he past four years have been characterized by geo-commercial strife between China and the United States: tariffs, the Tech Cold War, and a slew of targeted actions and sanctions. Though President-elect Biden might wish to change the tone of the relationship, the relations will remain fraught. Against this backdrop, five key tension points will set the context for global businesses.
1. Courtship and Decoupling
Tech sector decoupling will advance, with national security hawks erecting higher barriers. China will intensify its courtship of foreign firms in strategically useful sectors, particularly in finance and investment. China already acknowledges the need to open-up to drive competitiveness in its domestic market. Revitalized alliances between the United States and allies, particularly the EU, Japan, and Australia, will add external pressure, opening the door to new opportunities for foreign participation.
Global supply chains will further localize and disaggregate in response to COVID-19, the trade wars, and regional instability, creating new winners in South East Asia, South America, and North Africa. In June, a survey of global supply chain leaders found that 33 percent had plans to move manufacturing out of China in the near future. That said, China and the United States will continue to be the world’s “mega markets,” and China’s growth and stability should prove increasingly attractive for international capital investment, in contrast to heightened U.S. country risk. China’s Dual Circulation strategy will support this trend.
2. New Era for Industrial Policy
Much of China’s economic success has been fueled by government-led industrial policy. China’s upcoming 14th Five Year Plan will continue this tradition, with a focus on “high quality development” through innovative industries, urbanization and modernization of agriculture. Government support for homegrown semiconductor, 5G, AI, biotech, and defense industries will likely also feature heavily in the final plan to be released in early 2021.
Washington will rediscover its taste for “Buy American” industrial policy. Without the support of the Senate, a grand New Deal-like agreement is unlikely. But both sides have signaled willingness to provide public support for U.S. industrial development, including in clean energy, electric vehicles, infrastructure, and healthcare infrastructure. Government spending will likely have strings attached, with procurement dollars flowing to those owned by minorities and adhering to progressive ESG and labor practices.
3. Values-based Alliances
President-elect Biden has made it clear that his administration will seek to resume its multilateral leadership and abandon the lone wolf approach of the Trump administration. Expect the United States to put social values at the heart of its global reengagement, leading with democracy, freedom, human rights and anti-corruption. There will be opportunities (and some pressure) for global businesses to align with these values. A D-10-style alliance of the world’s ten leading democracies could be used for collective action against abuses in Xinjiang, Hong Kong, and the South China Sea.
Despite missteps, including resentment caused by its Wolf Warrior diplomats, China will continue to assert itself at the UN, WTO, WHO and in other multilateral institutions, finding common cause with Russia and other like-minded states. It will evangelize its worldview and reward its allies with market access, as well as building up its multilateral toolbox, including the Asia Infrastructure Investment Bank (AIIB), the Belt and Road Initiative and the newly ratified Regional Comprehensive Economic Partnership (RCEP) trade zone.
4. Climate Diplomacy and Trade
Climate action and decarbonization will become major features of U.S. foreign and trade policy. Beyond rejoining of the Paris Climate Agreement, the United States will use its arsenal of diplomatic muscle, defense agreements, development aid and preferential trade terms to achieves its climate goals. This will embolden companies and trading partners that are already ahead of the U.S. federal government’s climate commitments, while frustrating those in legacy carbon-intensive industries.
Climate could also be a bright spot for U.S.-China collaboration, following recent progress in China to decarbonize. That said, China’s efforts are largely focused domestically and are linked to a government commitment to quality-of-life environmental issues, such as clean air, water and soil. Its Blue-Sky Action Plan, updated in April 2020, links decarbonization and shifts from coal-fueled power to smog reduction and cleaner skies for 24 provinces and cities. We should anticipate flashpoints with the United States in third-party nations where Chinese commercial expansion relies more heavily on carbon-intensive energy and raw materials.
5. Sovereignty and National Security
National security will continue as the principal rationale to restrict Chinese businesses from operating in sensitive sectors in the U.S., particularly in technology, finance and bio-tech. The messy handling of TikTok and efforts to restrict investment in military-connected companies will likely give way to a more systematic approach to reviewing foreign investment.
The CFIUS review process may extend to existing investments that fall under regulatory oversight by specific departments. Such restrictions will enjoy bipartisan support, with Republicans championing restrictive actions against Chinese nationals working in sensitive sectors. As seen with President Trump’s recent Executive Order, the United States will also use its capital and debt markets in an attempt to contain Chinese globalization, spurring the swift development of the Chinese capital markets, including the new STAR Board.
China’s sovereignty and national integrity will remain of paramount importance to President Xi and in maintaining the Party’s legitimacy. Using its tech-surveillance apparatus and tools of the new cybersecurity and national security laws, the Party will retain its grip over all aspects of personal and commercial speech and conduct both in China and increasingly overseas. Any threat to its interests in Hong Kong, Taiwan and the South China Sea will be met with an increasingly assertive and confident response. As Cathay Pacific, the NBA, and Marriott can attest, commercial punishment awaits any business that disrespects these red lines.
a global affairs media network
Biden, China, and Five Tensions for Business
November 23, 2020
T
he past four years have been characterized by geo-commercial strife between China and the United States: tariffs, the Tech Cold War, and a slew of targeted actions and sanctions. Though President-elect Biden might wish to change the tone of the relationship, the relations will remain fraught. Against this backdrop, five key tension points will set the context for global businesses.
1. Courtship and Decoupling
Tech sector decoupling will advance, with national security hawks erecting higher barriers. China will intensify its courtship of foreign firms in strategically useful sectors, particularly in finance and investment. China already acknowledges the need to open-up to drive competitiveness in its domestic market. Revitalized alliances between the United States and allies, particularly the EU, Japan, and Australia, will add external pressure, opening the door to new opportunities for foreign participation.
Global supply chains will further localize and disaggregate in response to COVID-19, the trade wars, and regional instability, creating new winners in South East Asia, South America, and North Africa. In June, a survey of global supply chain leaders found that 33 percent had plans to move manufacturing out of China in the near future. That said, China and the United States will continue to be the world’s “mega markets,” and China’s growth and stability should prove increasingly attractive for international capital investment, in contrast to heightened U.S. country risk. China’s Dual Circulation strategy will support this trend.
2. New Era for Industrial Policy
Much of China’s economic success has been fueled by government-led industrial policy. China’s upcoming 14th Five Year Plan will continue this tradition, with a focus on “high quality development” through innovative industries, urbanization and modernization of agriculture. Government support for homegrown semiconductor, 5G, AI, biotech, and defense industries will likely also feature heavily in the final plan to be released in early 2021.
Washington will rediscover its taste for “Buy American” industrial policy. Without the support of the Senate, a grand New Deal-like agreement is unlikely. But both sides have signaled willingness to provide public support for U.S. industrial development, including in clean energy, electric vehicles, infrastructure, and healthcare infrastructure. Government spending will likely have strings attached, with procurement dollars flowing to those owned by minorities and adhering to progressive ESG and labor practices.
3. Values-based Alliances
President-elect Biden has made it clear that his administration will seek to resume its multilateral leadership and abandon the lone wolf approach of the Trump administration. Expect the United States to put social values at the heart of its global reengagement, leading with democracy, freedom, human rights and anti-corruption. There will be opportunities (and some pressure) for global businesses to align with these values. A D-10-style alliance of the world’s ten leading democracies could be used for collective action against abuses in Xinjiang, Hong Kong, and the South China Sea.
Despite missteps, including resentment caused by its Wolf Warrior diplomats, China will continue to assert itself at the UN, WTO, WHO and in other multilateral institutions, finding common cause with Russia and other like-minded states. It will evangelize its worldview and reward its allies with market access, as well as building up its multilateral toolbox, including the Asia Infrastructure Investment Bank (AIIB), the Belt and Road Initiative and the newly ratified Regional Comprehensive Economic Partnership (RCEP) trade zone.
4. Climate Diplomacy and Trade
Climate action and decarbonization will become major features of U.S. foreign and trade policy. Beyond rejoining of the Paris Climate Agreement, the United States will use its arsenal of diplomatic muscle, defense agreements, development aid and preferential trade terms to achieves its climate goals. This will embolden companies and trading partners that are already ahead of the U.S. federal government’s climate commitments, while frustrating those in legacy carbon-intensive industries.
Climate could also be a bright spot for U.S.-China collaboration, following recent progress in China to decarbonize. That said, China’s efforts are largely focused domestically and are linked to a government commitment to quality-of-life environmental issues, such as clean air, water and soil. Its Blue-Sky Action Plan, updated in April 2020, links decarbonization and shifts from coal-fueled power to smog reduction and cleaner skies for 24 provinces and cities. We should anticipate flashpoints with the United States in third-party nations where Chinese commercial expansion relies more heavily on carbon-intensive energy and raw materials.
5. Sovereignty and National Security
National security will continue as the principal rationale to restrict Chinese businesses from operating in sensitive sectors in the U.S., particularly in technology, finance and bio-tech. The messy handling of TikTok and efforts to restrict investment in military-connected companies will likely give way to a more systematic approach to reviewing foreign investment.
The CFIUS review process may extend to existing investments that fall under regulatory oversight by specific departments. Such restrictions will enjoy bipartisan support, with Republicans championing restrictive actions against Chinese nationals working in sensitive sectors. As seen with President Trump’s recent Executive Order, the United States will also use its capital and debt markets in an attempt to contain Chinese globalization, spurring the swift development of the Chinese capital markets, including the new STAR Board.
China’s sovereignty and national integrity will remain of paramount importance to President Xi and in maintaining the Party’s legitimacy. Using its tech-surveillance apparatus and tools of the new cybersecurity and national security laws, the Party will retain its grip over all aspects of personal and commercial speech and conduct both in China and increasingly overseas. Any threat to its interests in Hong Kong, Taiwan and the South China Sea will be met with an increasingly assertive and confident response. As Cathay Pacific, the NBA, and Marriott can attest, commercial punishment awaits any business that disrespects these red lines.
