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US-China relationship in 'new normal' will be largely adversarial

Chinese President Xi Jinping believes that it is time for his country to reclaim its historically central role in greater Eurasia.

WHOEVER is sworn in as the next president of the United States come January, the relationship between the US and China - the world's two largest economies - will never be the same.

In my 40 years monitoring, working and living in China, the bilateral relationship has been a broadly positive and constructive one, despite areas of disagreement such as Taiwan.

The "new normal" is the converse - a largely adversarial relationship characterised by conflict, with limited areas of cooperation.

Despite suggestions to the contrary, this is not temporary. It is not about the trade balance - or the military balance or the technology balance - it is about all of those and more.

For many businesses, the key calculus is a competition to shape global connectivity - supply chains, data flows, infrastructure, and the technologies enabling the future of commerce, such as 5G, digital payment systems, the most advanced semiconductors and specific user apps.

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It is a generational shift that will be marked by systemic confrontation for some time to come. This conflict was brewing long before Mr Trump was elected in 2016, and it has been driven by both sides.

The Trump administration has taken a hard line on China, but in many areas - the South China Sea, intellectual property theft, cyber attacks, market access, the governance of US-listed Chinese companies - this has been a long time coming.

These concerns are also largely bipartisan, and are shared to varying degrees by most US allies.

While a change of US leadership would bring some changes of emphasis, approach and style in addressing these issues, the agenda and goals will be broadly similar regardless of who occupies the White House.

Chinese President Xi Jinping believes that it is time for his country to reclaim its historically central role in greater Eurasia. Mr Xi's narrative of national rejuvenation, with China "standing up" after two centuries of weakness and exploitation, appeals to his domestic audience.

While this is a product of China's increasing wealth and power, it was also bound to cause friction with its neighbours and the US.

Beyond Washington, fears that China is bent on regional domination have been fuelled by events in 2020, including Beijing's moves to severely curtail Hong Kong's special status and its use or threat of punitive economic pressure in disputes with countries such as South Korea, Japan, Canada and Australia, as well as military pressure on India, Vietnam and the Philippines.

The US has increasingly responded to China's behaviour with tariffs, restrictive foreign investment criteria, sanctions and export controls - most critically around the supply of key technologies.

Many of these policies will outlive the Trump administration, and numerous other countries have become more open to restrictions on China than they were a year ago.

This is a major test case for the feasibility of US-China decoupling. Both sides have unveiled initiatives to insulate their tech ecosystems from the other, such as the US "Clean Network" initiative and China's multi-pronged strategy to end its dependence e on "unreliable" suppliers, in addition to its Made in China 2025 programme.

While the bilateral trajectory is troubling and will not be reversed by the US election, it is far from certain that relations will spiral towards broader decoupling and unrestrained conflict.

Overall, the US-China commercial partnership has remained remarkably resilient. US businesses continue to invest in China on a "China for China" basis, drawn by the purchasing power of 700 million urban consumers, rising per capita incomes, modern infrastructure and skilled labour.

While there has been significant diversification of supply chains to reduce reliance on China, there is still no similar-scale substitute for some of China's roles.

So far, there has been no Beijing-inspired public frenzy to boycott American brands, as has happened in the past with Japan and South Korea, and Beijing has been remarkably restrained in bashing US multinationals for the White House's actions.

But can the commercial relationship remain positive if the political one does not improve substantially?

First, while this is primarily a "US vs China" battle, in 2020 it has also looked more like a "China vs the rest" clash - the European Union, Japan, India and other nations are equally frustrated with some of China's actions.

Second, China's responses to US initiatives have been more growl than bite. Despite intense recent pressure from Washington, Beijing has resisted upping the ante while reassuring US investors that they are still welcome.

Finally, if there is a new US president in the form of Joe Biden, the US policy towards China - shorn of some of its more provocative elements - will likely become more coherent and predictable, and create an opportunity to moderate the current escalatory cycle.

While this would be a welcome change, fundamental areas of disagreement will remain. Some of the changes might actually deepen the competition.

A Biden administration would emphasise human rights and multilateral coordination against China - areas to which Beijing is highly sensitive.

Rather than a decisive, economy-wide divorce, the US and China are entering years of reluctant co-habitation.

Multiple industries will continue to face disruption, and political-policy complexities - hitherto seen as problems only in traditional strategic sectors such as defence and strategic national infrastructure - now have wider ramifications.

For investors on both sides, sectoral developments will matter more than ever. Tech, healthcare, financial services, artificial intelligence and anything centred on data - are becoming national strategic interests.

A crucial and highly opaque driver of developments will be whether Beijing is willing and able to recognise how its behaviour is contributing to a dangerous US-China trajectory, and to adjust accordingly.

Future US administrations must realise that treating China as an enemy in all things is neither smart nor practical. There is simply no one-size-fits-all for a country as complex as China.

Governments and corporations need nuanced policies that recognise that in some areas, China is an adversary; in others a competitor; and in still others a potential partner.

  • The writer is a partner in Control Risks, a specialist risk consultancy. He is also a former US diplomat.

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