More than two months into the Biden administration, some important contours of the post-Trump approach to US-China relations have begun to crystallize.
The president’s foreign policy team is coming together (including key positions for US-China policy), US military strategy is becoming clearer, and supply-chain management is a growing area of concern. Meanwhile, government reports released earlier this month — on artificial intelligence, trade policy, and national security priorities — have helped to better define the administration’s thinking on the China relationship going forward.
Here’s my latest geopolitical perspective, along with some potential macro and market implications.
Recent developments in Washington bolster my conviction that the US-China dynamic is on a new footing of intense rivalry, firmly rooted in “great-power” competition. The Biden team has called China “the only competitor potentially capable of combining its economic, diplomatic, military, and technological power to mount a sustained challenge to a stable and open international system.” In diplo-speak, them’s fightin’ words.
This deepens a fundamental shift in how US policymakers view the China relationship and will likely underlie many policy decisions — from trade, to climate, defense, alliance-building, the strategic role of capital markets, and more. While cooperation on some fronts is possible over the next 12 to 18 months (e.g., COVID-19, climate change), I do not anticipate any major trade agreements or diplomatic breakthroughs.
Longer term, bilateral relations are likely to continue on a downward spiral. US public opinion of China has been on a similarly negative trajectory (Figure 1). But I expect the elevated geopolitical risk to remain manageable in the short to medium term, given more predictable and better coordinated US policy responses under this administration.
Implications for defense and diplomacy
The military dimensions of US-China relations will go hand in hand with any diplomatic successes or failures. That likely means a low but persistent risk of military conflict between the two nations in the coming years and sustained global demand for both traditional defense spending and “dual-use” technologies central to burgeoning great-power-competition military doctrines.
Equally important to US-China relations will be the Biden administration’s efforts to strengthen military, diplomatic, and economic ties with the other three “Quad” countries — Japan, Australia, and India. To the extent US cooperation with these and other global allies bears fruit, it might undercut China’s influence and help maintain regional geopolitical stability.
Implications for other sectors
I believe the Biden administration is in the process of broadening its definition of what constitute “strategic” industries and sectors — those deemed vital to national security interests and ongoing competition with China — to include sectors with perceived US supply-chain vulnerabilities, such as semiconductors, electric-vehicle batteries, and pharmaceuticals.
I expect continued US-China (and global) decoupling in these and other strategic sectors, more regionalization of supply chains, and onshoring incentives for critical industries. In addition, there will be a long-term policy emphasis on the national security impacts of technology — including the prospect of increased government spending on such research — and artificial intelligence.
Final Biden-China thoughts
As I’ve said before, today’s geopolitical backdrop remains the most complex in decades, amplified by the uncertainties of COVID-19, but it may also present opportunities for discerning investors. There will be greater macro and market differentiation across regions, countries, industries, and companies — with plenty of potential winners and losers to sort through.
Related content: US-China: Four Biden scenarios