The anticipated meeting between Chinese President Xi Jinping and U.S. President Joe Biden is set to take place during the APEC summit in San Francisco next week. This meeting has generated global interest because it holds the promise of more constructive bilateral ties, including improving economic relations between the two largest economies in the world.
In recent years, the economic ties that once tightly bound China and the United States have unraveled, increasing risks for global businesses and investments. The escalating rivalry between these two superpowers has become the primary geopolitical risk affecting global market stability, according to the BlackRock Investment Institute.
China and the United States have engaged in friendly gestures and high-level exchanges over the past several months, all aimed at improving the tone and substance in bilateral ties and reversing soured economic relations. U.S. Treasury Secretary Janet Yellen reassured China that the United States does not intend to completely sever economic ties or exclude China from the current trading system. President Xi Jinping’s meetings in Beijing with Senate Majority Leader Chuck Schumer and then with California Governor Gavin Newsom suggested an upward trend in progress. Meanwhile, China’s warm reception of Micron, a targeted U.S. chipmaker, at the China International Import Expo, sent a positive signal to American businesses.
All this has undoubtedly set the stage well for the upcoming summit. However, market sentiment has adopted a wait-and-see attitude. The BlackRock Investment Institute still views China-U.S. tensions as a significant geopolitical risk, describing the recent thaw as “fragile.” This caution is surely warranted as previous diplomatic efforts, like the Biden-Xi summit on the sidelines of the Bali G-20 meeting a year ago, have shown promise but unfortunately failed to lead to substantial changes in economic relations.
Amid the deeply rooted tension in China-U.S. economic relations, addressing fundamental issues becomes a critical prerequisite for any substantial progress. The central challenge that underpins their efforts to stabilize economic ties is this: Can China and the United States bridge the gap between their contrasting approaches to achieve a common objective? In simpler terms, can these two nations begin to devise a new framework for mutually beneficial bilateral relations in the face of political contention and divergent perspectives on economic de-risking?
Beginning this year, the concept of “de-risking” has emerged as the Biden administration’s preferred economic strategy toward China. This approach aims to reduce dependence on China to safeguard U.S. national security interests without seeking complete disentanglement. China, however, views “de-risking” as a thinly veiled form of “decoupling” designed to impede China’s economic growth under the guise of U.S. national security concerns. China maintains that whatever its rhetorical formula, the United States must not cite security concerns as a basis for restricting American companies’ investments in China and for urging U.S. businesses to diversify their supply chains away from China.
The differing interpretations of de-risking by China and the United States highlight the profound unease with which they view the current state and trajectory of their economic relations. Finding a way to ameliorate this will be vital for promoting stability in their bilateral relationship.
Another obstacle to overcome is managing the growing strategic competition between the two nations. As geopolitical tensions increasingly impinge upon the broad economic relationship, the space for cooperation is shrinking. Without clear rules for healthy competition, efforts to restore stable economic relations are drawn into the expanding competition.
The intensifying competition is evident in the increasing number of sanctions imposed by both sides. A study by Chen Wenling, chief economist of China Center for International Economic Exchange (CCIEE), reported that the United States has imposed over 1,000 sanctions on China since 2018, targeting 725 organizations and 241 individuals. Following the outbreak of the Ukraine war in 2022, this trend persisted with at least six additional rounds of sanctions.
Significantly, a considerable number of these sanctions were imposed despite ongoing high-level diplomatic exchanges, underscoring that diplomacy has been ineffective in curbing retaliatory actions. This erosion of trust in the efficacy of diplomatic endeavors is a worrisome development for both sides, undermining the prospects of establishing stable relations.
As both countries emphasize security concerns in economic relations, the competition between China and the U.S. displays no signs of diminishing. While the United States persists in broadening its restrictions on chip exports, China has strategically utilized its resources and expertise in the production of critical minerals like rare earths and graphite to disrupt U.S. access to materials crucial for manufacturing semiconductors and electric vehicle batteries. Apparently, neither side is willing to concede an advantage in their respective areas of strength.
Given that the fundamental differences between the two nations remain unaltered, one anonymous U.S. government source suggested that no significant breakthrough is expected during the upcoming Biden-Xi summit. This absence of a breakthrough is quite understandable, considering the complex nature of bilateral tensions. Additionally, the looming uncertainty surrounding next year’s U.S. presidential election has made China cautious about making substantial commitments.
Despite these cautious expectations, Jude Blanchette, the Freeman China Chair at Washington’s Center for Strategic and International Studies (CSIS), in an interview with the Associated Press pointed out that “this meeting unlocks, especially in the Chinese system, space for further engagement in constructive work.”
Recent developments in bilateral exchanges suggest that this expanded engagement could entail the revival of an institutionalized framework for managing economic differences. This would be of great importance. As noted by Stephen Roach, the former chairman of Morgan Stanley Asia, leader-to-leader exchanges are essential, but they are not on their own sufficient to steer China-U.S. relations toward a positive trajectory. This necessitates the establishment of an institutionalized framework for managing the relationship.
In recent months, both nations have introduced a range of mechanisms to enhance bilateral dialogues. These mechanisms encompass initiatives such as an information exchange system on export controls and inaugural meetings of Economic and Financial Working Groups. These channels are designed to facilitate ongoing discussions concerning macroeconomic and financial policies and to pursue specific goals, including the resolution of sensitive trade and technology matters. As Janet Yellen mentioned, these mechanisms can ultimately “put our relationship on a surer footing.”
The coming year will be fraught with numerous high-risk events capable of significantly shaping bilateral relations and resonating across the global market. The January elections in Taiwan and next November’s U.S. presidential election will unquestionably have a substantial influence on the shape and content of China-U.S. bilateral relations. Given these challenges, leader diplomacy, the reestablishment of regular mechanisms for concrete discussion of key economic issues, and the expected resumption of military-military discussions will be crucial. If the Biden-Xi summit can yield a leadership agreement to pursue a framework to facilitate regular substantive communication between the two nations in all areas of mutual interest, this would go a long way toward alleviating market anxieties and, more broadly, promoting global stability.