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David Mahon sees a coming new but limited era of US-China détente that should result in a degree of market stability. Biden will have some useful Trump cards. But core tensions will depend on mutual reactions

David Mahon sees a coming new but limited era of US-China détente that should result in a degree of market stability. Biden will have some useful Trump cards. But core tensions will depend on mutual reactions

By David Mahon*

‘When terms are made after a great quarrel, a certain ill-feeling is bound to be left behind. Therefore, having entered into an agreement, the Sage adheres to his obligations, but does not exact fulfilment from others. The man who has Virtue attends to the spirit of the compact; the man without Virtue attends only to his claims.’ Laozi, 5th century B.C.E

As COVID inoculations spread at end of the first quarter of 2021, China will open its borders to its northern and Southeast Asian neighbours, and possibly Australasia. Once the more severe ramifications of the pandemic abate in other key economies, the world will focus on shared aspirations, but also economic and cultural rivalries.

We are entering a new but limited era of US-China detente that should result in a degree of market stability. The US and China may no longer be stumbling towards regional conflict, but there can be only guarded optimism that the relationship will be repaired substantially in the next four years, after it was poisoned by distrust and chagrin for more than a decade. President Joe Biden will continue the strategic pressures on China initiated by presidents Clinton, Bush and Obama that went on to become self-damaging posturing under Trump.

If Biden focuses on strengthening the US economy, instead of trying to weaken China’s as his predecessors did, everyone will benefit. It will also help if Chinese commentators spend less time identifying American democracy’s failures and instead find grounds to build a new US-Chinese partnership. No such shift looks likely.  

Economic resilience but strategic weakness

Whatever the quality of Beijing’s rapprochement with the US, China’s largely domestically driven economy will be strong in 2021. It has already recovered from the shock of this year’s COVID lockdown, despite Trump’s sanctions. Even exports, on which Chinese growth no longer depends, broke all records in 2019, were sustained in 2020, and will expand further in 2021. China’s GDP growth may exceed 7% in 2021, of which domestic consumption will likely account for more than 60%. The renminbi will remain stable, possibly strengthening in 2021 to RMB 6.5 to the US dollar.  

An unexpected third-quarter increase in Chinese technology exports, particularly smartphones, may indicate the start of a global recovery. However, as the extent of COVID damage to Western economies may be masked by subsidy and stimulus packages until sometime next year, it is too early to be sure.

China has also been working hard to fulfil its obligations under phase one of the trade deal it signed with the Trump administration in January. Imports of grain and soybeans rose 59% and 44% this year, and Chinese demand for imported produce, including meat, is likely to recover sharply in 2021. China wants a good relationship with US.

Despite a strong domestic economy, and the resilience it confers, Beijing understands its evolution depends on greater global economic integration.

To give Biden space, Beijing will need to respond to US criticisms on subjects such as economic nationalism on the Mainland and civil liberties in Hong Kong with less pique, no matter how poorly informed or motivated it may perceive such criticisms to be. After taking such a battering from the Republican Party over the past four years, China’s leadership will find such restraint difficult.

The US should have modest expectations of reaching any political agreements with Beijing. President Xi Jinping will not soften China’s claims in the East and South China Seas, and any public criticism by trading partners regarding its regional influence will be met with acerbic, stubborn retorts. The complex and often valid regional disagreements regarding the reefs and atolls on which Beijing’s South China Sea bases have been built often obscure its one strategic principle: China must be able to defend the Straits of Malacca and the sea lanes they feed. Most of the goods and resources on which China depends to sustain its economy pass daily through these narrow straits and north-eastwards to its ports. The US has the power to close these sea lanes and strangle China’s economy at will. If the US could step back and initiate an agreement to reduce tension in the region, China may reconsider stepping forward assertively in the future.

Trump’s useful cards

To consolidate a post-COVID, US economic recovery and rebuild a measure of trust, President Biden will need to lower the tariffs Trump imposed on most of America’s key trading partners. But he is unlikely to do this swiftly with China, as they afford his administration useful leverage in negotiations. Although Biden will not resort to his predecessor’s warlike boasts and economic decoupling rhetoric, he will need to address the widespread public misperception that the loss of American power and prestige is substantially China’s fault. He will lead a deeply divided nation, but one unified in anti-Chinese sentiment.

Biden’s administration will continue to restrict Chinese technology companies’ access to the US market and those of its allies. Huawei is unlikely to see any reprieve, although bans may be lifted on social-networking platform WeChat and video-sharing app TikTok. China in now investing heavily in technological self-sufficiency, particularly microchip mills. If the US had not decided to contain China’s technological development in an attempt to slow its rise, such a move would have been unnecessary. This containment will reduce China’s economic growth slightly over the next five years, but it will not inflict substantial damage. It will, however, hurt the US. The US Government has already managed to mortally wound the very companies on whose behalf it claimed to have waged the trade war. American tech giants Cisco and Broadcom have lost billions and they and their competitors will lose billions more.

Over the short term, most Western economies will welcome some rapprochement and any narrowing of the focus of areas of US-China contention, knowing that China will help pull the world out of recession in 2021. But as Trump’s foreign policy chaos subsides, China’s trading partners will need to remain vigilant, otherwise they could find themselves drawn into strategic partnerships with America against China that may be damaging to their commercial interests. Struggles between large nations are often camouflaged by apparent concerns for human rights and principles of fair trade when their aims are actually to maintain and project power. It has not been lost on Beijing that President Biden has a greater chance of building economic alliances against it than Trump ever had.

Many US companies supported Washington’s tough stances on China, citing the need to end favouritism toward domestic monopolies and SOEs, but as they need access to the world’s largest, fastest-growing consumer market, they will in the end do deals wherever they can. If it can be unified, the US corporate sector has the power to influence Washington as it did in previous decades.

Contrary to US assumptions, China is opening its markets to increased foreign competition, and under present conditions will continue to do so. Until recently, the financial sector was dominated by Chinese state-owned interests, with restrictions on foreign participation, but it is now opening rapidly, offering US financial firms many opportunities. Biden will provide a more predictable, saner environment for common commercial aspirations to be met. If he can have the courage to persuade corporate America that China is not the source of all its economic woes, much is possible.

Détente

Tensions in the East and South China Seas are unlikely to ease, but those related to Taiwan may a little, simply because Biden will be more careful than his predecessor. Trump sought political disruption for the often-imaginary short-term trade opportunities it created, without considering the strategic consequences. Hopefully, the new administration in Washington will seek to discuss civil and human rights concerns in person as part of a general normalisation of the relationship with Beijing, rather than resort to empty public and media posturing. No nation is without present fault in the field of human rights, and no nation should use the human rights failures of its strategic and commercial competitors as tools of coercion or containment.

A Democrat-led White House has the possibility of reversing the isolationist policies of the Republican term to reconstruct the WTO and other global entities dealing with international law, health, the environment and human rights.

With greater global confidence and international forums once again resourced to mediate disputes, the United States and China may refer more complex issues to them, so they may focus on repairing their damaged bilateral relationship. Biden probably still harbours the internationalist ideals of his early political career, forged in the age of Kennedy, that the world now sorely needs. 


*David Mahon is the Executive Chairman of Beijing-based Mahon China Investment Management Limited, which was founded in 1985. 

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25 Comments

If you have not heard about the duel circulation economy in China with an emphasise on internal economic circulation, I recommend you to have a look.

https://news.cgtn.com/news/2020-10-25/Guide-to-China-s-dual-circulation-...

In five to ten years, when China masters the whole supply chain of computer chips, the US will find agricultural products are the only commodity China is probably interested in purchasing from them.

By that time, an universal downward shifting of real wage in the west world will probably not result in pretty outcomes.

LOL, the best chips are from South Korea and Taiwan

We all know what coming so why don't your mates just get on with the inevitable invasion of Taiwan so we can make China democratic and free its people?

https://www.bbc.com/news/uk-54988870
https://www.army-technology.com/comment/indian-defense-spending-given-bo...
https://news.defence.gov.au/capability/270-billion-boost-defence-capabil....
https://www.reuters.com/article/us-usa-taiwan-china-idUSKBN26R3SH

etc..etc..etc

In five to ten years, when China has stolen majority of chip IP

China have threatened to pluck the eyes out of the Five eyes one by one. Bullies normally attack the weakest first so it might be an interesting couple of years in NZ.

Also, since the release of COVID-19 worked so well for the CCP, I wonder what month they will release COVID-21?

Your statement Also, since the release of COVID-19 worked so well for the CCP, I wonder what month they will release COVID-21? is totally FAKE NEWS, The CCP would NEVER release this on their people, they would be FINISHED, GONE for good, however they would release somewhere a long away from them eg Europe and make out it started there. Then it could result in a NUCLEAR WAR if found out. NO, NO China would NOT do such a dangerous irresponsible event.

Err, you know that hypothetically it can be release by accident right? not intentional... not even by every respective govt on the planet.. let's say just like this Covid19, if we have to choose believe that it's naturally came from Bat consumption, then why China govt. now ban such consumption? (during Sars & Mers China don't even ban this century old traditional consumption, ..wonder why now they are opt to ban it?)

Probably worth reading some of the articles on this site. China hasn't been doing so well out of COVID-19, like every other country, if the increasing bond defaults are anything to go by. Diseases just happen and human beings should expect that. It's not the first pandemic and won't be the last.

I am pessimistic about the Sino-American relationship. I believe there will be a hot conflict between these two nations by the end of this decade. And it may result in mutual destruction.

Well I guess you can wait for the implosion but realistcally it'll just be a war of words and a lot of posturing. Neither country will push the envelope - they both have too much to lose

Mutual destruction? Total destruction

Biden hasn’t won the election

yeah, and US didn't land on the moon

The USA never landed on the moon mate, the technology didn't exist to get there back then but they will be "Going Back" in 2024, the tech may just be available but expect some people to die. Biden however WILL be president.

Hahaha.. ladies and gentlemen we have a real live "Flat Earther" in our midst. What a hoot!!!???

Not a flat earther, you only need to stand on a beach and watch a boat sail away into the distance to realize the earth is a sphere. My electronics background lead me to the conclusion the moon landings never happened. How many died on the Challenger missions compared to the Apollo missions ? We have a long way to go before we get to the moon.

You have an electronics background huh? I wouldn't get you to change a lightbulb. The Challenger deaths were directly attributable to cost cutting and shortcuts taken by a contractor or (in the case of Atlantis) poor maintenance checks To maintain they are proof the Apollo missions were faked is the height of delusion and irrefutable proof of a "conspiracy theorist". I suppose you also believe Kennedy was killed by the CIA?

Men have walked on the moon, there is no way that so many people involved, crews of a number of trips to the moon, and all those people on the ground have maintained the secrecy of a hoax since then. Believing it hasn't happened is a bananas as thinking the earth is flat or that 9/11 was an inside job.

QAnon is a different site, mate

Says the man with interest, ouch... who the **** poking my eyes from behind? - damn, it's dark here. Anyone?

The Chinese have always been insular, hence the bloody great wall. When the British sent a trade emissary
(Lord Macartney) he was pretty much ignored and his gifts shut up for 70 years untouched.(1790's ish) The British wanted trade due to the imbalance, lots of Tea going to Britain and China only wanting silver in return.

The British need to sell products to China to even the trade imbalance ended up that Opium was the only thing with a ready market in China and in the end the opium wars of 1840-1842 forced China to open up.

China has always wanted to sell to the world but not so happy about traffic the other way.

Well I have to say trade with China works well for NZ

China as a nation has a much longer history than Anglo Saxon. Though people always associate Imperialism with the British empire. China had already played that game even before the term was coined.

really where? The rulers of all under heaven missed most of the world.

The winner of the 2020 US Presidential race will not be decided until the Electoral College December 14th @ the earliest! Stop spreading fake news interest.Co.nz: this is an appalling lack of journalistic integrity; or perhaps just a lack of fundamental research skills.