US-China relations: From bad to worse

A bipartisan consensus over thwarting Beijing’s assertive pursuit of its ‘core interests’ signals a turbulent period ahead for US-China relations. The COVID-19 pandemic has fuelled long-simmering tensions and has accelerated a shift towards increasing strategic competition. In this insight, we explore several broad areas where we expect relations to worsen. These will be analysed in greater depth over the coming months, particularly in the run-up to the November poll, and the prospect of a new US administration in 2021.

Trade and economic de-coupling

The two sides remain locked in a trade war and the Phase One agreement struck in January 2020 represents a partial ceasefire at best. Despite reducing tariffs on USD120 billion worth of Chinese goods, the Phase One deal locks in an average tariff rate of approximately 19% across all Chinese imports, a marked contrast to the 3% rate registered before the start of the trade war.

Tariff rates will remain high between the two largest economies, denting the profitability of US firms that offshore part of their supply chain to mainland China and export their goods back to the US market. The scope for a Phase Two agreement is remote. Beijing is falling short of its commitment to buy more US goods and will likely wait for the November election results before undertaking any new commitments.

The US will continue its campaign to stymie the rise of Chinese tech companies perceived to threaten America’s technological supremacy and national security.

The US Commerce Department moved in May to prevent Huawei, the world's largest manufacturer of telecommunication equipment and second largest of smartphones, from accessing US technology or software. The rule-change, expected to enter into force in September, escalates the administration’s aggressive moves to de-couple US technology and communications infrastructure from Chinese telecoms firms.

With concerns over Huawei’s links to the Chinese military and fears that Beijing may use dependence on Chinese technology as a tool to pressure Western economies, we expect the US to continue its drive to persuade US allies to bar Huawei from participating in the rollout of 5G networks; and restrict the export of critical tech components to Chinese firms via the US Entity List.

Capital markets: A new front?

The push for greater transparency from Chinese companies listed on US exchanges portends another front in Sino-US competition. In May, the US Senate voted unanimously to pass the Holding Foreign Companies Accountable Bill, which would enable the Securities and Exchange Commission (SEC) to bar the trading of shares from any company that has not been audited by US regulators for three consecutive years. The bill would also force companies to disclose the extent of their ownership by foreign governments.

Senate lawmakers have sought to pressure Chinese firms that have long-resisted transferring information over to overseas regulators to comply with US disclosure and transparency standards. Passage of the bill would put over 150 Chinese listed companies (with a total market capitalisation of USD1.2 trillion) at risk of greater regulatory scrutiny from US officials. The House has taken up similar legislation reflecting a strong bipartisan desire to tighten regulatory oversight of Chinese capital in US markets.

Security flashpoints

Flashpoints surrounding Hong Kong, Xinjiang, Taiwan and the South China Sea, will continue to sour bilateral relations with limited scope for negotiation or compromise.

After Beijing’s decision in June to enact a sweeping new National Security Law in Hong Kong, the US government responded swiftly with sanctions and legislation designed to remove any special privileges conferred onto the city.

These included passage of the Hong Kong Autonomy Act, which broadens a sanctions regime against individuals and financial institutions viewed as materially undermining Hong Kong’s autonomy; an Executive Order that designated a number of US laws to treat Hong Kong as part mainland China, and steps to revoke favourable export controls with the city.

These moves followed past actions targeting Chinese officials for the mass incarceration of Muslim Uighurs in Xinjiang. The US has also routinely sought to project its military power in the Pacific as a signal of support to Taiwan and other US interests in the South China Sea. But as the closure of the Chinese consulate in Houston on 22 July – ostensibly on national security grounds – indicates, the list of security flashpoints is rapidly expanding beyond these long-standing issues, with more likely to emerge in the run-up to the November election.

What is the outlook?

We do not expect there to be an off-ramp for the current trajectory of worsening bilateral relations. Politically, the Trump administration has no electoral upside in trying to accommodate or find a solution to the large number of irritants causing friction between the two sides. Indeed, Democratic presidential candidate Joe Biden has attacked the Trump administration for being too soft on China.

While a change in 2021 would see a Biden administration seeking to mend frayed relationships with traditional geostrategic partners, their approach towards China will likely be one of continuity more than change. Meanwhile, bipartisan support in Congress for maintaining an aggressive posture on matters related to trade, technology, and security issues will ensure that relations remain frosty for the foreseeable future.