A New Era In US-Sino Relations?

By Teeuwe Mevissen, Senior Macro Strategist at Rabobank (pdf version available for pro subs in the usual place)

Summary

• US president Biden and president of China Xi Jinping met each other this week, for the first time since November 2022

• The US-Sino relationship has deteriorated since the Trump administration

• Areas of tensions between both nations include security, trade investments and territorial issues amongst others

• While the meeting did deliver some concrete results it is unlikely that we will see a significant improvement of US-Sino relations for the foreseeable future.

Introduction

To underscore its uniqueness, we have to go back to November 2022 for the last personal meeting between the leaders of the two most powerful countries at the moment, the US and China. Back then, Biden and Xi met each other on the sidelines of the G20 meeting in Bali, Indonesia. This meeting in Bali was preceded by a significant period of increased tensions between the US and China following Nancy Pelosi’s visit to Taiwan. Pelosi’s trip was regarded by China as a provocation and a departure from the one China policy. As such, Pelosi’s visit resulted in the end of direct communication between the military of both countries. A potentially dangerous situation since it could lead to incidents developing into something much worse. This and other challenges that currently define US-Sino relations clearly illustrate a need to create a floor under US-Sino relations. But, before we look at this week’s meeting achievements, let’s first briefly go back to the last official meeting between Xi Jinping and Joe Biden in Bali and the topics that were discussed back then.

Bali 2022

First, it will not come to anyone’s surprise that Taiwan was one of the more thorny issues that was discussed between both countries during the G20 top in Bali. Xi Jinping called Taiwan the “first red line” that must not be crossed in U.S.-China relations. Biden on his turn, seemingly tried to calm things down, stating that the one China policy – which supports both Beijing’s one China stance as well as Taiwan’s military – was unchanged. This is a policy that has often been described as strategic ambiguity, which emphasizes the mixed signal that this policy sends out. But there was definitely a lot more to discuss. North-Korea, the Russian invasion of Ukraine, investment and trade policies and artificial intelligence (AI) were also discussed amongst many other topics. Since many (if not all) of these issues remain unsolved, they were high on the list of topics that both countries needed to discuss.

San Francisco 2023

So, fast forward to 15 November, a scheduled meeting between Biden and Xi took place in San Francisco. Below we provide an overview of the most important topics that were discussed and those that are key in defining the US-Sino relationship. We make a distinction between US’s interests, China’s interests and mutual interests. However it must be said that some interests also overlap. The distinction therefore is not always clear. Security, for instance, is of mutual interest, but within the realm of security both China and the US also have their own specific interests. We will conclude this report with our take on the results of the bilateral meeting between both world leaders and see to what extent progress has been made on these issues and more generally the bilateral relationship between the US and China.

US’s main interests

Trade and investments

Starting with the Trump era, the US has sought to establish a more equitable trading and investment relationship with China. For long the US has been having a huge trade deficit with both China as well as the rest of the world. In 2022 the total US trade deficit reached a record high with a reported trade deficit of almost $950 billion. According to the US department of Commerce the trade deficit with China reached a level of $382.9 billion in 2022.

Moreover, trade in 2022 between the US and China grew for a third year in a row. It is therefore hard to claim that the trade relationship between the US and China has become more balanced, despite tariffs and other measures that have been implemented since 2018 to achieve such. However, just ahead of the meeting between Biden and Xi this week, China did buy an amount worth more than $3 billion of soybeans, which should be regarded as a sign of good will and a desire by China to move to a more equitable trade relationship. However, in the past China has already made promises regarding trade and opening up its economy that still need to be fulfilled. For instance by continuing to subsidize certain strategic sectors in order to undercut Western competitors as seems to be the case in the sector for electric vehicles.

Furthermore, the US federal government pension fund now excludes investments in Hong Kong in addition to investments in mainland China. Additionally, the US has curbed investments flows to China in some sectors that it identifies as strategic and other sectors deemed critical to US national security. This is yet another sign that the US will continue to ‘de-risk’ its relationship with China and to contain China’s economic and technological rise.

Fentanyl

Another important issue concerns fentanyl. The synthetic opioid has caused havoc in many US cities and fentanyl addiction is an important death cause for US citizens between the age of 35-45. However, it is expected that China will be moving on this issue to accommodate the US in tackling the current fentanyl crisis. As such and already before the meeting took place, Biden and Xi were expected to announce an agreement which would see a crackdown form Beijing on this specific sector. Needless to say that it is in the interest of the US to reverse the current rise in fentanyl addicts. Aside from a public health perspective this topic also touches social, legal, and labour force related issues.

Human rights

The US has often decried China’s stance on human rights, most notably with regard to its practices in the Xinjiang province. The US has sanctioned companies that produce goods with the help of Uyghurs. Moreover, the US will also discuss so-called exit bans. These measures ban non Chinese citizens from leaving the country in case of suspicion of criminal offenses. Moreover the US will seek to solve cases of imprisoned US citizens of which the US claims are wrongfully detained. Finally it is in the interest of the US to project its soft power to the rest of the world in order to become a more appealing strategic partner compared to its rivals.

China’s interests

Trade and investments

China continues to seek to turn the current tide of declining exports and reduced flows of foreign direct investments (FDI). Indeed as recently as November 2023, China reported the first contraction in (net) FDI since data has been published in 1998 with a deficit of 11.8 bn during the third quarter of this year. While the current levels of trade between the US and China are still sizable, the process of de-risking (which includes reindustrialisation) will most likely sooner rather than later result in reduced US imports from China.

Territorial issues

China has continued to press the US on maintaining its one-China policy and insists that the US does not interfere with its internal affairs. Furthermore, China criticizes the US for its freedom of navigation patrols in the South China sea. Additionally, China decries the US for trying to contain China within the region by setting up alliances with regional players like the Philippines and Australia.

Technology

China’s “Made in 2025” state-led industrial policy aims for technological independence and the ability to compete with high tech products on global markets. More specifically they aim for an increase in domestically added content of materials from 40% to 70%. The US has restricted access to certain advanced technologies to China. This also includes US allies that have been pressured by the US to restrict Chinese access to certain technologies. So as long as China is not able to produce its own cutting edge technology, it will remain dependent on what the US is willing to export. As such it is clearly in China’s interest to regain access to some of the most advanced technologies.

Mutual interests

Security

As mentioned above, Pelosi’s visit to Taiwan back in August 2022 led China to cutting direct communication lines between both armies. Moreover, the previous minister of defence of China, general Li Shangfu, was put on the US sanction list for being involved in the purchase of SU-35 combat aircraft and Russian S-400 air defence systems. US secretary of defence Loyd Austin tried to re-establish communication lines with the now missing Li Shangfu but was unsuccessful. While Li Shangfu has been expelled from the state council, his name still can be found on the website of China’s ministry of defence and until now, no new minister of defence has been appointed yet.

Re-establishing direct communication lines between both militaries remains a goal for the Biden administration and with General Li Shangfu being dismissed, new possibilities arise to re-establish these lines of communication with the clear aim to nip any chance of escalation in the bud. These (almost) incidents have increased since China has become more assertive in the region while the US continues its freedom of navigation patrols in the South China sea.

But there is much more. The US seeks to convince Beijing once and for all that it should not deliver military equipment to Russia. Also the EU has sent this message to China signalling that it would have a strong negative effect on relations between the West and China. Needless to say that both trade and investments would be affected when China would actively support Russia’s military.

Finally, the US will seek to pressure China to play a more important role in dealing with the nuclear threat arising from North-Korea. It is however questionable to what extent China has real leverage over North Korea in order to persuade it to change its posture in the region. Moreover it is also questionable whether this would be in the interest of China itself.

But Xi has also expressed himself clearly when he said that China is not seeking to fight a cold or a hot war with anyone. While it is important to realize that this statement is at odds with China’s territorial claims (even when China’s claim on Taiwan is excluded) it should still be clear that China – like the US – realizes that a hot war between both superpowers would have devastating consequences and would go against the interest of both. Xi Jinping has eluded to this by repeatedly saying that nuclear wars can never be won and therefore should never be fought. But also here we see a contradiction, since China has embarked on a path to expand and modernize its nuclear weapon capabilities.

China also addressed the ongoing tensions in the South China Sea and claims that the freedom of navigation patrols that the US and allies are performing are a violation of Chinese sovereignty. It will also address US weapon deliveries towards Taiwan and will seek for a US statement which would clearly denounce any attempts from Taiwan to separate itself from mainland China.

Climate

The most obvious mutual interest both countries share is climate change. Both countries increasingly deal with extreme weather circumstances, climate warming and pollution. Before the meeting there were already positive signs regarding this topic. This also offers hope for the next UN climate talks which will be held in Dubai this month. The US State Department and China’s Ministry of Ecology even made identical statements regarding mutual cooperation in limiting emissions of nitrous oxide and methane. Both nations will also support global initiatives to triple renewable energy capacity by 2030.

AI

Recent warnings from scientists and companies that are involved in the development of artificial intelligence (AI) have put the issue high on the list of security issues. Moreover, there seems to be common ground to exclude AI command and control (NC2) systems for nuclear weapons. Furthermore China has also signalled that it is interested in joining talks about norms and rules for AI. Finally, the South China morning post reported that Biden and Xi were expected to pledge for a ban on AI in autonomous weapon systems like drones. This amongst others with the aim to prevent the risk of weapon systems ‘going their own way’ and all the potential consequences that could arise from this. Unfortunately, in the case of AI there will always remain an incentive to create a weapon that could tip the balance in a direct conflict with an adversary.

What to expect after the Biden Xi meeting?

While expectations before the meeting where modest at best, the meeting still has delivered some results. First, a floor seems to have been established regarding the US-Sino relationship. Both leaders expressed clearly that a conflict between both superpowers should be avoided. However, developments within international relations are not static or linear. As such it is likely that tensions between both powers will continue to be an important feature describing US-Sino relations. Second, both superpowers have committed to step up efforts to reduce global warming and fight climate change. Third, China has pledged to curb exports of precursors for fentanyl. Furthermore Biden announced that experts from both China and the US will meet to discuss and determine: “what’s useful and what’s not useful, but dangerous and what’s acceptable” regarding AI. Xi and Biden also agreed to reopen direct communication between both militaries in order to prevent incidents that could lead to an escalation between both countries. While it is absolutely positive that both the US and China are engaging with each other via the highest diplomatic levels, it is important to realize that the current situation of strategic competition/systemic rivalry that has characterized US-Sino relations since Trump became president in 2016, won’t change. As such the relationship has not materially improved. This might be illustrated best by Bidens remark at the end of the press conference where he mentioned that he still sees Xi Jinping as a dictator. Therefore we can only conclude that there is still a long way to go before we can talk about normalizing relations between China and the US.