US and China relationship risks
Understanding the risks associated with the Chinese economy has become paramount for investors, businesses, governments, and other stakeholders. China's rise as a global economic powerhouse that impacts international markets in every sector and industry, necessitates comprehensive ongoing risk assessment. Conducting accurate economic ‘risk assessments’ on China is notoriously challenging however due to difficulties in obtaining reliable data, vested and politicised viewpoints, and the inherent complexities of the Chinese political economy.
This series of George James Consulting (GJC) articles touches on a range of current and emerging risks to the Chinese economy that are worth watching through 2023 and beyond. It is recommended that this be used for informational purposes and that further research be undertaken as required on specific risk topics. The number of the topic # is not necessarily indicative of the likelihood or impact of the risk discussed.
#2 – Ongoing tension and strategic rivalry with the United States
The relationship between the worlds two largest economies, the United States and China is crucial for both nations. The current tensions and increasing geo-political rivalry between China and the US is hence an important indicator for the Chinese economy. This relationship could also be described as a ‘key risk’ for the Chinese economy and should be carefully watched. A high level summary of the US/China relationship over the last twenty years is as follows:
2003-2008: Under the Presidency of George W. Bush and Chinese President Hu Jintao. The Bush administration pursued a policy of engagement with China, seeking to encourage China's integration into the global economic and multilateral political systems. Bilateral trade between China and the US expanded significantly during this period despite US criticism of China for undervaluing its currency.
2009-2016: Under President Barack Obama and Hu Jintao (until 2013) and incoming President Xi Jinping (from 2013). The Obama administration implemented a policy of ‘rebalancing’ towards the Asia-Pacific, with a focus on strengthening alliances and partnerships in the region. Bilateral trade between the countries continued growing, albeit with the US running a significant trade deficit with China. The US continued to press China to allow the Renminbi to appreciate.
2017-2021: Under President Donald Trump (until January 2021), President Joe Biden (from January 2021) and Chinese President Xi Jinping. President Trump adopted a confrontational approach towards China which led to restrictions on Chinese technology companies (such as Huawei), and China being identified publicly as a ‘strategic competitor’. Trade disputes between the countrys escalated with both countries imposing tit for tat tariffs on each other's goods. The US argued that it was seeking to address the trade imbalance by demanding China reduce its trade surplus. The valuation of Renminbi continued to frustrate the US with although it never formally identified China as a ‘currency manipulator’.
Military and national security tensions grew during this period. Taiwan continued to surface as a source of tension between the nations with the US providing support for the island nation mainland China claims as part of its ‘one China policy’. The US increased arms sales to Taiwan, fostered greater regional support for Taiwan, and leading political figures such as Nancy Pelosi visited Taiwan. The US also led increasingly frequent freedom of navigation maritime patrols through disputed international waters such as the South China Seas and associated air patrols. Tension and incidents (‘near misses’) over disputed airspace increased with each side blaming the other for recklessness. Both sides have also apparently chosen to publicize these incidents for public awareness.
The emergence of the COVID-19 global pandemic added to these strained relations with the Trump administration directly blaming China for its handling of the outbreak. The origins of the virus remain disputed in the public domain as do China’s COVID management policies.
2021-2023. The US-China relationship has remained tense under the Biden administration. Few of the policies introduced under the Trump administration have changed and numerous other issues continue to be contentious including: human rights, China's treatment of Uighur Muslims, cybersecurity, and the ongoing territorial disputes in the South China Sea. The relationship ‘with no limits’ between China and Russia is also a notable drag on the relationship as are ongoing issues such as are intellectual property theft, anti-competitive behaviour and market access.
What to watch in 2023:
Overall, whether the US government perceives strategic advantage or necessity in the further pursuit of economic penalisation and/or constraint of China for a range of reasons.
The US pushing China regarding the trade deficit and unfair trade practices by China. Concessions from both sides will be key for the relationship moving forward meaningfully.
Technology competition becoming more evident. Growing distrust in the US and among like-minded countries (following US lead) around Chinese technology companies. This distrust may be connected to national security reasons, supply chain risks, but also protectionism around strategic industries. This may include areas such as such as artificial intelligence, semi-conductors, 5G networks, and big data capabilities. This will have a significant impact on Chinese technology development, international standards, and the international market for Chinese technology.
Sentiment towards China within the US business community. US businesses perception and confidence in China may continuing to slide downwards. This could be on the back of concerns around the reliability of supply chains, Chinese government market interventions, the US/China trade dispute, and access to an affordable workforce. Specific issues such as the Chinese Cyber security and Data protection laws may also create concern for US business.
Tensions over Taiwan and the South China Seas. A miscalculation by either side during an air or sea patrol cause rapidly escalating into limited conflict. It is understood that the development of protocols to de-escalate such incidents is a high priority for US Secretary of State Blinken.
National security incidents continuing to feature. The Chinese spy balloon incident of early 2023 was an example of heightened sensitivity around such issues and could cause distractions to the resolution of other bi-lateral issues.
Cyber security issues. Ongoing exploitation of US networks by Chinese cyber actors that causes significant loss of US confidential information and/or access to this information or system. Publicity and unintended consequences from this activity provides further cause for a US response.
Regional tension and flare ups. The underlying tension generated between the US and China acting in each others geographic spheres will continue to grate both sides. Specific incidents could cause tension too such as North Korean miscalculation, suppression of public sentiment in Hong Kong, location of Chinese military/spy base near US territory, or development of new Chinese bases in Asia-Pacific.
The US to continue highlighting human rights within China. This is likely to focus on treatment of ethnic minorities such as the Uighur's and could lead to leading to tension and an inability to resolve wider bi-lateral issues.
Sentiment towards China in the US deteriorates. Any one of the issues noted could generate a negative perception of China and providing impetus to US political leaders to respond.
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Last updated: May 2023
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