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U.S.-China Relations Hit a Snag

Blog

U.S.-China Relations Hit a Snag

A brief housekeeping note before we get to today’s newsletter. You can listen to the latest episode of The Perch Pod on the past and future of U.S.-Iranian relations by clicking here. You can read an article Jacob was quoted in about U.S. food supply chain issues by clicking here. As always, feel free to share this newsletter and our podcast with anyone you think might be interested in the content. Please also feel free to reach out to us directly if we can help you or your business navigate these difficult times and set you up for future success by replying directly to this e-mail. Without any further ado, onto this week’s main issue: the newest and latest deterioration in U.S.-China relations.

Since a March 27 phone call between U.S. President Donald Trump and Chinese President Xi Jinping, relations between Beijing and Washington, while by no means friendly, had assumed an air of pragmatism. Both sides seemed to have agreed, at least for the time being, to put aside their differences and to focus on getting the COVID-19 global pandemic under control. China even subsequently and significantly increased imports of U.S. agricultural products in an earnest attempt to live up to its commitments in the so-called phase one U.S.-China trade agreement agreed to in January.

Now, it seems the honeymoon is over, and the repercussions in the U.S.-China relationship could be severe.

On Sunday, the Associated Press somehow acquired a four-page Department of Homeland Security intelligence report marked “for official use only” that concluded China had “intentionally concealed the severity” of COVID-19 in early January. That same day, U.S. Secretary of State Mike Pompeo told ABC that “China has a history of infecting the world,” that there was “enormous evidence” that COVID-19 originated in a laboratory in Wuhan, and that the US would “hold [China] accountable” for the “global economic devastation” it had caused. Then, around midnight on Sunday (just after lunchtime in Beijing), Reuters published a report that the US was “turbo-charging” an initiative to sever global industrial supply chains from China.

The Reuters article contained much more than a juicy quote from a U.S. State Department deputy undersecretary. Citing officials familiar with U.S. plans, Reuters also reported that the US might soon announce new, concrete, anti-China actions, to potentially include additional tariffs, tax incentives for reshoring American companies, sanctions against Chinese officials or companies, closer relations with Taiwan, and an economic alliance dubbed the “Economic Prosperity Network.” In hindsight, Secretary Pompeo’s comments last Wednesday about working with Australia, India, Japan, New Zealand, South Korea, and Vietnam to “restructure supply chains” have taken on new meaning.

China will read these American threats as overtly hostile. China was already primed for frustration because of Secretary Pompeo’s recent campaign to blame China for COVID-19, recently lambasting the Secretary in state-run media as an example of American ineptitude and dysfunction. One People’s Daily column even called the U.S. attempt to collect compensation for COVID-19 as a “shame for human civilization.” Still, while this war of words is annoying for China, it is hardly a cause of any existential concern. A concentrated U.S. attempt to put pressure on companies active in China to abandon operations there, to increase the independence and strength of Taiwan, and to assemble a regional alliance aimed squarely at containing Chinese ambitions, is a different thing entirely.

It is perhaps little coincidence that earlier today, news of a report drafted by the China Institutes of Contemporary International Relations (CICIR), reportedly presented last month by China’s Ministry of State Security (China’s primary intelligence agency) to Xi himself, also hit the wires. Sources familiar with the report said the CICIR advised that China was facing a level of global anti-China sentiment unmatched since the 1989 Tiananmen Square crackdown, and that in a worst-case scenario, China needed to be prepared for an “armed confrontation” between China and the United States. (It is worth noting that at this point, a copy of the report is not readily available, and what is known about it is coming from sources that are familiar with it.) In response to questions on the CICIR report, China’s Foreign Ministry said it had no “relevant information.”

It is possible to read the news of the CICIR report as dissatisfaction with Xi Jinping’s stewardship of China’s global reputation – just as it is possible to read the U.S. leaks as a part of a media campaign to burnish President Trump’s anti-China credentials as his reelection campaign kicks off in earnest. The more likely interpretation is that China let the information about the CICIR report become public knowledge as a warning that it is prepared to defend itself by all means necessary if it deems its core interests are threatened – and that the US is attempting to capitalize on the negative press surrounding China due to its lack of transparency about COVID-19 to the world back in January to assert its own interests.

The saving grace in all this saber-rattling is that powerful forces in both the US and China have little use for it. U.S. multinational companies do not want to be forced to uproot their supply chains in China any more than they are in favor of starkly protectionist U.S. trade policies. Getting tough on China is all well and good – if it leads to U.S. companies gaining better access to the burgeoning Chinese market. China, meanwhile, is in no position to be cut off from the global economy. China’s eventual goal is to move up the value chain and become a major producer of high-tech goods, but China is still years, and potentially decades, away from anything resembling self-sufficiency and in the interim needs access to foreign investment and technology. To the extent that Xi has faced domestic political pressure to speak of, it has come from frustration that he miscalculated how long China needed to hide its strength and bide its time on the world stage.

It is unclear at this point what the next U.S. move is. It is hard not to appreciate the irony that a version of the so-called “Economic Prosperity Network” alluded to in the Reuters report already exists. It is called the Trans-Pacific Partnership (TPP), which the Trump Administration made a very big deal of turning its back on just three days after assuming power back in 2017. For any other U.S. politician, such a radical about-face might seem impossible, but then, President Trump has consistently shown that past positions and previous statements are hardly constraints on his future decisions. Re-joining the TPP, or reverse-engineering some kind of new TPP-like entity, is an obvious policy to embrace if the goal is to strengthen US access to markets abroad while isolating China economically, though its domestic political viability is as tenuous in 2020 as it was in 2017.

The deeper point to be made is that the interests of the U.S. and Chinese governments are not just clashing with each other, but with the respective economic forces on both sides that have become so starkly dependent on the relationship. In that sense global supply chains have been taken hostage by the national security concerns of policymakers in Washington and Beijing and are no longer strictly speaking the purview of the companies for whom national security concerns are bad business. As a result of the US and China increasingly viewing each other as threats, their respective moves are creating an unpredictable and unstable political and economic environment. As in recent such episodes, the two sides will probably find a way to deescalate the inevitable tension that will build up as a result of the events of the past few days, but it is the necessity of the qualifier “probably” that is the real crux of the problem.