What will sustain US-China relations if economic gains no longer suffice?

• With economic trends getting worse and calls for US companies to bring production home growing louder, the future foundation for the US-China relationship is unclear
• Foreign direct investment appears to be the one area of mutual, sustained interest. Will that be enough?

New tensions are piling up in the already fraught US-China relationship. Principal among them is a reshoring trend that has moved well beyond the political catchphrase featured by both the Joe Biden and Donald Trump administrations.

A rare bipartisan approach in Washington continues to call for returning production from overseas and expanding domestic operations. These voices will grow louder throughout 2022.

This marks a significant shift in the US-China relationship that has managed to sustain itself largely through economic gains for both sides. Even US companies in China are hitting a wall.

Global supply chain resilience is the new buzz phrase. It caught on in part due to Covid-19 complications in shipping and ports, but the pandemic impetus will subside over time. Political tensions between the world’s two largest economies, however, show no signs of slowing.

Decades-long divisions can no longer be papered over with a combination of economic opportunism and political hubris. Neither side can contain the domestic political influences that are increasingly shaping economic decision-making. And the economic incentives for manufacturers to produce in the US are resulting in real job growth.

Industries deemed critical to US national security, including chip manufacturing, rare earths and transport systems are the main beneficiaries. The made-in-America trend could total US$4.6 trillion in trade, according to the McKinsey Global Institute. Hundreds of thousands of jobs are reportedly being created as a result.

General Motors, for example, recently announced production of electric vehicle battery parts, not for a plant in Asia, but with an Asian business partner in North America. Intel is planning US$120 billion in US chip manufacturing investments. Even US Steel is planning a new manufacturing plant slated for launch in 2024.

 

This may have serious implications for Beijing and Washington, which have managed to sustain relations over the past 50 years despite their ideological differences. The dynamic has shifted considerably since Henry Kissinger’s grand bargain that began with a secret trip to Beijing in 1971.

Back then, US support for China’s re-emergence in global affairs included bilateral diplomatic representation and support for a permanent UN Security Council seat. It expanded to include China’s entry into the World Trade Organization in 2001. The cost for Beijing was simply splitting from the then Soviet Union.

Now, serious differences no longer remain hidden behind diplomatic pleasantries and protocol. Even the most transactional of relationships in international business are feeling the effects of strained ties.

 

Chinese exports to the US are increasingly scrutinised under national security, accounting, and human rights lenses. Chinese firms, including China Telecom, China Mobile and China Unicom, have been delisted from US exchanges, and many more may be forced to do so if they do not comply with US auditing standards.

US businesses in China are having an increasingly hard time as well. According to a 2021 US-China Business Council report, a startling 82 per cent of those surveyed said that trade tensions have affected their business.

The number of respondents indicating that China’s industrial policies have negatively affected their opportunities rose to 38 per cent, more than tripling from only 12 per cent in 2019.

And one main impact has been “Chinese customers actively shifting away from American company products or services to domestic or non-American competitors”.

While the overwhelming majority of US businesses are still interested in investing in China, 94 per cent said that their main purpose is to access or serve the Chinese market. This too may be under threat.

Nike’s sales in China have suffered a double-digit drop compared to the prior year at both Tmall (minus 31 per cent) and Pousheng (minus 30 per cent). New trainer releases that usually sold out at physical stores quickly were also left sitting on shelves.

This follows criticism of Nike’s stance on not using Xinjiang-made goods in their products. Walmart is under similar fire following Chinese customers claiming they removed Xinjiang-made products.

Even Elon Musk, after building a Gigafactory to produce electric vehicles in Shanghai, couldn’t avoid censure following claims that his Starlink satellites had posed a risk to China’s space station, a criticism that could also be levied on the debris from China’s destruction of its own satellite years ago.

All of this is occurring against the backdrop of a slowing Chinese economy. Quarter-on-quarter growth in 2021 has been anaemic, barely expanding 0.2 per cent in the third quarter. Far more competition from high-quality Chinese-made goods and greater brand recognition pose additional headwinds for foreign firms.

This begs the question: if economic trends are getting worse, and calls for US companies to bring production back home keep getting louder, what will be the foundation for the US-China relationship going forward?

We’re in uncharted territory. If areas of non-contentious cooperation become the minority of shared interests, then they provide little impetus to improve ties.

Interest in sustaining relations has remained robust on one front, foreign direct investment, which involves a far longer time horizon. Despite all the rhetoric during the Trump administration, Chinese FDI into the US actually rose substantially, peaking in 2019 at nearly US$40 billion, up from under US$15 billion in 2015.

Similarly, American FDI into China has been on a steady upward trajectory, reaching nearly US$124 billion in 2020, more than double that of a decade earlier.

As US economic policy continues to look increasingly inward, and international trade influence wanes, these financial ties may be the one area of mutual, sustained interest. They will have to weather even more “made-in-America, for America” policymaking that will continue to pressure US and foreign firms for the foreseeable future.

Author: Brian P. Klein (@brianpklein) is a geopolitical and economic strategist and former US diplomat, SCMP