2020 ELECTION SERIES: THE U.S.-CHINA DIVORCE IS ‘NOT A COLD WAR YET BUT YOU CAN SEE IT FROM HERE’

BY DANE CHAMORRO

Whoever is sworn in as U.S. president come January, the U.S.-China relationship will never be the same. For all of my 40 years monitoring, traveling, working, and living in China, the bilateral relationship has been a broadly positive and constructive one with areas of disagreement (e.g. Taiwan). The new normal is the reverse—a largely adversarial one characterized by conflict with only limited areas of cooperation.

Despite suggestions to the contrary, this is not temporary and it’s not about the trade balance—or the military balance or the tech balance—it’s about all of those and more. For many businesses, the key dimension is a competition to shape global connectivity—supply chains, data flows, infrastructure, and the technologies that enable the future of commerce such as 5G, digital payment systems, the most advanced semiconductors, and specific user apps. It is a generational shift that will be characterized by systemic confrontation for some time to come.

This conflict has been brewing since long before 2016, and has been driven by both sides. Yes, President Trump and those around him have taken a “hard line” on China but in many areas—human rights, the South China Sea, IP theft, cyber-attacks, Xinjiang, market access, the governance of U.S.-listed PRC companies—this was not only justified but long overdue. These concerns are also largely bipartisan, and are shared to varying degrees by most U.S. allies. A change of U.S. administration would perhaps bring some changes of emphasis, style, and approach to tackling these issues, but the agenda and goals will be very similar regardless of who occupies the White House.

On China’s part, it’s clear that President Xi Jinping has a much higher risk tolerance than his predecessors and he appears confident now is the time for China to retake (note “re”) its historic central role in greater Eurasia. Xi’s narrative of national rejuvenation, with China “standing up” (中国站起来) after two centuries of weakness and exploitation, resonates well with his domestic audience. While this is a natural outgrowth of the country’s increasing wealth and power (much like America’s own rise in the 19th century)—it was also bound to cause friction with China’s neighbors and the prevailing military power of the region, the United States.

Beyond Washington, fears that China is bent on regional domination have been fueled by events in 2020 including Beijing’s moves to severely curtail Hong Kong’s special status and its use or threat of punitive economic pressure in disputes with countries from South Korea and Japan to Canada and Australia, not to mention military pressure on India, Vietnam, and the Philippines (South China Sea claimant states).

While the bilateral trajectory is very troubling and will not be reversed by the U.S. election, it is far from inevitable that relations will spiral from here towards broader decoupling and unrestrained conflict.

The United States has increasingly responded to this rise of China’s behavior with tariffs, restrictive foreign investment criteria, sanctions, and export controls—most critically around the supply of key technologies. Much of this policy mix will outlive the Trump administration, and many other countries have become more open to restrictions on China than they were a year ago. This is a major test case for the feasibility of “divorce” or decoupling from China. For example, both sides have announced programs to insulate their tech ecosystems from the other, such as with the U.S. “Clean Network” initiative and China’s multi-pronged strategy to end reliance on “unreliable” suppliers in addition to its Made in China 2025 program.

While the bilateral trajectory is very troubling and will not be reversed by the U.S. election, it is far from inevitable that relations will spiral from here towards broader decoupling and unrestrained conflict. Overall, the U.S.-China commercial partnership has remained remarkably resilient. U.S. businesses continue to invest in China on a “China for China” basis—drawn by the purchasing power of 700 million urban consumers, rising per capita incomes, modern infrastructure, and skilled labour (last year China became the world’s largest retail market).

While there has been much diversification of supply chains to reduce reliance on China, there is still no mass exodus and there is still no similar-scale substitute for some of China’s roles. So far, there has been no Beijing-inspired public frenzy to boycott U.S. brands, as has happened in the past with Japan and South Korea, and Beijing has been remarkably restrained in rarely “bashing” U.S. multinationals in retaliation against White House actions. But can the commercial relationship remain this positive if the political one does not improve substantially?

First, keep in mind that while this is primarily a “United States vs. China” battle, in 2020 it has also looked more like a “China vs. the Rest” battle—the EU, Japan, India, and others are equally frustrated with some of China’s behaviours. Second, China’s responses to U.S. initiatives have been measured (more growl than bite). Even under intense recent pressure from the White House, Beijing is resisting upping the ante while privately reassuring U.S. investors that they are still welcome. Finally, if there is a new U.S. president, the approach to China is likely to change—it will likely become more coherent and predictable, drop some of the most provocative stylistic elements, and create an opportunity to moderate the current escalatory cycle.

There is no one-size-fits-all with a country and relationship so complex. In some areas China is undoubtedly an adversary, in others a competitor, and in still others a potential partner.

While this would indeed be a welcome change, the fundamental areas of disagreement will remain. Some of the changes might actually deepen the competition. A Biden administration would emphasize human rights and multilateral coordination against China—both things Beijing is highly sensitive to.

Rather than a decisive, economy-wide divorce, the United States and China are entering years of reluctant co-habitation. Multiple industries will continue to face disruption and political-policy complexities that were once seen as problems only in traditional strategic sectors like defense and strategic national infrastructure. For investors on both sides, sector will matter more than ever: tech, healthcare, financial services, AI, anything centered on data—are all becoming “national strategic interests.”

A crucial and highly opaque driver of developments will be whether China’s leadership is willing and able to recognize how its approach is contributing to a dangerous U.S.-China trajectory, and adjust accordingly. Future U.S. administrations must also realize that treating China as an enemy in all things is neither nuanced, smart, nor practical. There is no one-size-fits-all with a country and relationship so complex. In some areas China is undoubtedly an adversary, in others a competitor, and in still others a potential partner. Governments and corporations need policies that recognize that.

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Dane Chamorro is a Pacific Council member and Partner Asia Pacific at Control Risks.

The views and opinions expressed here are those of the author and do not necessarily reflect the official policy or position of the Pacific Council.