The Economist Intelligence: US-China relations under a Biden presidency

A report by The Economist Intelligence Unit, Sept 17 2020

US FlagThere is little prospect for an improvement in US-China relations under a Biden presidency, but the policy focus and tactics of the US would change.Joe Biden, the Democratic candidate, looks set to win the US presidential election in November. A Biden victory would usher in stark changes in US domestic and foreign policy. However, one of the few elements that will continue to develop regardless is the rivalry between the US and China; the two powers have been on a collision course for the better part of a decade.

The Economist Intelligence Unit believes that there is little prospect for an improvement in bilateral relations in the coming years.The trend towards greater competition will continue, but US handling of the conflict would look different under Mr Biden’s presidency than it has under Donald Trump’s leadership. We expect the rivalry between the two countries to increasingly shift away from trade towards other issues, including intellectual property (IP) protection and market imbalances created by China’s economic model. US foreign policy under Mr Trump has been isolationist, focused on removing any foreign constraint on US power by withdrawing from multilateral bodies and attempting to reduce US trade deficits. Conversely, we would expect Mr Biden to revive US foreign engagement, particularly on strategic topics. As a result, the US and China would increasingly come into confrontation on security issues and human rights.

A bleak state of affairs

If Mr Biden wins the presidency, he will come to power with US-China relations in a dismal state. Bilateral merchandise trade volumes are at their lowest level in years, as the coronavirus pandemic has dampened demand and tariffs have kept costs high. The phase-one trade deal signed in January 2020.

china gdpis effectively a dead letter, but we expect that it will remain in place, as the Trump administration will prefer to avoid further undermining the US economy in 2020. However, the impact of the coronavirus and the recent deterioration in US-China sentiment mean that the deal will do little to boost trade volumes.The phase-one deal provided positive news on the trade front, but it has done nothing to prevent a rise in tensions in other areas, including high-technology supply chains, investment, financial services, security and human rights. To name just a few actions, the US has recently intensified its export controls on the Chinese technology giant, Huawei; restricted US government investment in China; and imposed sanctions on some Chinese officials in relation to human rights abuses in Hong Kong and against the Uighur population in mainland China. The US has also taken a firmer policy stance against China’s territorial ambitions in the South China Sea, potentially setting the two countries up for an accidental confrontation in the region.

Where do we go from here?There is little prospect for a meaningful improvement in US-China relations under a Biden administration. The two countries would remain locked in a strategic competition for economic and technological dominance. The overarching nature of the conflict between the US and China would remain the same under Mr Biden as it has under Mr Trump; the view that the two countries are competitors, rather than a partner, is now firmly held in both Beijing and Washington. However, the policy tone and tactics employed by the US are likely to change noticeably under Mr Biden. Under a Biden administration, we would expect the US to:l maintain the current focus on addressing trade and economic imbalances in an attempt to protect US firms (albeit with different tactics to those of the Trump administration); andl increase the attention paid to security and human rights issues, continuing the trend seen in recent months.

As the Biden administration works towards these goals, we would expect to see two main differences. First, the tone would be different as the US moves away from the Trump administration’s belligerent foreign policy towards one of engagement. Second, we would expect the US to attempt to work with allies to engage China on these issues collectively. A Biden administration might also leave room to explore ways to boost the bilateral US-China relationship. Issues of environmental protection, for example, have historically been an area of collaboration between the US and China.

Under Mr Biden’s expected progressive policy stance, we would expect closer co-ordination in this area, which could help to prevent US-China ties from deteriorating further. Trade and investmentEfforts to establish a level playing field for US and Chinese firms are the main pillar of Mr Biden’s approach to China. Like Mr Trump, Mr Biden views China as a strategic threat to US industries. Mr Biden’s economic revival plan includes numerous pledges to combat Chinese trade practices, including state subsidies, surplus production and dumping, currency manipulation, weak IP protection and forced technology transfers

Trade deficit fears will ease

Increased exports to China would be welcome from the US perspective, but we do not expect Mr Biden to maintain Mr Trump’s focus on reducing the US trade deficit with China. This raises questions around the fate of the phase-one trade agreement, which includes higher quotas for Chinese imports of US goods but does nothing to address the Chinese structural trade and economic practices facing US firms.

china exportsOverall, we expect Mr Biden to be pragmatic. If there is a real prospect of meaningful talks between the two countries in 2021, once the immediate impact of the coronavirus crisis is likely to have faded, the administration may choose to leave the phase-one deal in place. Mr Biden could, in turn, threaten to scrap the trade agreement in order to demand more progress on the substantive areas of disagreement, such as an improvement of the enforcement mechanisms that aim to deter Chinese economic discrimination against foreign firms. China is likely to consider stronger US trade supervision to be an infringement on its sovereignty, but re-engagement could ultimately pave the way for existing tariff removal. However, given how much US-China ties have deteriorated since the start of 2020, gathering enough motivation and trust on either side to broach these topics will be difficult.

A firm shift towards non-tariff trade measures

Tariffs have proven to be too blunt a tool in trade talks so far. They have also increased input costs for US firms while undermining their export competitiveness. We expect the Biden administration to reduce some existing tariffs—particularly on Chinese-made intermediate products that are difficult to replace for US companies and households. In their place, the administration would employ other measures in an effort to shore up US industry and confront China over its trade practices. However, tariffs on some sensitive industrial components would be likely to remain.

Mr Biden has said that his administration would launch a regular review of supply chains and seek to achieve self-sufficiency in the production of critical supplies (such as medical and personal protective equipment). Such a review would be ongoing, creating an opportunity for other products and sectors to become deemed to be critical in the future; industrial metals, rare earths and other components of high-tech manufacturing are likely targets.Rather than tariffs, a Biden administration is likely to encourage more US-based manufacturing by using government spending as an incentive. For example, Mr Biden has proposed US$700bn in government investment in research and development (R&D) and procurement over four years; his administration would be likely to prioritise companies that have chosen not to relocate their production and investment centres in China. This would be difficult to achieve in practice, but it suggests a trend towards more stringent requirements for firms hoping to access public funding.Mr Biden has also promised “aggressive trade enforcement action” against unfair trade practices, particularly IP theft. It remains unclear what measures this would entail, but they could include government support for legal action against Chinese firms that have violated contracts, or sanctions against accused Chinese firms or individuals that would bar them from accessing US markets.

A collaborative approach in sight

A Biden administration would attempt to rally US allies in Europe and the Asia-Pacific region in order to magnify the weight of the policy shift regarding China. Under the Trump administration, the US has effectively dissolved the dispute resolution mechanism of the World Trade Organisation (WTO) by blocking the appointment of appellate body judges. A Biden administration would be likely to re-engage with the WTO in order to try to rebuild these mechanisms. However, given the slow nature of WTO cases, the US government is still likely to rely on its own policy solutions—particularly sanctions—rather than force a chance in China’s position.Many of Mr Biden’s senior foreign policy advisors have been firm proponents of engaging with allies in order to increase their collective impact on strategic issues.

Samantha Power, who served as the UN envoy in the administration of Barack Obama and has been cited as a potential candidate for Biden’s secretary of state, has argued that a collective approach is the best way to push back on China’s assertive economic policies. Dr Power said in 2019 in a speech in Australia that “China will not relent if they sense that they can extract concessions from companies, from governments, by bullying and by leveraging their economic might.” Nevertheless, a firmer approach—with clear lines drawn in the sand on IP protection, forced technology transfer and cyber espionage—would not immediately suggest confrontation. Contrary to the Trump administration’s reliance on brinksmanship, another key Biden advisor, Jake Sullivan, has proposed a “competition without catastrophe” approach to China. Against this backdrop, we expect that the Biden administration would continue working to scrutinise (or exclude) already-low Chinese inward investment flows to the US, particularly in high-tech sectors, and make it harder for US firms to export sensitive technology to China.

By stepping up its diplomatic engagement in Europe and Asia Pacific, the Biden administration may hope to encourage its allies to tighten their own scrutiny of Chinese investment, in an attempt to squeeze China’s foreign markets, particularly for high-tech companies. Increasing EU-China strains uggest growing European appetite for such a US strategy. However, the US will face an uphill battle to re-build ties with many Asian economies, which have grown increasingly reliant on China as an economic partner in recent years. China will also not yield to US pressure in developed markets, and Chinese officials will threaten retaliation against countries that block Chinese investment. However, these headwinds would concurrently prompt Chinese companies to increasingly focus on emerging economies that are less firmly aligned with the US, including those that form the Belt and Road Initiative.

Security

Security tensions with China are running high, particularly with regards to Taiwan and the South China Sea. However, tackling these issues would not initially be a priority for a Biden administration.

The coronavirus pandemic—as well as its resulting economic, social and political fallout—will command the new administration’s immediate attention for much of its first year in office. This will inevitably lead to a de-prioritisation of US foreign policy. Once this initial period of domestic focus has passed, the US will seek to bolster its regional security presence, including with regards to the South China Sea. Some obstacles will remain

SChinaSealingering disputes within Congress, for example, will continue to complicate US efforts to sign the UN Convention on the Law of the Sea (UNCLOS). Instead of focusing on international legal frameworks, Mr Biden will in turn prioritise forming (or enhancing) coalitions with “like-minded” allies as part of a strategy to counter China. This could prove difficult. Efforts to draw support from NATO, for example, would struggle amid limited appetite among NATO countries to step-up their security engagement vis à vis China. Few NATO members have major security interests in Asia, and as a result, most would resist being dragged into a regional conflict. China would in turn view any attempts to establish regional NATO patrols or local NATO units (potentially within the US Pacific Command) as a provocation. Furthermore, policy priorities among NATO’s biggest contributors also lie elsewhere: the UK, for instance, will remain busy with Brexit and propping up its economy after the coronavirus-induced recession.

France—which is already wary of appearing too closely aligned with the US—and Germany will be focused on the EU’s post-pandemic recovery and would hesitate to disrupt important Chinese economic ties. Both France and Germany have also historically favoured diplomatic engagement to defuse tensions with China, rather than direct confrontation.As an alternative, we would also expect the US to bolster the Quadrilateral Security Dialogue (Quad, an informal security framework between the US, Japan, Australia and India). All of the Quad members are currently experiencing disputes with China, suggesting receptiveness for a co-ordinated regional approach. However, the Quad’s military capabilities remain limited. The organisation is also nebulous, and internal bilateral disputes are common. Co-ordination with Quad countries—and others in Asia—will be challenging, with most nations unwilling to jeopardise their critical economic links with China. Increased ties with Japan through the Five Eyes intelligence alliance (which currently includes the US, the UK, Canada, Australia and New Zealand) are possible, but that alliance does not encompass the military sphere. As a result, even as the US expands its security footprint in Asia, efforts to strengthen regional security frameworks will be challenging. Initially, this might result in unilateral US actions (such as increased maritime patrols and freedom of navigation operations). Such a strategy would keep tensions with China elevated, but it may ultimately be a positive development: regional resistance towards “taking sides” could, for instance, contain the emergence of an Asian arms race. Appetite for a direct military conflict is low in both the US and China. Mr Biden’s focus will be on restoring US international prestige after the chaotic foreign policy of Mr Trump. He will do so carefully. Entering into a direct conflict with the second largest economy in the world, which has nuclear capabilities, would undermine those goals and derail hopes of a post-pandemic global economic recovery. Chinese policymakers similarly acknowledge the reality of an increasingly unfriendly international environment: in the event of any bilateral security conflict, most developed (and many developing) nations would probably side with the US, owing to its economic and military primacy. As a result, China would struggle to find support from other significant military powers. Broader strategic considerations are also at play: Chinese anti-access/area-denial capabilities, for example, might reinforce China’s naval position in the South China Sea. However, the country would struggle to offset the wider repercussions of total conflict, including US-backed trade embargoes, sanctions or other economic restrictions. There are critical risks to this apparently benign scenario, however. China’s recent diplomatic provocations have raised the possibility of conflict on multiple fronts, including with Taiwan, India and within the South China Sea. Increased US naval patrols could expedite Chinese plans to safeguard its regional economic and security presence. Chinese militarisation of the South China Sea and exercises around Taiwan will continue, eroding the fragility of the current status quo and raising the likelihood of diplomatic missteps. This could also negate any initial hesitation among Asian (or Australasian) countries in backing a US-led coalition of “like-minded” nations. Under such a scenario, the risks of a regional arms race might come to fruition. The US would probably have no choice but to engage more forcefully, such as in the South China Sea.

Human rights and the environment

A Biden-led US would be likely to step up its pressure on China on human-rights issues. Tensions in this area have been brewing in recent months. The US has recently imposed sanctions on Chinese officials over the treatment of the Muslim Uighur population in Xinjiang and in response to the new national security law passed for Hong Kong, which limits the territory ’s autonomy. Previous US administrations have been hesitant to push China too hard on human rights issues, for fear of derailing economic ties. In the current climate, however, an increased focus on human rights would appear both desirable and politically useful for the Biden administration. We would expect additional sanctions against Chinese government officials and entities that are accused of such abuses; although the focus would be likely to remain on Xinjiang and Hong Kong, China’s perceived bullying of Taiwan would also be likely to gain greater attention in the coming years.One possible area for co-operation between the US and China is on the environment. Mr Biden has outlined ambitious plans to make the US a net-neutral economy in terms of its carbon emissions by 2050. He has also proposed a US$2trn investment to improve energy efficiency, shift toward sustainable infrastructure and housing, boost R&D in critical technologies, and expand renewable power generation. China’s energy and environmental policy has been progressive compared with the US’s policy in recent years. This could provide ample opportunity for joint policy proposals around clean technology and industrial upgrades, which could potentially help to balance against tensions elsewhere. There are, then, some green shoots.

Posted by gandatmadi46@yahoo.com

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