While the Biden administration has expressed a desire to manage competition, the two governments are barely on speaking terms and when they do talk, it is usually an exercise in frustration. President Biden’s phone call with Xi Jinping in early March was most noted for the warnings the U.S. side issued against Chinese support for Russia’s invasion of Ukraine. U.S. trade representative Katherine Tai has said her conversations with Beijing have yielded no progress on commercial differences. And when the United States recently announced the departure of nonessential personnel from the Shanghai consulate, the Chinese Foreign Ministry accused the United States of not trying to protect lives but of politicizing the pandemic.
There will be no easy exit from this new chapter of Sino-American strategic competition—a chapter that arguably started with Xi’s moves against the South China Sea and neighboring states seven years ago, as the Obama administration was still exploring modalities for a productive bilateral relationship. No political leader in Washington will now argue for returning to that earlier hopeful period in bilateral relations and the thrust of the Biden administration’s Indo-Pacific strategy is properly to strengthening alliances and partnership to deal with a more coercive and ambitious China. Yet at the same time, the current trajectory in the bilateral relationship bodes ill for the ability of Washington and Beijing to manage crises that might emerge in the coming years. Both sides regularly assume the worst intentions of the other: Beijing’s anti-Western social mobilization campaign continues unabated, the quiet dialogue mechanisms that once allowed strategic exchanges between the White House and Zhongnanhai have been replaced by lecturing megaphones.
In the wake of the global financial crisis, natural disasters, Covid-19, and extensive supply chain challenges, corporate leaders have become adept at preparing for “black swans” and the continuity of business contingencies, embracing “just in case” over “just in time” and learning to prepare redundancies and protect key technologies. But the current dynamics in U.S.-China relations suggest that there may be a need to prepare for a new bevy of potential black swans from technology competition to major military contingencies.
The impediments to war between the United States and China—from the deterrent effect of nuclear weapons to the trillions of dollars in possible economic damage—remain robust. But the escalation ladder from current “gray zone” coercion and diplomatic jostling up towards cyber, technology decoupling, and even military threats is also closer at hand for Beijing, and therefore Washington. In the Taiwan Strait, Chinese military overflights that cross the midline or circle the island are now a regular occurrence. Although there is reason to doubt that Xi Jinping has set a firm deadline for reunification, Beijing may increasingly believe that force is their only option. An accidental collision between ships or jets in the South China Sea is not only possible—it has also occurred. The nuclear submarine USS Connecticut’s collision with an unknown underwater object in October 2021 is a case in point. This incident did not spiral into a larger conflict, but it easily could have. There is now greater commercial and military traffic in the South China Sea than ever, but the United States and China have very few crisis management mechanisms, with insufficient ways to communicate at an operational level in real time.
The U.S. and Chinese economies have become so intertwined over the last 40 years that when Trump first launched his trade war, the idea of decoupling seemed absolutely impossible. Even the restrictions on Huawei looked like a pebble of decoupling in an ocean of connectivity.
Not so anymore. The woven threads of commercial ties have already started to fray. Total merchandise trade has held steady, but processing trading, which highlights movement of goods within supply chains, is down. Equity investment from the United States to China has only dropped a little and U.S. companies still report being profitable, but their angst at their treatment is on the rise. Venture capital deals have steadily fallen. Meanwhile, all manner of Chinese investment to the United States has plummeted. Overall financial flows are still quite high (and perhaps larger than ever), but the storm clouds are gathering, with the 250 Chinese companies on U.S. markets poised to be delisted, and growing concerns in the United States about the downsides of U.S. institutional capital in Chinese markets. Travel is down to a trickle of businesspeople willing to endure lengthy quarantines. The growth of sudden lockdowns, represented most shockingly by Shanghai, is certainly another deterrent to travel.
It is now entirely conceivable that commercial ties could substantially unravel. One route is through the expansion of defensive regulatory measures that would raise the costs of doing business. Both sides have instituted a range of restrictions and are pursuing analogous programs to achieve supply chain resiliency and reduce their dependency on the other. There are now nearly 1,000 Chinese companies penalized in one way or another by the United States for national security or human rights reasons. The final China bill that emerges out of the Senate-House conference may very well start to require U.S. investments to China to undergo national security reviews the same way the U.S. screens inward investment. And China could start to use, among other tools, its Anti-Foreign Sanctions Law and its own Unreliable Entities List to punish U.S. companies that do not toe Beijing’s line.
