Principal and Director of Analysis
2. US-China: stabilisation without normalisation |Top Five Risks | RiskMap 2021
Top Five Risks
US China: stabilisation without normalisationFor businesses, relative respite in US-China escalation will be time to refocus, not relax
US-China rivalry will continue to loom over the global business risk landscape in 2021. A change in US leadership may offer some respite from the bilateral buffeting. However, businesses must not be lulled into a false sense of security: 2020 locked both the US and China into trajectories that will drive geopolitical shifts and disruption for years to come. Still, a break from constant firefighting will be welcome in the C-suite. Business leaders should take the opportunity to focus on strategic responses to long-term US-China rivalry.
Two to trade war
“Tough on China” is a bipartisan mantra in Washington, and the framework of strategic competition promoted by outgoing president Donald Trump is close to consensus. Biden and his team plan to sustain tariff pressure, control technology exports, scrutinise human rights and promote “Buy American” economic nationalism. However, this will come with important shifts in approach (more multilateral), priorities (innovation over trade deficits) and tone (less bombast). A more conventional White House will likely reduce the potential for escalation – a key objective for incoming president Joe Biden as his administration grapples with COVID-19, recession and a racial justice reckoning at home.
The Chinese side of the equation tends to get far less attention than the US, but will be just as decisive. China is in its own “critical historical moment”, as President Xi Jinping has often stressed, and its domestic challenges outweigh external ones (as we discuss elsewhere in RiskMap). China assumes that a long-term, strategic struggle with the US is inevitable, and that it must contain where possible, “fight” when necessary (though not militarily) and urgently reduce vulnerability to US action through “self-reliance”. Xi hopes to pursue self-reliance while also taking the post-Trump opportunity to reset relations, but the two priorities will often conflict.
In the past, Beijing would have likely prioritised a reset – toning down behaviours fuelling US pushback, and giving encouragement to those in Washington advocating de-escalation and dialogue. However, an unintended consequence of the Trump era was deepening China’s shift onto a more confrontational trajectory. By late 2019, many Chinese leaders despaired of negotiating their way back to stable relations, were resigned to a long-term struggle, and were aligning core policies and political narratives to face that prospect.
The bitter course of US-China ties in 2020 further fixed this posture, and it would take a major – and highly improbable – rethink by Xi to alter it more than superficially. A major strategic recalibration is unlikely: when forced to choose, Xi will usually prioritise domestic agenda and self-reliance over easing external tensions, even as negative international reactions mount.
The US-China struggle is increasingly global, and goes beyond tariffs, supply chains and 5G politics. In some cases, companies from third countries have felt the fallout even more than US and Chinese ones. Triangulation is still the order of the day, but negative sentiment towards China – and willingness to risk its ire – is growing. This global dimension will be even more pronounced in 2021, as Washington moves to coordinate allies and partners to put pressure on China.
Despite likely improved trans-Atlantic relations under Biden, the EU will continue to try to strike a difficult balancing act between the US and China. The EU will hope to boost trading ties with both sides, but is unlikely to reverse its tightening investment restrictions. Scrutiny of Chinese investment and market access in sensitive technology sectors in particular are likely to increase further. Meanwhile, though the EU is likely to broadly align with US attitudes in response to alleged human rights violations by China, the bloc’s members are unlikely to agree on sanctions that go as far as measures imposed by Washington.
In some countries, such as India, geopolitical alignment will be driven less by Washington’s prodding as by New Delhi’s own re-evaluation of its engagement with Beijing in the wake of the worst border tensions in over four decades. The crisis elevated the New Delhi-Beijing relationship from a theatre of high diplomacy to the centre of national consciousness, evoking the kind of passions India and Indians usually reserve for Pakistan. In 2021, this will inform and shape India’s choices across areas like geopolitics, foreign trade, investment, and the digital economy. This will have far-reaching implications for India’s political economy and the ability of Chinese capital and technology to take part in it.
Business is very much in the crosshairs of this strategic competition. From Belt and Road projects to multinationals’ fortunes in China, and from technical standards-setting to digital currencies and fintech; wide-ranging competition will involve both carrots and sticks – opportunities and risks for companies squeezed between conflicting political and policy pressures, public opinions, laws and regulations. Exposure is not limited to traditional strategic sectors like defence, nor to new ones like semiconductors and 5G. In 2021, it can stem from comments by employees and links to Chinese entities targeted by Washington, to use of data and decisions to comply with regulatory requests.
The road ahead
The US and China will thus continue to clash in 2021, but with reduced scope and speed of escalation under a more conventional White House. This widely shared outlook is probably right, but within these broad outlines, policy details will matter enormously for many companies, and quite different scenarios could unfold depending on subtle differences and contingencies. Two top-line scenario narratives are summarised below.
There are more optimistic scenarios than these, and much worse ones. Twenty years ago, George W. Bush took office and faced a diplomatic crisis within months, when US and Chinese military aircraft collided over the South China Sea. The risk of such accidents occurring – and escalating – is probably greater in 2021 than 2001. However, the two scenarios outlined here are the most likely. One involves a partial stabilisation, the other is characterised more by escalation, but neither restores the geopolitical and business environment.
Scenario 1: Two-Speed Trade War [stabilisation]
The Biden administration signals from day one that it will be tough on China, preserving existing tariffs, sanctions and export controls as leverage. The two countries continue clashing across the current range of issues, but both are quietly keen to reset ties and focus on domestic problems. The pace and scope of escalation is reduced relative to 2018-20, with resumed cooperation on issues like climate change.
- The White House is more receptive to US business concerns (and sometimes those of allies), and less ready to take unconventional, unilateral and highly disruptive actions.
- This eases the threat of sudden escalation and direct disruption; pressure drops below the “game-changing” threshold in some areas, such as forcing major supply chain and investment shifts.
- Competition and disruption remain intense in priority areas but ease in non-strategic sectors. Risk-opportunity equations diverge depending where companies sit along this “strategic” spectrum.
Scenario 2: New POTUS, same cycle [escalation]
This scenario has elements of the above moderation in 2021, but the points of US-China collision remain so fundamental and divisive that the bilateral cycle drives escalation rather than normalisation: narratives of systemic competition and mutual threat prove stronger than the pragmatic pull towards business as usual.
- Biden’s focus on issues including human rights, and efforts to coordinate multilateral pressure on China, clash with Beijing’s “core interests”; they imply irreconcilable differences – and flashpoints.
- Beijing’s hardened positions constrain its scope to mollify the new US administration as it would in Scenario 1; unwilling to “turn the other cheek” for another four years, it steps up retaliation.
- This is still not a worst-case scenario of broad decoupling or total bilateral breakdown, but brings resumption of the 2020 escalation cycle, along with its uncertainty and disruption for businesses.
Lulls may lie
Much of 2021 may feel like stabilisation – especially as the new US administration finds its feet and focuses on urgent domestic challenges. However, escalation remains a more likely long-term trajectory if underlying trends remain unchanged. Either way, good planning is not about trying to predict a single geopolitical future. It is about anticipating a range of scenarios and implications specific to an organisation, and adapting to take advantage or improve resilience accordingly. Systematic, targeted monitoring then identifies when things change and demand adjustments.
This approach helped companies navigate US-China turbulence in recent years, amid relentless bilateral threats and tit-for-tat. It helped them distinguish between short-term challenges to be managed and deeper trends requiring strategic change. It helped them tell a dramatic political gesture from a regulatory action with imminent compliance or supply-chain implications. And it helped them take better decisions to face an uncertain future. These will remain crucial capabilities in 2021.