Western companies, on the other hand, will depend on how well they’ve laid the groundwork for momentous change in the global supply chain. Those like Nike or Benetton who are rapidly diversifying their supply chain will take a hit, but emerge intact and will continue to prosper over the long term.

The same is true of Western economies, where improvements in factory automation have made the concept of “Near Shoring” to be far more viable. 

According to Thomas Insights, 83% of companies they surveyed were planning to add North American suppliers within a year, something unheard of just three or four years earlier. 

“What happens when four in five manufacturers add North American suppliers to their supply chain in the next 12 months?” the Thomas Insights reports asks. “From Thomas’ research, manufacturers add an average of 11 suppliers to their supply chains on a yearly basis.

“If 83% of the 579,811 manufacturers in the USA bring on one new supplier (single contract) at an average of $921,247 per contract, it amounts to a potential $443 billion injection into the U.S. economy.”

China, on the other hand, would be absolutely crippled. The country’s biggest and best customers are, in fact, the Western nations of North America and Europe, along with the Asian powerhouses of South Korea and Japan. Against that bounty, Russia offers a broken economy and some cheap oil and gas.

It’s to be hoped that sanity and enlightened self interest will prevail in Beijing, but as we’ve seen with the Russian government, leaders sometimes allow their ego and their craving for power to outweigh their own common sense. 

As the US has warned, it is sadly very possible that the world is headed for a new Cold War, with Russia and China again freezing on the wrong side of the fence. 

CLOSE TO VIEW ARTICLE x

You have 3 articles left to view this month.

Your 3 Free Articles Per Month Goes Very Quickly!
Get a 3 month Premium Membership to
The Licensing Letter for just $147!

Sign up now and get unlimited access to all articles, archives, and tools for The Licensing Letter!

Close

EMAIL ADDRESS


PASSWORD
EMAIL ADDRESS

FIRST NAME

LAST NAME

TITLE

COMPANY

PHONE

Try Premium Membership

(-000tll)
()