Corporate America vs China Inc: the constants and the variables

The trading relationship between the US and China was one of the dominant themes of the Trump presidency, forcing the rest of the world to pick a team. At the start of a new administration we take a deep dive into how, if at all, the situation could change under Biden. The first part looked at the prospects for turning back the clock, the second analysed the consequences of a further deterioration in the relationship, and the third assessed the likelihood of a happy compromise between those two extreme positions. This fourth and final part seeks to identify the clues we need to predict the future of this relationship.

With the many different forces in play it’s very difficult to accurately project where the equilibrium of the US-China dynamic in the technology and telecoms sectors will go under the Biden administration, or if there will ever be an equilibrium at all. However, we see the following broad trends in the near future.

There is highly unlikely to be a reprieve for Huawei, but some Chinese companies can expect to come off the entity list. The sanctions against Huawei are not only producing material impact but also highly symbolic of America’s resolution to take on the Chinese expansionist agenda. On the other hand the new administration may choose to remove some other companies from the list, as a goodwill gesture to diffuse the tension. A prime example would be Xiaomi, which has been recently added for opaque and tenuous reasons. The counterargument would be that, precisely because of its symbolic value, unless Huawei is let off the hook, China may consider any other gestures to be not enough.

Telecoms will continue to be an industry largely based on international standards with variations in local implementation, but the footprints of individual companies may be less global. Given the intensifying rivalry between the US and China, the silence of companies representing American interest in standardisation forums can mean either future technologies in the US get isolated, resulting in a Balkanised 6G market. Or heavy IPR payments to companies outside of the US in the future, a reverse of recent telecoms history.

To avoid such a scenario the US government needs to explicitly declare that interactions with Huawei (and other companies on the entity list) during standardisation body events do not constitute an offence of transferring American technologies. Such a move is fully in line with the Biden administration’s spirit of reengaging with global community and international organisations.

With the Sword of Damocles removed, companies with operations in the US and American scientists will be able to play offensive when it comes to setting standardisations for new technologies, including 6G, the race of which has already heated up.

The geopolitical rivalry will continue to play the role it has played recently in 5G, making vendors’ footprint more regionalised. The Chinese vendors will continue to primarily serve the home markets and will be welcomed in the African markets, while having a limited position in Europe and close to non-existent in the US.

Supply chains will become less centralised, and America is likely to benefit from the move to more diversified supply locations though not necessarily more diversified suppliers. One of the strongest votes of confidence in America so far is TSMC’s decision to invest $3.5 billion to build a cutting-edge, 5nm fab in Arizona starting in 2021. Part of the reason behind TSMC’s plan could be a reaction to the growing tension across the Taiwan Strait, following the crescendo of China’s claimed sovereignty over Taiwan and recent incursions of its air force across the Strait’s median line.

Unlike businesses like Nike, which race to the bottom to save costs, the TSMCs and Nokias of the world make their supply chain decisions based on a number of factors, for example level of automation, connectivity, quality of labour supply, regulatory, certainty in rule of law, and geography. We do not expect to see a large-scale exodus of supply chains from China, but more regional hubs are likely to emerge to shorten the supply chains and to be closer to clients, replacing one single global manufacturing centre.

Some trends will be reverted under Biden, though. The most significant change will be his administration’s approach to the American allies, Japan, Australia and Europe in particular. Contrary to his predecessor’s preference for going its own way, Mr Biden has made it clear that he will seek a concerted approach to tackle major issues he faces, one of them being China. To borrow from the Communist Party nomenclature, the Western allies need to form their own “United Front” when dealing with China. (The FT borrowed another bit of Communist China jargon, “One-China Policy”, which the paper means to speak to China in one voice.).

Unfortunately, Biden’s united front, at least the partnership with the European Union, has not got off to a flying start. The new administration is unhappy with the CAI )Comprehensive Agreement on Investment) agreed only weeks before Biden’s inauguration. Jake Sullivan, Biden’s National Security Advisor tweeted a thinly veiled jab at the EU leadership. It is therefore a tall order for Team Biden to shore up the partnership before it falls apart. The good news for the American administration is that Angela Merkel, by far the most enthusiast promoter of the deal with China, will step down his year, and so will go Germany’s overbearing influence on the EU’s policy agenda.

The Biden administration will also seek collaboration with China on issues facing both countries, in particular climate change. On his first day in the White House President Biden signed an executive order to take the US back into the Paris Climate Accord, one of his key pledges during the campaign. If the world is ever going to achieve carbon neutral the two largest greenhouse gas emitters must work together.

However, China does not seem to be too keen to make such collaboration a given. The country’s foreign ministry spokesperson recently said cooperation with the US in specific areas like the climate “are subject to and closely linked with the overall climate of bilateral relations.” Meanwhile, China’s seriousness in achieving the 2060 carbon neutrality target it sets itself is also called into question. On top of being by far the world’s biggest coal burner, China has recently secured oil supplies for the coming decades from Saudi Arabia, Iran, and the UAE, showing no sign of reduced appetite for fossil fuel consumption.

Envoi

Both Nigel Inkster and John Gray, whose works have been cited in this analysis, were unsure whether the US, or the western world in general would prevail in the competition with China. As John Gray put it in his essay, “the US’s position in the world has changed irreversibly. What is fast unravelling is not only the hyperglobalisation of recent decades but the global order set in place at the end of the Second World War.”

Inkster also used a war analogy. Instead of the familiar “tech cold war” reference, he preferred to liken the current rivalry between the US and China to “the relationship between Britain and Imperial Germany in 1914 that involved strategic rivalry but also an entanglement so deep that commentators at the time believed it would make war between them inconceivable.” It didn’t.

Both authors believe China will come out of the COVID-19 pandemic stronger. “Xi Jinping’s regime looks to have benefited from the pandemic,” wrote Gray. “The virus has provided a rationale for expanding the surveillance state and introducing even stronger political control. Instead of wasting the crisis, Xi is using it to expand the country’s influence.”

Inkster drew a similar conclusion. He called China a “techno-security state” or a “über-surveillance state”, and an “intelligence state” in his book. After the pandemic, however, Inkster commented, the rest of the world may find increasing surveillance and monitoring and tracing more acceptable, even desirable, at least when it comes to controlling the spread of the disease.

The changing sentiment will, according to Gray, not only beef up China’s narrative of the order of the world, but also reflect the post-pandemic reality. “When the economy restarts, it will be in a world where governments act to curb the global market,” Gray said. Fundamentally, he believes globalisation has reached the point that it needs a radical correction. “Contrary to the progressive mantra, recently repeated by (former British Prime Minister) Gordon Brown, global problems do not always have global solutions.” Such predicament makes Inkster’s “great decoupling” all but inevitable, and the US may not come out on top.

William Safire, author and Richard Nixon’s speechwriter, reminisced in a New York Times opinion piece that the former president, who normalised relations with Communist China to further split the Communist world, said he died “with some sadness that he was not as hopeful (about the political benefits of increased trade with China) as he had once been: ‘We may have created a Frankenstein.’”

Nixon died in 1994. Safire’s essay was written in 2000, aiming to warn the Congress against granting China the permanent normal trade relations (PNTR) status, which was strongly backed by President Clinton and would pave the way for China to join the WTO. It didn’t do the trick. Clinton prevailed. The rest, as the saying goes, is history.

Nixon was wrong with his metaphor though. Clearly he meant Frankenstein’s creature or Frankenstein’s monster. “I was on the verge of correcting him … but I bit my tongue,” Safire remembered.

Incidentally a popular quote making rounds in China over the last few decades also has an identity problem. For many years the Chinese media loved to say, “when China wakes, she will shake the world.” It is a line purportedly uttered by Napoleon, out of admiration. It was even used by Mr Xi himself on his state visit to France in 2014.

However, according to the research by historian and Napoleonic expert Jean Tulard, this line was a complete Hollywood invention. It was first delivered by the characters in the film “55 Days at Peking” (1963). The Chinese media, as well as Mr Xi, have also conveniently left out the first half of the fabricated imperial quote: “Let China sleep.”

If Tulard’s academic conclusion is correct, both the line’s humble origin and the background of the film will be embarrassing as it’s an episode in history modern-day Chinese politicians would least want to be associated with. The story of the film was set in the Boxer Rebellion at the turn of the 20^th century, when China’s rulers, emboldened by the insurgents, blindly declared war on eight of the world’s most powerful nations, all at once. To say it didn’t end well would be a massive understatement.