U.S./China Geopolitical Tensions, but Ukraine the Real Focus
Bottom Line: Neither President Biden or Xi are interested in significantly escalating tensions between the U.S./China, but some further posturing and U.S. sanctions could be seen in the coming weeks. On Taiwan, we still maintain the view that a China invasion remains low risk in the next five years, both as China military buildup continues into the late 2020’s and China strives for better economic resilience. However, we remain focused on the Ukraine war, where Putin is set for a high risk offensive in the coming weeks.
With the U.S. shooting down a balloon and three unidentified objects in the last week, U.S./China tensions have risen. What will happen and will geopolitics be an issue once again for 2023?
Figure 1: Taiwan Scenarios
Source: Continuum Economics
U.S. Sensitivity over Balloons
A media and political storm has occurred in the U.S. in reaction to the China weather balloon that was shot down, as the U.S. administration and population remain hyper sensitive to any incursion in U.S. airspace after 9/11. The Biden administration has already blacklisted six Chinese aerospace companies associated with balloons and further U.S. action is likely in the coming weeks. The Biden administration and congress are now considering action to restrict U.S. companies operating in China from providing technologies that could help Chinese military or surveillance operations.
China has counterclaimed that the U.S. has flown 10 balloons over China in the last year and the war of words has ramped up.Additionally, reports in the U.S. suggest that the Chinese weather balloon could have been blown off course from Guam (here) and the other objects are likely private and not associated with China. China does not want to escalate as the focus for the next couple of years is to ensure that the economy recovers and becomes more domestically resilient. Last November’s meeting between President Biden/Xi warmed up the relationship, with China keen to improve global trade relations. Additionally, we continue to feel that the risk of a military invasion of Taiwan remains low in the next five years (Figure 1). The Chinese military is not strong enough to mount a successful invasion, while the Western sanctions on Russia after the invasion of Ukraine has prompted caution over financial resilience. China will likely want to deescalate this incident.
President Biden does not want to escalate tensions with China significantly, but will likely be encouraged by advisors to use this as an opportunity to weaken China’s technological catch up. This is the reason why we feel that some further sanctions will be imposed on China by the U.S. in the coming weeks. Domestic politics also means that Biden needs to avoid looking weak in responding to China. Even so, the Biden administration’s measures will likely be modest and targeted. In a multi-month horizon, we expect U.S./China tension to ease.
Ukraine War
The Ukraine War in contrast is set for escalation with Russia preparing for a major offensive in the next couple of weeks (here). The delivery of Leopard tanks to Ukraine will not yet have taken place, which leaves a window of opportunity for Russia in the coming months. While the main target will likely be the Donbas region, military think tanks are also looking at the risk of a Black sea coast and/or Kyiv offensive either as a target or distraction to split Ukraine’s forces.
President Vladimir Putin’s offensive is high risk, as failure to make significant gains would likely cause internal division within Russia and move the Ukraine war towards deadlock into the summer. This could see Putin making big threats or seeking to distract (e.g. destabilizing Moldova). As we highlight in our scenario analysis this could lead to a frozen conflict, which could either see a peace deal or perhaps not. However, the conditionality for peace talks for Ukraine and Russia is high. Indeed, we still feel an ongoing war that drags through 2023 and into 2024 remains the most likely outcome.