Date first published: 28/05/2020

Key sectors: all

Key risks: political instability; economic growth; investment; trade war

The United States (US)-China relationship is changing in fundamental ways. Buzzwords and phrases like ’decoupling’, a ’new Cold War’, and ’strategic rivalry’ are now permeating the discourse surrounding the world’s most important bilateral relations. Since 2018, China and the US have engaged in an intensive and costly trade war, which deescalated after the signing of phrase one trade deal in January 2020. Yet, rather than providing the basis for long-term stability, the initial trade agreement has sowed the seeds for future confrontations. More broadly, a number of fundamental ideas that once guided the relationship are being called into question.

The inauguration of US President Donald Trump ushered in one of the most far reaching adjustments of US’ China policy since 1972. For over 40 years, the bilateral relationship navigated many of its ups and downs, but had generally developed along a positive trajectory of deepening diplomatic, economic, and people-to-people ties. Proponents of the relationship often argued that strategic dividends would outweigh short-term economic pains caused by deepening economic ties with China. One view was that a prosperous China would generate greater demands for high quality imports which in turn would benefit Western companies and workers. There was also widespread hope in the US that as China climbed the economic ladder, it would seek to embrace characteristics of Western governance model and liberal values. But the absence of tangible political reforms in China has always been a source of disappointment.

In recent years, that trajectory of engagement, which has served as the cornerstone of US-China relations, has practically come to an end. For hawkish members of the Trump administration, rolling back the country’s ever-close economic relations and reliance on Chinese exports and investment has always been the end game, even before the outbreak of COVID-19. The pandemic has accelerated Washington’s desire to disengage from what they saw as vulnerabilities to surveillance and sabotage, dependencies that disrupt the economy, and challenges to the US’s technological and military supremacy. In recent months, US lawmakers and officials in the Trump administration have strengthened a series of provisions to cleave parts of the world’s two largest economies, from export controls on sensitive American technology such as semiconductors to reform of foreign investment to tariffs on Chinese imports.

While much of the blame falls upon Trump for pushing the bilateral relations to a tipping point, it is equally important to point out that China, in some ways, has been pursuing its own decoupling for nearly a decade.  When Chinese President Xi Jinping introduced Document Nine in 2013, it signalled a sharp change in domestic policies which prompted nationwide crackdowns against human rights lawyers, academics with liberal views, and media outlets. The document identified the seven most important threats to the Communist Party’s grip on power, namely a list of universal values and norms that are foundational for Western democracies. It also decried freedom of press and civil societies while labelling human rights, independent judiciaries, and national armies (the Peoples’ Liberation Army (PLA) serves the Party, not the state) as incompatible with the Communist Party’s leadership. Xi also launched the ‘Made in China 2025’ campaign to promote indigenous technologies in order to reduce reliance on US and other Western supplies.

As most officials and experts agree that brewing trade tensions between Washington and Beijing, intensified by the COVID-19 pandemic, will alter the business relationship between the two countries and force some multinational corporations to re-orient their supply chains, there are still two key underlying questions that need answers: how far will decoupling go, and why the relationship nose-dived.

With regards to the former, President Trump has made one of his most stern warnings to date in threatening to “cut off the whole relationship”, a scenario which is unlikely and practically improbable. Not least of the problems Washington would encounter is the fact that China is the second-largest US creditor, holding more than US$1tn in US government debt.

Notwithstanding his aggressive rhetoric, it is evident that Trump looks to seize the opportunity provided by the pandemic to reduce economic dependence by diversifying US supply chains away from China. Given the extreme complexity of supply chains, it is still not clear what these critical areas are. One particular area that has been reshaped for security reasons is advanced technologies, from telecommunications to semi-conductors. Another plausible area where we will see accelerated decoupling is medical supply chains, a vulnerability exposed by the difficulties of getting masks, gloves, and even ventilators.

Of course, the economic decoupling will not be cost-free. Some firms that re-shore production to higher-cost countries, such as the US, will certainly lose some of the efficiency gains they have obtained in recent decades. It is likely that for many developed countries, the protectionist push could be met with serious oppositions where companies will be incredibility resistant to anything that hurts their share price. In May 2020, the South China Morning Post reported that despite the financial support from the Japanese government, major Japanese companies intend to keep manufacturing in China on the grounds that it remains a critically important market and that shifting production to a new country would be too costly. Still, there are going to be industries that will ultimately move their business to another country no matter what. In the words of Robert Zoellick, a former US trade representative, “we just have to decide where we want to pay the cost. If we develop it at home, it will have costs and it will have costs for US exporters who stand to lose overseas access in a world of increasing trade barriers”.

This trend will also transcend politics, meaning that economic decoupling will likely outlast the Trump administration. There is now a bi-partisan hardening towards China, which has only been exacerbated by the pandemic. The presumptive Democratic Presidential candidate Joe Biden is unlikely to go easy on China as he is under increasing pressure to move his trade and economic policies further to the left. Earlier this month, Biden announced joint forces that consist of his top aides and supporters of Bernie Sanders to develop a unified Democratic platform. Sanders had previously called for the re-negotiation of trade deals with China while pledging to bring manufacturing jobs back to the US. At the same time, the Republicans have repeatedly trounced the former vice-president for being soft on China in laying the groundwork for what it appears to be a heated election cycle, where China will certainly be a central issue.

As COVID-19 has enabled the Trump administration to aggressively push and expedite its economic decoupling agenda, the big question is how did the relationship reach its current moment? To a large extent, the talks of untangling parts of the world’s two largest economies are the fruit of decades of liberalised trade with China, which many sceptics see as responsible for the hollowing out of key industries like manufacturing. In a span of less than three decades, China has transformed itself from a low-wage assembly line for the manufacture of Western-engineered products to a sheer competitor to the US on various fronts like technological innovation. China will soon become one of the leaders in technologies such as artificial intelligence, robotics, fifth generation cellular networks (5G) and possibly biotechnology. Displeasure towards China’s state-owned enterprises, often subsided by the government, have also grown over the years as they are accused of competing unfairly with companies from the US and other developed countries.

In addition to an intensifying economic and technological competition, both countries are also now engaged in an ideological and systems competition. Previously, the absence of sharp ideological competition was one of the differentiating characteristics of the US-China relations from the Cold War rivalry between the US and the Soviet Union. Now, however, there are growing questions in the US about whether China remains content to nurture its system at home, or whether it has broadened its ambitions to export its own governance model. President Xi’s speech in 2017 fanned this debate when he stressed that “China offers a new option for other countries who want to speed up their development while preserving their independence”. Xi’s statement sparked a wave of commentary about the re-emergence of ideological competition, in that Beijing seeks to promote a ‘China model’ that rivals the spread of liberal democracy.

Coupled with the aforementioned structural changes in the international system, it is expected that the US-China relationship will be headed in a more competitive direction in the foreseeable future. The resulting competition is likely to include a broader range of issues and involve a number of actors. It is uncertain that a new US president would or could fundamentally change this dynamic or that Xi Jinping would undergo radical policy shifts at home in the coming years.  Many of the issues are closely linked to the national interests and capabilities of both countries, suggesting, but not guaranteeing their perpetuity.