Escalating Tensions Between China and the US

5 min read.

Despite the omnipresence of subtle friction between China and the United States (US) over the years, these tensions have accelerated in recent months. US-China relations are at their lowest in decades as the Trump administration threatens to shut down Chinese consulates in America and increasingly bans Chinese companies from entering the American market. Moreover, geopolitical tensions between the world’s two largest economies have been cast under the limelight due to the impending US presidential elections.

In January 2020, a trade pact signed by the US and China in January 2020 sought to ease political friction between the two powerhouses, however, the entry of the COVID-19 pandemic into the picture caused tensions to heighten once again. These tensions have undeniably impacted businesses and left companies in a state of vulnerability. In a survey released by the American Chamber of Commerce in Shanghai, more than 25 percent of respondents expected US-China trade tensions to last “indefinitely”, as compared to about 17 per cent a year ago. Meanwhile, only 14 percent of companies thought the issue would be resolved within a year. 

Tensions between China and the US have intensified in recent months.
Credit: Bloomberg

What Does This Mean for Businesses?

For enterprises seeking to enter the US market, geopolitical tensions have increased their vulnerability to tit-for-tat policies and the unpredictability of their outlook. Before they can even enter the market, however, it seems that their origins now matter significantly. Many Chinese companies are viewed by the American government to be under the influence of the Chinese government, and hence a threat to the country’s national security. This has prompted the American government to blacklist many Chinese companies on an “Entity List” under the Export Administration Regulations (EAR). The Entity List restricts sales of US goods to listed companies, including items made abroad with US content or technology. Essentially, blacklisted firms cannot buy components from US companies without the government’s scrutiny and approval.

Over the course of 2020, the Trump administration has ordered the US Department of Commerce to add various Chinese companies to its Entity List incrementally, including 33 new companies in May, 11 in July, and 24 in August. Among these companies are NetPosa, one of China’s most famous Artificial Intelligence (AI) companies, Nan O-Film Tech, a supplier for Apple’s iPhone, and Changji Esquel Textile of the Esquel Group, which produces clothing for Ralph Lauren, Tommy Hilfiger and Hugo Boss. The wide range of industries to which the blacklisted companies belong highlights a desire of the US government to decouple its economy from China’s in different sectors.

According to Foreign Policy, these policies partly stem from the Trump administration’s ideal of achieving reciprocity with China. Past statements released by the US government have often emphasized a desire to create “reciprocal trade relationships” and policies carrying the intent of reciprocity are usually accompanied by the word “fairness”. The idea of an even score card of actions is believed by the US government to serve American interests, however, these tit-for-tat policies could in fact end up hurting both parties, as the world’s two largest economies become increasingly interdependent. While Chinese companies are increasingly venturing to American markets, US financial institutions are growing their presence in China, while global supply chains remain incomplete without components from either one of the two countries. 

Chinese President Xi Jinping and US President Donald Trump attended their bilateral meeting on the sidelines of the G20 Summit in 2019.
Credit: CNBC

Will the Outcome of the US Presidential Election Make a Difference?

Undeniably, US-China relations have become a hot-button issue in the US’ upcoming presidential elections. As such, Republican candidate President Donald Trump and Democratic candidate former Vice President Joe Biden have espoused divergent views on the best policies America should adopt to tackle China’s growth in power as a major powerhouse global economy. 

On one hand, Trump frames himself as the only president to have stood up to Beijing and its supposedly predatory trade policies. In his acceptance speech, he asserted that his administration had implemented “the toughest, boldest, strongest and hardest-hitting action against China in American history by far.”

The Biden campaign refutes this claim, arguing that the Trump administration rarely follows through despite talking tough about standing up against China. In a statement released in August, the Biden campaign said that “President Trump’s policies have strengthened China’s hand and weakened America’s by denigrating our alliances, pulling back from the world, abandoning our values and tarnishing our democracy,” ever since he took office in 2016. 

Yet, in spite of this disagreement between the two, one similarity remains clear between both candidates: US-China tensions can be expected to heighten no matter the outcome of the election, where America will likely continue to implement stringent policies against China. More policies aimed at retaliating against Beijing and shielding America’s domestic market from Chinese companies can be expected in the upcoming years.

In an interview with Paul Krake, the founder of US-China Series, Paul elaborated that the US is likely to retain protectionist measures against China regardless of the outcome in November. However, the two candidates may approach US-China relations with different approaches. Paul expects the recently heightened anti-China rhetoric to tone down post-election if Trump were to be re-elected, for he identified the Trump administration’s recent retaliatory policies against China to be more of a short-term election strategy than an enduring diplomatic agenda. That said, a Trump administration will continue to focus on tackling issues of national security and economic decoupling from China. Meanwhile, a Biden administration will likely focus on strengthening military alliances and tackling human rights issues in China. It will possibly also adopt a multilateral — as opposed to bilateral — approach by utilizing international platforms such as the United Nations (UN), World Health Organization (WHO) and World Bank to facilitate diplomatic relations with China.

Experts have echoed this view. According to Jimmy Chang, chief investment strategist at Rockefeller Asset Management, “both parties [will come] up with anti-China positions as a way to win votes” in the upcoming elections. However, he agrees that “there’s a bipartisan consensus to get tougher on China”, anticipating “things [to] move at a faster pace” after the November elections. Meanwhile, BlackRock, a global investment management corporation based in New York City, predicted the mounting tensions between the two countries to potentially “affect nearly every dimension of the US-China relationship — regardless of the US election outcome”.

Liu He, China’s Vice Premier, and President Trump signed an initial trade agreement in January 2020 at the White House.
Credit: New York Times

Being ‘first in, first out’ of the COVID-19 pandemic, China’s economy is on its way to a slow recovery, while the US, along with most other major economies, continue to struggle with bringing the virus under control. The US government has identified an urgent need to curb China’s economic growth and prevent it from overthrowing the US’ position as the world’s largest economy. However, a complete decoupling is unlikely to be beneficial for either country, as US exports rely heavily on Chinese demand. Furthermore, American medical supply chains are mostly situated in China, a vulnerability unearthed by the recent COVID-19 pandemic. Meanwhile, China is dependent on US technology and commodities to complete its own supply chains, without which it will be unable to gain a comparative advantage in the technology sector.

Amidst the intensifying tensions between the two global powerhouses, however, both countries seem to recognize the benefits of working together, at least for now. A New York Times article published in July this year described the trade agreement signed by the leaders of the two countries earlier in January as  “an area of calm” and a “rare point of stability”. Despite an uptick in political tensions in the subsequent months, the Trump administration has not threatened to impose additional tariffs on Chinese imports, and neither side has shown any intent to overthrow the agreement thus far. From a legal perspective, this mutual understanding could signify a secure connection between the countries in the interest of ensuring successful business exchanges in the future. However, given the volatility of US-China relations in recent months, a bifurcation between the two countries would not be surprising, either.