Overview
Today's Deep Dive is 1,480 words and a 9-minute read.
As the world’s two largest economies, the United States and China are intertwined by deep economic interdependence and strategic rivalry. Following a period of deteriorating relations between 2018 and 2023, this year has marked a critical juncture, where efforts to stabilize bilateral ties are counterbalanced by lingering risks that could easily escalate. Both Washington and Beijing have worked to avoid major confrontations, but tensions continue to simmer under the surface, especially in areas such as the South China Sea, Taiwan, and the global economic order.
As the dynamics of the US-China relationship continues to evolve in the years to come, a thorough analysis of both sides’ strategic framework, economic independence, and emerging risks will be crucial for understanding the potential pathways ahead for businesses, particularly those operating in China and the larger Indo-Pacific region.
A New Strategic Framework for Bilateral Ties
Both the US and China have been facing heightened domestic priorities that influence their foreign policy. High-level US visits to Beijing in mid-2023 and a November summit between Biden and Xi held in California set the tone for a more constructive working relationship, with both sides agreeing to regular discussions on key issues such as military communication, climate cooperation, and artificial intelligence risks. The just concluded visit of US Under Secretary for International Affairs Jay Shambaugh to Beijing, part of a broader initiative to stabilize economic ties, emphasized the importance of maintaining open lines of communication between the two countries. Importantly, his meetings focused on macroeconomic coordination and reducing the risk of miscalculations, particularly in the financial and trade sectors. Both the US Treasury Department and China’s State Council published concise press releases concerning the meetings on September 20, noting the importance of bilateral economic communication.
For the US, maintaining a competitive edge against China, especially in technology and defense, remains paramount. Domestically, President Joe Biden has framed China as a competitor that the US must counter economically while protecting national security. On the other hand, President Xi Jinping continues to prioritize internal economic growth and social stability, as China navigates a slowing economy and aging population, along with continued challenges in sectors like real estate and technology. The diplomatic guardrails in place reflect this balance of internal and external priorities.
One notable area where China has shown to be mindful of Western sensitivities is its restraint to fully align itself with Russia’s military actions in Ukraine. Despite its strategic partnership with Russia, Beijing has largely avoided crossing red lines on Western-imposed sanctions on Moscow, keeping its economic self-interest in mind. Chinese firms have, by and large, avoided supplying lethal aid to Russia, although dual-use goods remain a concern for Western policymakers. This delicate balancing act demonstrates China’s broader strategy of avoiding direct confrontation with the West while protecting its interests.
Economic Interdependence Remains a Reality
While the US has pushed for “de-risking” its economic ties with China rather than full-scale decoupling, uncertainty continues to cloud the future of US-China economic relations. President Biden has made it clear that the US aims to reduce reliance on Chinese manufacturing for critical industries like semiconductors and pharmaceuticals. However, he has steered away from the more aggressive tariffs and decoupling rhetoric touted by the previous Trump administration, preferring a more measured approach to reduce supply chain risks while maintaining some level of economic engagement.
That said, the outcome of the 2024 US president election could change this calculus. A return of Donald Trump to the White House could lead to a revival of sweeping tariffs and a more confrontational trade policy, with the former president’s plans for a second term including a 60% tariff on all goods from China and 200% tariff on Chinese electric vehicles specifically, compared to the 100% tariff that Biden imposed on Chinese EVs in May. Meanwhile, a Kamala Harris presidency is likely to largely follow Biden’s approach on US-China relations, leveraging alliances to address trade disputes and counter China’s global influence, while maintaining a firm stance on critical issues like supply chain security and strategic industries. While Harris’s campaign has not focused heavily on foreign policy, her current national security advisor, Philip Gordon, is a likely pick for her White House National Security Advisor. Gordon reportedly played a key role in crafting the US-China policy under Biden. Gordon has a reputation as a pragmatic and moderate thinker. In a 2020 assessment published in War on the Rocks, Gordon advocated for a comprehensive strategy to defend US interests and compete with China based on domestic and economic renewal, leveraging global alliances, bolstering regional deterrence, and clear-eyed dialogue with Beijing – all of which became part of the Biden China policy.
At the same time, the US has pursued greater multilateralism, especially in the Indo-Pacific, to counter China’s growing influence. Initiatives like the Quad – a security grouping between the US, India, Japan, and Australia – and AUKUS – focused on deepening military ties between the US, UK, and Australia – highlight Washington’s commitment to building a solid coalition to manage China’s rise. This multilateral approach also extends beyond security, as the US has successfully pressured European allies to adopt tougher stances on China’s economic practices and human rights record, a significant shift from European countries’ reluctance to criticize Beijing in previous years.
Risks Continue to Accumulate
Despite recent stabilizing measures by Washington and Beijing, significant risks remain below the surface. One of the most volatile areas is the South China Sea, where skirmishes between China and the Philippines have become increasingly frequent. These incidents underscore the contested nature of the region, with China’s territorial claims clashing with the interests of other Southeast Asian nations as well. For Washington, the stakes are high: the 1951 US-Philippines Mutual Defense Treaty obligates the US to come to Manila’s aid in the event of an armed conflict. Further escalation between China and the Philippines could potentially pull the US into a direct military confrontation with China, a scenario both sides seek to avoid but cannot be discounted entirely. A similar scenario applies to Japan, from whom the US-Japan Security Treaty would invite Washington’s intervention should a conflict over Beijing and Tokyo break out over the disputed Senkaku (as known in Japan)/Diaoyu (as known in China) Islands, where Beijing has increased naval and air patrols in the past year, to Tokyo’s ire.
Taiwan remains another flashpoint in US-China relations. The recent election of Lai Ching-te risks further complicating the situation, as Lai belongs to the Democratic Progressive Party (DPP), viewed with antipathy from Beijing for its pro-Taiwanese independence leanings. Relations between Beijing and Taipei were particularly tense during the tenure of his predecessor Tsai Ing-wen, also from the DPP, and Lai’s presidency spells concerns that cross-Strait relations could deteriorate further should he continue Tsai’s assertive approach toward Beijing. For Washington, supporting self-defense capability without provoking a military confrontation with China will be a sensitive tightrope to walk. The situation in Taiwan could significantly test US-China relations in the near term, especially as both US and Chinese presidents face domestic pressures not to appear weak on the issue.
Private Sector Outlook
For businesses, the current state of US-China relations presents both challenges and opportunities. While some companies have been moving their manufacturing operations out of China due to rising labor costs and supply chain vulnerabilities, many businesses remain reluctant to fully disengage from the Chinese market. China’s manufacturing prowess, market size, and role in global supply chains make it an indispensable partner for many multinational corporations. Earlier this month, the America Chamber of Commerce in Shanghai published its 2024 China Business Report showing that member companies hold a less optimistic outlook for China based on uncertainty in the US-China relationship and macroeconomic pressures, with only 47% optimistic about the five-year business outlook while 13% ranked China as their headquarters’ top investment destination, both rates being the lowest in the survey’s history. On the other hand, companies noted improvements in China’s regulatory environment.
With this in mind, a new era of relative stability achieved through recent diplomatic efforts could offer businesses a greater measure of predictability. Both the US and Chinese governments are currently focused on avoiding conflict and managing competition, while Beijing has aimed to present a business-friendly atmosphere, announcing earlier this month a decision to eliminate restrictions on the manufacturing sector and expand opportunities for foreign direct investment in the health sector. Companies, particularly those with operations in China or the Asia-Pacific region, may find that risks, while present, are becoming more controllable.
At the same time, managed competition could benefit the private sector. Both countries are doubling down on innovation, with government support flowing into industries like artificial intelligence, semiconductors, and renewable energy. For businesses in these sectors, the competition could drive new advancements and market opportunities. While the geopolitical environment remains complex, businesses that adapt to the new normal of strategic competition may find that there are opportunities to thrive on both sides of the Pacific.
