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dragonAs Chinese, Taiwanese and Japanese ships challenged each other over some tiny rocky outcroppings in the Sea of Japan in September, both Toyota and Nissan announced late last month that they were cutting back production of their vehicles in China—Nissan for eight weeks. The reason: protests by angry Chinese citizens at Toyota and Nissan dealerships in China that led to damage to some locations and concerns about a boycott of Japanese products, which some auto industry analysts suggest could be relatively long-lived.          

Might the same thing happen to American companies in China someday during some diplomatic flare-up between the two countries?

China has long been a favored destination for multinationals, including U.S. companies, anxious to tap into the world’s biggest national market and use China’s industrious but relatively low-wage workforce to manufacture goods for sale back home or in other developed markets. But investing in China has always carried political risk for companies from most countries. As Japanese companies know, and are learning once again, when China has a dispute with another country, it can impact companies from that country that operate inside China as Chinese officials, either overtly or behind the scenes, use the network of Communist Party officials who are still placed in all schools, state companies and other organizations to stir up latent Chinese xenophobia and nationalist rage.

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