U.S./China Strategic Competition

Figure 1: U.S. Exports and Imports with China (USD Blns 12mth moving average)

Source: Datastream/Continuum Economics 

Warm Diplomacy After Biden/Xi Meeting, But 

The November meeting between President Biden and Xi at the G20 meeting has helped to thaw relations between the U.S. and China. Meanwhile, President Xi’s election for a 3^rd term has seen him switch focus to domestic issues including supporting the economy and ending the zero COVID policy. On Taiwan, Xi messaging has changed towards “a family across the Taiwan straits” rather than one country two systems rhetoric. Could all of this herald an end to U.S./China strategic competition to benefit Asia and the global economy?

The U.S./China relationship is multi layered, with the near-term tactical approach contrasting with long-term strategic goals. Additionally, areas of cooperation will be counterbalanced by areas of tension or intense competition. Perhaps the best way to look at U.S./China relations is to look at certain issues.

• Mutual respect. China wants respect from the U.S., after the rocky times during the Trump administration. President Xi will potentially travel to the U.S. in November 2023 for the APEC summit in San Francisco provided that the tone of high level communications is maintained and enhanced. China would like this to improve through 2023 before confirming Xi visit and the Biden administration is open to listening and discussing. However, actions speak louder than words and the U.S. will likely seek actions from China on a number of fronts, which in most areas China will be reluctant to provide.
• Climate Change. Biden and Xi are heading in the same direction on climate change.Acceleration of controls on carbon emissions will be a goal for the COP28 meeting in Abu Dhabi starting November 30. The Biden administration wants this ideologically, while China also wants this for energy security reasons as well as ideological reasons. If progress can be made on this it could help other areas, but we would not expect an early breakthrough.
• Technology. October 2022 saw the Biden administration toughening the technology war by banning exports of advanced microchips to China and also restricting the export of semiconductor tools. This is a significant escalation of U.S. efforts to hold back China from closing the technology gap with the U.S.  China has reemphasised its own plan for advanced semiconductor self-sufficiency, but technology experts are split on whether China can achieve this technological leap despite an intense public/private partnership and government funding. China will likely want to work to soft these curbs, but the Biden administration will be reluctant to water down this key lever over China. One area to watch is artificial intelligence and whether global safety standards can at a minimum be discussed. 
• Taiwan. China has recently softened the rhetoric towards Taiwan, which could be a tactical approach ahead of the Taiwan elections due in early 2024 -- to ensure that a new government is not too anti-China. It is also worth noting that China continues to cross over the median line in the Taiwan straits and in December fly a record 71 missions around Taiwan in one day. Thus the overall Taiwan approach is a mixed message for 2023.China certainly needs time on the Taiwan question, as their military is not strong enough to launch a successful seaborne invasion. An invasion would be possible 2027 when China’s current military buildout become more mature. One issue to watch is whether U.S. House speaker Kevin McCarthy actually travels to Taiwan, as he has promised in the past and whether China reaction match the backlash seen during Nancy Pelosi visit.
• Ukraine War. The U.S. wants China to put pressure on Russia to end the Ukraine war. Certainly China has pressured Putin into dropping the sabre rattling over nuclear weapons, but part of the reason was China’s fear of U.S. secondary sanctions on China’s trade if Russia actually used a battlefield nuclear device. China will likely want to preserve its relationship with Russia and this will curtail the limits of pressure that China will apply on Russia. Remember that China and Russia strategic interest in commodity trades has grown stronger since the Ukraine war to China’s benefits with Russian commodities sold at a discount to global prices.Should Putin decide that Russia need serious discussions over a peace deal, then China could act as an intermediary as it could enhance China role in the world.However, the UN and Turkey could also be a forum for such discussions. Our central view remains that the war will likely drag on for much of 2023. 

Overall, diplomatic language and events should improve between China and the U.S. through 2023, which would be topped by a potential visit of president Xi to the U.S. in November 2023.  U.S./China relations will certainly feel more cooperative in 2023.  This should not be interpreted as an end to U.S./China strategic competition however.  The U.S. is highly unlikely to soften its grip in the semiconductors sector, while the Biden administration will be reluctant to ease Trump era trade sanctions without major concession from China – which are unlikely. Strategic competition will likely return in the run-up to the November 2024 U.S. presidential election.