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After US and China Alaska Meeting: A 2021 Outlook for US-China Relations

On March 18th and 19th 2021, the first high-level diplomatic meeting since Biden’s election took place in Anchorage, Alaska against the backdrop of deteriorating bilateral relations of the two countries. The meeting opened with heated exchanges of rebukes of each other’s policies, but followed with much more rational and constructive discussions, which suggests that both sides were serious about seeking opportunities for cooperation despite their differences. In contrast of the popular expectation that U.S. and China will return to normal diplomatic protocols after the Alaska meeting, the meeting ended with no major breakthroughs while several sanctions were placed from both sides since the meeting ended. US Secretary of State Antony Blinken said on March 29th that he sees “increasingly adversarial” aspects to the United States’ relationship with China.

Over the last 30 years, U.S.-China relations have undergone an impressive transformation from animosity and conflict to candid dialogue and constructive cooperation. However, US-China relations have sharply deteriorated since 2020 because of the COVID-19 pandemic. Additionally, Donald Trump’s administration, paved way for a rocky bump in the US-China relationship as Trump  waged a trade war on Beijing by increasing tariffs on Chinese imports. Further, China retaliated by doing the same.

For this blog post, ESI and ANBOUND present the voices from both the US and China while answering some critical questions.

Q1: How do you see the future of technology, research, and development intensive businesses (such as semiconductor, high-tech hardware or IT services, telecommunication, biotechnology etc.) in two countries? Or how do you see two countries’ collaboration and competition in cutting-edge technology?

Steve Wray, Senior Vice President & Principal, ESI: The Biden administration has taken an aggressive, investment-based approach to the growing technology competition between China and the United States. While maintaining a vigilant approach to issues of intellectual property rights and appropriate use of technology, the newly introduced American Jobs Act, often referred to as the Infrastructure Bill, shows a new focus on domestic investment in research and development, manufacturing upgrades and reshoring as a means for challenging China’s growing strength in technology and research. This focus on investment in US capacity recognizes the United States’ failure to match Chinese investment and concern over a loss of control over the advanced research and manufacturing that used to be an American advantage. Expect increased competition for talent, raw materials, and investment as this plays out.

Don’t count out the economic impact of the COVID-19 pandemic as a triggering factor in increased US investment domestically. The loss of supply chains due to pandemic-related issues demonstrated the fragility of economic connections and has triggered efforts on both the left and the right in the US to re-shore key industries and facilities. This is an area where cooperation between parties may be possible, particularly as the efforts at economic recovery expand.

Siang Kim Chia, Chief Editor, ANBOUND Malaysia: The confluence of geopolitical events is driving the reshoring of US manufacturing from developing countries, especially from China back to the United States. Yet, the supply chain has its own logic. Once a network of suppliers and buyers in a region is established, it is difficult to remove part of this network. Such network is indispensable in technological research and development in manufacturing.

Meanwhile in China, the 14th Five-Year Plan reveals a rise in the proportion of science spending devoted to basic research. This actually means that China is placing more emphasis on research and development. While there is conversation about self-reliance in China, which is a natural outcome under the current geopolitical circumstances, it has never denied international cooperation. Indeed, China as a major stakeholder and active participant in globalization requires collaboration with countries in the world, not least with the United States.

Granted that such collaboration is improbable now in certain more sensitive areas, China and the US still need to work together on issues like stabilizing global supply chains. Collaboration also be extended to the digital economy and sustainable development, particularly in its standardization, secured data flows, cross-border transactions, and promote the development of industrial digitalization through the improvement and innovation of technology application.

Q2:  Some are saying that US and China are moving to a so called “New Cold War”? If so what do you think could happen in the “New Cold War”?

Richard Voith, Founding Principal, ESI:  War, whether “cold” or the direct use of arms is a failure of diplomacy that ultimately wastes resources that otherwise could be put to good use.  The prospect of the US and China engaging in a “New Cold War” will, like all wars, adversely affect the economies of both nations, and the outcomes may well be asymmetric and unpredictable. The pursuit of narrowly defined “America First” policy or Chinese assertions that behaviors with respect to human rights, intellectual property, and territorial claims are “internal affairs” both ignore the underlying economic and social reality of globalization. The pandemic, for example, is a truly global phenomenon which could have been much better addressed in an environment of trust and cooperation.  Although “globalization” has become a dirty word for a significant number of people, it is a short step from anti-globalization to outright xenophobia, a key ingredient in sustaining “cold wars’, which is a perspective that undermines healthy competition as well as cooperation.

The opening of China and the increase in globalization over the last 50 years has seen unprecedented reductions in global poverty and increases in wealth. There have been failures as well which have created serious challenges including rising disparities of in the distribution of wealth, climate change, and increasing social divisions (which are vividly on display in the US and on a more muted basis in China.)  None of these challenges will be truly addressed by a “New Cold War” except that associated rising nationalism may temporarily paper over internal divisions in individual nations.

Chan Kung, Founder, ANBOUND: The world has not escalated into another “Cold War”. One needs to note that by definition, “Cold War” is ideologically motivated, not geopolitical. In contrast, at our current age, geopolitics has become the dominant force in world capital and markets. As the United States has strategically ranked China as a long-term competitor, geopolitics will become a long-term factor which will affect China’s development. In an era of increasing geopolitical influence, China needs to rethink the significance of the geopolitical era and respond to the arrival of the “geo-economic” era. If major countries engage in geo-economics, they will have greater influence. If the geo-economy prevails, it will be very detrimental to China as a whole.

The influences of geopolitical factors on the market are ubiquitous and manifested at all levels. For instance, the sanctions and restrictions imposed by the United States on many Chinese companies have caused geopolitical distortions in the industrial division of labor and supply chain systems. At the level of the capital market, increasing geopolitical factors have also formed new interventions, especially the various financial sanctions and access restrictions under the pretext of “national security” initiated by the Trump administration. This has impacted global capital, where non-market interventions have been added to the market. Comparatively speaking, the US under the diplomatic measures taken by the Biden administration will be more sophisticated compared to those taken during the Trump era, and there will be more meticulous policies focusing on practical results. This may have more lasting effects on China.

Q3: How will US and China work on COVID-19 and vaccine issues?

Steve Wray, Senior Vice President & Principal, ESI: The COVID-19 pandemic has highlighted challenges between the US and China in identifying, fighting, and eradicating viral diseases. The lack of collaboration and cooperation at the beginning stages of the pandemic is a likely contributing factor to the rapid spread and devastating impact of the virus around the world. Hopefully, this will not be repeated following the US return to the World Health Organization, but even with that, we should expect US skepticism and vigilance when it comes to working with China on emerging diseases and viruses.

One area of competition appears to be the distribution of vaccines to the developing world. As the US has struggled to combat the virus and ramp up its vaccination program, China has been able to provide vaccines and supplies to developing countries as it develops new economic and political relationships. The Biden Administration’s American Rescue Plan provided funding for international vaccination efforts, and it would be logical to expect a concerted effort to expand vaccination worldwide with US resources once the US vaccine threshold is hit in early summer. It will be interesting to watch this play out, and how competitive or collaborative these global efforts become.

Chan Kung, Founder, ANBOUND: The severity of the COVID-19 pandemic has highlighted the extreme importance of vaccines. When it is difficult for countries to take extremely strict lockdown measures to halt the pandemic, vaccines become one of the means, if not the only hope for countries to combat the coronavirus. In this regard, a “vaccine war” is imminent.

This “vaccine war” is not merely limited to the purchase of vaccines. The hotly discussed “vaccine passport” issue in many countries is also an extension of the “vaccine war” and may trigger a series of major disputes and geopolitical effects. Developed countries may not necessarily recognize the “vaccine passports” of developing countries and developing countries may also refuse to recognize the “vaccine passports” of some developed countries due to fear of virus transmission.

Despite of its many problems, for the economies of countries impacted by the pandemic, the possibility of “vaccine passport” is very real. For some large-scale vaccinated countries, which are mainly developed countries, they are unlikely to give up the possibility of recovering the economy as soon as possible because of the advantages of the vaccination.

Q4: Former US president Donald Trump placed tariffs on around US$370 billion of Chinese goods, with Joe Biden already saying he would not make any ‘immediate moves’ to lift the tariffs. How would China and US’s economy be impacted from the continuing tariffs in 2021?

Richard Voith, Founding Principal, ESI: The political appeal of “bringing jobs back from overseas” is undeniably politically attractive, just as is keeping immigrants from taking “American jobs.”  On the other hand, people love the low prices of imported goods and firms benefit from the talent of skilled labor which in many cases are new arrivals from China.  At the same time, the US benefits enormously from exporting goods and importantly services across the globe and US citizens work around the globe as well. Well-structured economic competition with broadly accepted rules of cooperation in regards to trading nations has the most potential to generate not only economic growth, but also environmental sustainability, successful responses to things like the current pandemic, and peaceful coexistence.

Unfortunately, the challenges in creating domestic economies that prosper in a global environment, and the failure to generate domestic opportunities that are perceived as fair, are significant even as the entire economic pie is growing. Failure to address these challenges result in a tit-for-tat imposition of tariffs that respond to domestic political needs but fail to address the needs for cooperatively determined rules for international trade. This also halters the rise in income and opportunities for whom the tariffs are alleged to protect.

Ultimately, tariffs between the US and China have had a very predictable impact of encouraging China to prioritize developing its own industries and technological prowess while making China’s now enormous market less open to US firms. Because anti-China rhetoric in the US has been successful (in part due to Chinese policy choices on a number of fronts), the Biden Administration will be domestically driven to continue unproductive tariffs. Ultimately, both the US and China will both be better off with the tariff issue resolved, but this will likely take cooperative action on the part of China that require changes in current policy.

Siang Kim Chia, Chief Editor, ANBOUND Malaysia: The general characteristics of US-China relations in the Biden era are that the risks and uncertainties are considerably reduced. However, there are still technological restrictions in view of the tariffs imposed by the current US administration.

As President Biden has indicated that the tariffs will not be lifted in the immediate future, it can be seen that in terms of trade, he would continue to stick to the general direction of the past. That being said, this would not be the main direction of his governance. The US-China trade war could see certain respite sooner or later. China as the largest trading partner of the United States, could still hope for the pressures in the trade with the US being reduced.

In a recent development, in the USTR National Trade Estimate Report on Foreign Trade released last month, while a number of China’s trade policies were criticized therein, the report does acknowledge that the Phase One Agreement reached by both parties early last year “establishes a strong dispute resolution system that ensures prompt and effective implementation and enforcement”. While admittedly the tone of the relations between China and the United States, as seen in this report is confrontational, there is still cooperation and communication, which forms a new kind of co-opetition between the two countries. Both US and China need to define the boundaries between core interests and general issues, so as to build effective bilateral relations, thereby achieving the “coopetition” between the two countries and gradually bringing the relations back to the track of cooperation.

“Carbon tariff” on the other hand, will significantly affect China’s import and export trade, as there would be a number of low energy-efficiency products that cannot be produced. Consequently, changes in consumption patterns would see some changes as well. In this regard, Chan Kung, ANBOUND’s founder has put forward the strategic concept of developing a “hydrogen energy society” a few years ago, and ANBOUND’s research team has been suggesting the Chinese policymakers to implement this strategic concept in the past two years.

Q5: What are some of the industries that might have significant development potentials despite the heating US China relations?

Jing Liu, Associate Director, ESI: Climate change is a global issue and no single country can solve the climate crisis by itself. Despite the frosty Alaska talk between US and China earlier, Biden administration’s climate envoy John Kerry met with his Chinese counterpart Xie Zhenhua in a climate summit “Ministerial on Climate Action” co-hosted by China after the Alaska Meeting. John Kerry said that “American pursuit of greater research and development on climate change is not a counter to China”. Biden Administration’s historic $2 trillion climate proposal raised detailed climate action across sectors, including transportation, electricity, building and construction, and agriculture which is aimed at achieving the long-term goal of net-zero emissions by 2050, which would be one of America’s largest federal efforts ever to stem its greenhouse gas emissions if the proposal was signed. This is an opportunity for US and China to build a wall of trust to cooperate in a way that supports their dynamic bilateral relationship more broadly.

Sidney Wong, Senior Advisor, ESI: Apart from looking for industries with potential within America and China, we should prepare ourselves for the realignment of the global supply chain. The new American-Sino relationship is reshaping the world’s economic geography. For twenty years, resource-rich countries like Australia have exported raw materials to China who utilized their hard-working labor for making products exported to Europe, America and Japan. That triangle of flow will change. It is likely that the vast maritime region including the ASEAN countries and the Indian Subcontinent is staged for taking off. As China is moving to mid- and high-tech manufacturing, this region where a total of around 2.4 billion people reside, will have enormous business opportunities and could be the next World Factory.

Wang Yi, Head of Global Development Program, ANBOUND: Noticeably, China-US trade amount remains at a high scale. According to the Customs statistics of China, in 2020, the bilateral trade in goods valued 4.06 trillion yuan ($630 billion), a year-on-year increase of 8.8%, the highest growth among China’s top five trading partners. Of which, China’s export to the US was 3.13 trillion yuan and up 8.4%. While China’s import from the US were 931.87 billion yuan and up 10.1%, it is evident that a strong inertia and mutual demand of trade relationship exists between China and the US. There will probably be a larger collaboration within other industries, from manufacturing to services. China is a country with many consumers. The world is currently observing its gradual transition from a production-oriented society to a consumer-oriented society.

During the 14th Five-Year Plan period (2021-2025), China is excessively stressing more on high-quality development and the well-being of its citizens. Green Innovation brings along sustainable growth for China. The government has formulated a new emission reduction target, which sheds light on the capital market with a new theme of investment and green finance modeling. This is not only of direct significance for energy corporations, but it also carries importance to urban renewal, infrastructure, and other related fields. An upgrade in China’s industrial ventures and a healthy transformation in its economic structure shall mirror its “green benefits”.

The strategy behind the Yangtze River Economic Belt is to accelerate the development of the western region to look promising. It bridges an east-west balanced economic space, hedging the great impacts on the external environment of the Chinese economy, by expanding its market space and stimulating consumption needs. Measures against the COVID-19 pandemic have generated, or behaved as a catalyst for various services, especially living, social communication, online workspace, knowledge payment, education, entertainment, and healthcare.

The rise in China’s aging population and decline in its birth rate is leading China to enter an aging society where more than 260 million people are 60 years and above. This is generating a demand for services especially for the elderly. The Chinese market welcomes the entry of foreign businesses that provide related aging products, and services associated to medical care. In the past few years, some US-funded and other foreign medical institutions have also successively settled in China. The US medical exports to China are mostly high-end pharmaceuticals and medical devices. US-China cooperation in the medical field will be of help to reduce the US’s trade deficit.

Urban renewal is one of the major subjects for Chinese policymakers. The Ministry of Commerce has revealed initiatives on improvement of pedestrian streets, walkable district, and livable communities, which are in fact in line with the “Pedestrian Oriented Development (POD)” advocated by ANBOUND since 2018. Urban collaboration, particularly on smart cities, could be another viable field of collaboration for both US and China. The research partnership between ANBOUND and ESI is one such example which helps seek pragmatic solutions to connect US-China trade and provide ease in cooperation.

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