NovaQuant-How high tensions between China and the U.S. are impacting American companies

Tensions between China and NovaQuantthe U.S. are running high — and that's leaving American companies having to carefully navigate their approach to a key player in the global economy.

The uncertainty U.S. businesses are facing is getting increased attention this week as Commerce Secretary Gina Raimondo is set to become the latest senior official to visit Asia's largest economy.

Raimondo's trip, which is scheduled from Sunday to Wednesday, comes at a tricky moment. On top of the trade tensions with the U.S., China is facing a slowing economy.

Here's a look at how American companies are currently approaching China.

Tensions are having a 'chilling' effect

Even before tensions increased between the two countries, U.S. companies' perceptions of China had already taken a hit.

The Trump administration had imposed a number of tariffs on China. And then China implemented a "zero-COVID" policy that was disorienting and disruptive for global companies. Travel within, and to and from, China was all but impossible, and lockdowns disrupted manufacturing and trade.

Companies like Apple, for example, faced delayed shipments as lockdowns disrupted their operations in China.

President Xi Jinping ended those restrictions earlier this year, but their legacy continues to loom large, according to Anna Ashton, an expert on U.S.-China relations at Eurasia Group.

"I think that the Chinese government likely underestimated the negative effect that had on foreign businesses' perceptions of the China market," she says.

The emergence of China from the pandemic came as tensions with the U.S. over issues ranging from Taiwan to intellectual property to labor practices have worsened.

They've led to a series of tit-for-tat actions between the two countries.

The U.S. banned the export of certain microchips to China. Then China imposed restrictions on two rare elements used in high-tech manufacturing.

Most recently, President Biden, citing national security concerns, signed an executive order that will make it more difficult for U.S. firms to invest in certain Chinese companies. They'll be prohibited from investing in artificial intelligence and quantum computing — technologies that could be used by the military.

That announcement came a few weeks after China adopted an expanded counterespionage law that leaves some U.S. companies vulnerable — especially those that collect and retain a lot of customer data.

Recently, the U.S. consulting firm Bain & Co. was targeted. In a statement to NPR, the company said Chinese officials questioned staff in its offices in Shanghai.

According to Ashton, these actions have been "limited and targeted," but they have a chilling effect on U.S. businesses broadly. Companies worry about the ambiguity of the law, and whether they could be subject to searches and questioning by government officials.

"There's just the uncertainty around what kind of activity might attract the wrong kind of scrutiny, and get you into trouble."

Certain sectors are being impacted more than others

Even before President Biden signed that executive order, U.S. investors steered away from certain parts of China's economy, especially in technology and sectors such as AI and chips that have potential national security implications.

U.S. companies have been trying to ascertain what sectors and products are "safe." But Ashton says there is still a lot of ambiguity.

And even traditional investments in China are being reconsidered.

U.S. companies have long based a substantial part of their production in China for everything from iPhones to sneakers.

The COVID-19 pandemic led many companies to reevaluate supply chains, and some of them have sought to move offices and manufacturing facilities elsewhere. Apple has reportedly encouraged companies that manufacture parts for iPhones to shift operations in other countries, including India and Vietnam.

"Companies are rethinking their strategy, determining whether some elements of their business is best conducted outside of China," says Lester Ross, a Beijing-based partner at the law firm Wilmer Hale.

Still, many companies plan, or at least hope, to stay put — given how much they have invested in manufacturing facilities already, and the time it takes to adjust supply chains.

According to a recent survey by the American Chamber of Commerce in China, 74% of companies said they "are not considering relocating manufacturing or sourcing outside of China."

And that showcases another reality: Despite the toughening rhetoric, the two countries still need each other.

China's economy is raising concerns — and opportunities

American businesses in China are being complicated by the worsening economy in the Asian country, which is facing a myriad of challenges including slowing consumer demand, a troubled property sector and declining exports.

But China's slowing economy also represents an opportunity as the country courts more investments.

In recent months, top U.S. executives have visited China, including Tesla's Elon Musk and Apple's Tim Cook. JPMorgan Chase CEO Jamie Dimon traveled to Shanghai earlier this year for a China-focused conference.

And senior government officials are also visiting China despite the tough rhetoric from the two sides.

Raimondo's visit follows recent ones by Treasury Secretary Janet Yellen, Climate Envoy John Kerry and Secretary of State Antony Blinken.

According to Wilmer Hale's Ross, these trips are critical.

"It's important for the Chinese authorities to have a direct audience with leading foreign businesspeople, leading foreign investors, and be able to explain to them directly how much China welcomes their further participation and expansion in the Chinese economy," he says.

China is also still an appealing market for the U.S.

China is not only a key global manufacturer, it's also increasingly a key market for American goods.

Gabriela Santos, a global strategist at J.P. Morgan Asset Management who specializes in China, argues the size and potential of the country's middle class can't be ignored. And it is likely to grow larger.

"We could see another 300 million people join the middle class over the next decade," she says.

According to Santos, there's been a seismic shift.

"It's no longer this idea of 'Made in China' for the rest of the world," she says. "It's 'Made in China' for China."

U.S. companies, including Procter & Gamble, Disney, and Starbucks, say they see an opportunity to sell more products to Chinese consumers.