Turbulence Ahead: US-China Relations in a Shifting Landscape
Trendspotting - Special Issue on China
US-China relations are currently at an important inflection point in that the status quo, which has largely served both countries well over the last 20 years, has become unsustainable. During the last few weeks alone, President Biden signed an executive order to restrict U.S. investments in Chinese entities in semiconductors and microelectronics, quantum information technologies, and certain artificial intelligence systems, while former President Trump warned that “China wants to change the standard, the currency standard. And if that happens, it’s like losing a world war.”1,2 Meanwhile, China’s defense minister, Li Shangfu, issued a warning of his own, stating that the US is “playing with fire” over the future of Taiwan.3
Hyperbole aside, is there anything meaningful that can be said about how US-China relations are likely to develop over the next few years? Will tensions escalate further or might we see another détente? How can C-Suite executives best prepare their companies for whatever the future may bring?
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History Matters – A Lot
US-China relations have oscillated between cooperative and adversarial phases ever since the former’s founding in 1776. The early years were largely positive, as the US needed to replace its lost trade with England and manual labor for its Westward expansion. At the other end of the relationship spectrum lies the Korean War, which may have begun as a civil war between North and South Korea but evolved into a direct military conflict between the US and China, including the potential use of nuclear weapons.4
The modern phase of US-China relations started with President Nixon’s ping-pong diplomacy-driven détente of the 1970s and strong US support for China’s WTO accession in 2001. However, relations have soured once again over the last fifteen years, in the wake of the Global Financial Crisis and China’s coming out party at the Beijing Olympics in 2008, and especially since the rise of Xi Jinping in 2012 and election of Donald Trump in 2016. It is difficult to envision a return to the status quo ante. In fact, a partial decoupling, or de-risking, now seems a fait accompli,5, 6 accompanied by endless speculation from the global punditocracy that another military conflict may be imminent.7
Grievances and Areas of Contention
It is important to recognize that both sides have legitimate grievances, in part due to the inherent tension between incumbent and emerging superpowers.8 The US feels aggrieved that it went out of its way to integrate China into the WTO in 2001, with the quid pro quo expectation that China would democratize and westernize in return. For China, however, economic integration has never been about westernization, but about modernization and reclaiming its lost status as a great nation. At a deeper level, the US and China have mutually exclusive understandings of themselves, the geopolitical world order, and economic development policies. And that is what makes the current conflict so intractable and essentially irresolvable.
Both the US and China see themselves as exceptional nations. However, US exceptionalism is based on the belief that it was founded on a set of universal principles of individual rights and freedoms, a democratic system of government, and a laissez-faire approach to markets and trade. In contrast, Chinese exceptionalism is based on the belief that it is unique in ways that cannot be duplicated elsewhere, even by China itself. In other words, Chinese exceptionalism is specific, local, and inwardly focused as opposed to American exceptionalism, which is universal, global, and outwardly focused.
It should come as no surprise then that Washington’s belief in the universal appeal of the post-WWII, rules-based, world order simply isn’t shared by Beijing. That doesn’t necessarily mean China wants to completely upend the current world order, from which it has benefited perhaps more than any other nation. More likely, Beijing is seeking a Yalta 2.0 type of re-alignment into regional spheres of influence and a far greater say in multilateral organizations, such as the United Nations.
Similarly, Beijing doesn’t believe that the free trade policies advocated by Washington are appropriate for emerging countries that are still transitioning from primarily agricultural, centrally planned, economies to modern industrial, market-based, economies. Chinese policymakers have obsessively studied the collapse of the Soviet Union and the failure of economic restructuring initiatives that advocated a rapid “cold turkey” approach, instead of a more gradual transformation. In fact, Deng Xiaoping himself was highly critical of Soviet leader Mikhael Gorbachev’s approach to structural reforms, believing that political freedom can only occur after economic transformation has largely been completed – i.e., Perestroika before Glasnost.9,10
Developing plausible scenarios for how US-China relations will develop over the next few years and beyond represents a formidable analytical challenge. A useful approach for unpacking the inherent complexity and uncertainty is through the application of game theory. After all, the conflict involves two players who are making sequential moves and countermoves based on their own interests, cognitive biases, and decision-making degrees of freedom. And these moves are as much a function of the domestic politics and economics of each country as the personalities of their leaders. As such, their interactions and the potential outcomes are far more predictable than they may appear at first blush.
Conceptually, the US and China will each have to adopt one of four potential strategic postures:
Confrontation / Competition (2008-present)
Outright hostility (1950-53)
Regrettably, the inherent tensions between emerging and incumbent superpowers, mutually exclusive worldviews, numerous potential flash points, and internal political/economic dynamics in both countries make significant de-escalation unlikely. In addition, growing anti-US sentiment among Chinese consumers helps Beijing by diverting attention away from the country’s declining economic growth potential and resulting societal tensions. Meanwhile, anti-Chinese sentiment in the US is unlikely to abate during the upcoming presidential election cycle and beyond and national security concerns will continue to override economic considerations in both countries.
Fortunately, the potential for a full-blown military conflict is far less likely than often suggested, even by knowledgeable observers, due to the complexity and low likelihood of success of a Chinese maritime invasion, the enormous (geo)political, economic, and human costs, as well as Chinese leaders’ historically informed aversion to risk and instability.11 Nevertheless, some degree of escalation is probably inevitable. Potential scenarios range from a partial economic decoupling to a major international crisis over Taiwan.
Some degree of decoupling is inevitable and, in fact, already underway. Why? Because the US wants it and China needs it. As the incumbent superpower, the US wants to continue to lead the post-WWII world order by protecting its lead in next-generation technologies such as semiconductors and artificial intelligence, while ensuring access to critical resources, including rare earth elements. Conversely, China needs to catch up in next-generation technologies and secure independent access to energy, food, and other critical resources, so it can assume its desired role as the emerging superpower in either the existing or an alternative world order.
The costs of even a partial decoupling would, of course, be enormous. A US Chamber of Commerce study estimates annual output losses in specific industries of up to $24B in medical devices, $38B in chemicals, $51B in aviation, and up to $124B in semiconductors. In addition, there would be difficult to quantify negative impact on US productivity and innovation, supply chain diversion away from US players, and declining attraction for VC investment in US innovation.12
Alternatively, a Taiwan crisis has become plausible enough that, from a managerial decision-making perspective, it would be irresponsible not to develop contingency plans; events could unfold very quickly and the economic impact would be far greater than with a decoupling scenario. For example, a scenario where China would use a naval blockade to quarantine Taiwan could result in immediate and difficult-to-reverse disruptions that impact trade and investment on a global scale with an economic impact in excess of $1T, even before factoring in international responses or second-order effects. In addition to trade with China itself, there would likely be sharp increases in inflation rates and shortages in key industries around the world, due to major trade and global manufacturing disruptions (e.g., medical, telco, harvesting, mining). Immediate business risks for foreign MNCs in China would include consumer protests and boycotts, capital controls, asset seizures, and nationalization. Employee safety, property damage would be additional concerns.13
Charting a Path Forward
Few companies are fully prepared for either of these scenarios even though many would find every aspect of their business impacted in the short-, medium, -and long-term. Moreover, the concern is not just getting caught in the middle, but also that the status quo could deteriorate very quickly in unpredictable ways. So, what should C-Suite executives do?
First, many multinationals should fundamentally re-assess their China strategies.14 Have alternative US-China scenarios been developed and their implications analyzed? Are the opportunities and risks associated with various degrees of political and economic decoupling fully understood? For many, the Chinese market will remain a massive market as well as an important manufacturing base and growing source of innovation. Others may decide to exit in light of slower economic growth, rising labor costs, new data protection and other regulations, growing consumer nationalism, strong local competitors, and an increasingly volatile geopolitical environment.
Second, are there ways of de-risking the business to improve organizational resilience – e.g., by diversifying supply chain activities away from China to other countries, moving into other export markets, and/or rethinking partnerships with local Chinese companies? Doing so can be challenging, involving not just the supply chain mechanics but a transition to a broader supply chain network that will require careful planning, infrastructure investments, and monitoring to ensure continued alignment with the overall strategy.
Third, most multinationals will need to become more ambidextrous and agile to compete in an increasingly bifurcated world, not just in China but everywhere. They will have to find ways of operating under very different market, competitive, and regulatory conditions in one country versus another. They must ensure that their strategic decision-making, investment, and crisis management processes are flexible enough to quickly adapt to changing circumstances anywhere. And they must base their decisions not just on revenues, costs, and profits, but, increasingly, also on non-business considerations, such as national security or even the future of democracy itself.
For many business strategists, this will mean taking on additional responsibilities to help their CEOs, boards, and executive team members navigate the turbulence ahead, making their roles even more challenging but also far more rewarding.
1 “Biden orders ban on certain US tech investments in China,” Reuters, 2023
2 “Donald Trump warns Tucker Carlson that China might take over the world,” Daily Mail, 2023
3 “Chinese defense minister warns of ‘playing with fire’ on Taiwan during Russia meeting,” CNN, 2023
4 “How the Korean War almost went nuclear,” Posey, Smithsonian Magazine, 2015
5 “Renewing American Economic Leadership,” Sullivan, Brookings Institute, 2023
6 “Hold High the Great Banner of Socialism with Chinese Characteristics and Strive in Unity to Build a Modern Socialist Country in All Respects,” Xi, Qiushi, 2022
7 “China-US War by 2025 Predicted by Four-Star General,” Time, 2023
8 “The Future of US-China Relations,” Jullens, China Compass, 2017
9 “Perestroika: New Thinking for our Country and the World,” Gorbachev, Harper & Row, 1987
10 ”Deng Xiaoping and the Transformation of China,” Vogel, Harvard University Press, 2013
11 “Chip War,” Jullens and Robinson, C-Suite, 2023
12 “Understanding US-China Decoupling,” China Center, US Chamber of Commerce, 2021
13 “The Global Economic Disruptions from a Taiwan Conflict,” Rhodium Group, 2022
14 “Business with China: Should I Stay or Should I Go?,” Cainey, C-Suite, 2023
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