China’s President Xi Jinping had earlier warned US President Joe Biden not “to play with fire.”
Of course, if Pelosi’s visit hadn’t gone ahead, the Biden administration would have faced a strong reaction from both parties in Congress for not standing up to Beijing’s threat to Taiwan or human rights issues regarding Tibet and Xinjiang, not to mention Hong Kong.
So where does it leave trade between the world’s two leading powers?
Consider the not-too-distant past. The US supported the Republic of China against Japan in the Pacific war of 1941-45.
When the Chinese leadership fled to Taiwan in 1949 following the victory of Mao Zedong’s communists in the civil war, Washington continued to recognize the exiled regime as China’s legitimate government, blocking the People’s Republic of China from joining the UN.
This shifted in 1972 following then President Richard Nixon’s historic visit to China – in a move to isolate the Soviet Union during the Cold War. The US now acknowledged the PRC as China’s sole government.
It downgraded its Taiwan policy to merely informal relations while affirming a peaceful resolution to the mainland communists’ claim for reunification.
In turn, this opened US-China trade, ending an American embargo since the 1940s. Economic ties proliferated in the 1980s under Mao’s eventual successor, Deng Xiaoping, helping the Chinese economy to multiply while the US enjoyed lower consumer prices.
Western manufacturing firms either outsourced to Chinese companies or set up operations themselves. They benefited from cheaper production and not having to own factories or deal with labor issues. As for China, it gained tremendous manufacturing capability.
As the middle class grew wealthier, the country became a major consumer market for US firms such as Apple and GM. Beijing insisted this was done through local partnerships, transferring technology in the process and further enhancing the nation’s manufacturing know-how.
China and the US captured more than half the growth in GDP across the world from 1980 to 2020. US GDP grew nearly five times from US$4.4 trillion to $20.9 trillion in today’s money, while China’s grew from $310 billion to $14.7 trillion.
Chinese and US GDP based on purchasing power parity | 1990-2021
Yet there have been increasing concerns about China’s faster economic growth and the fact that the US buys much more from its rival than the other way around. This drove the big decline in American domestic manufacturing which helped Donald Trump win the US presidency.
Equally, the rivalry has extended to other areas as China has sought a leading role on the world stage. Both nations are nuclear powers, although the Chinese military has only 350 warheads to America’s 5,500.
China has a larger navy, with some 360 battle force ships compared to the US 297. Again, China’s are mostly smaller – only three aircraft carriers compared to America’s 11, for example. Other rivalries exist. Both countries are competing in space to establish the first Moon base.
All this has threatened American dominance, while President Xi has also been much more forthright both domestically and internationally than any Chinese leader since Mao.
Washington has gradually become more hostile, starting with President Barak Obama’s pivot towards other Asian nations in 2016 and then President Trump’s sanctions against China’s “unfair” trade practices.
Trump imposed extra tariffs on goods imported from China in 2018 and restricted Beijing’s access to various semiconductor manufacturing technologies in 2020. China responded with countermeasures along the way.
When President Biden took office in 2021, he began highlighting long-simmering complaints about human rights issues in Xinjiang and the threat to Taiwan while still endorsing the “One China Policy.” He also imposed sanctions on certain Chinese companies of a kind not seen since the Mao-era trade embargo.
President Biden also banned goods from China’s Xinjiang region on the grounds of forced labor in 2022, affecting the purchasing of products by many Western companies. China reportedly moved workers to other parts of the country to enable them to keep buying.
The Covid-19 pandemic further increased the distance between the two countries. After China’s “zero-Covid policy” helped to disrupt supply chains and cause product shortages, the Biden administration began calling for reduced dependency on its rival.
American firms started restructuring their supply chains. In June, Apple moved some iPad production from China to Vietnam to cater to growing demand in Southeast Asia.
Near-shoring to Mexico has gained momentum. Apple manufacturers Foxconn and Pegatron are considering producing iPhones for North America in Mexico rather than China to take advantage of lower labor costs and the free-trade agreement between the US and Mexico.
Two global blocs are increasingly emerging, with US Treasury Secretary Janet Yellen calling in April for “friend-shoring” with trusted partners, dividing countries into friends or foes.
In June, President Biden announced a new “Partnership for Global Infrastructure and Investment.” Aiming to mobilize $600 billion in investments over five years, this was an overture to countries already being courted by China under its Belt and Road Initiative.
Days earlier, China had hosted the annual BRICS summit, which includes Brazil, Russia, India and South Africa.
It welcomed leaders from 13 other countries: Algeria, Argentina, Egypt, Indonesia, Iran, Kazakhstan, Senegal, Uzbekistan, Cambodia, Ethiopia, Fiji, Malaysia, and Thailand. Xi urged the summit to build a “global community of security” based on multilateral cooperation.
Iran and Argentina have since applied to join the bloc.
We are already seeing what bipolarity will mean for vital components and commodities. In nanochips, the US is leading a “chips 4” pact with Japan, Taiwan and possibly South Korea to develop next-generation technologies and manufacturing capacity.
China will invest $1.4 trillion between 2020 and 2025 in a bid to become self-reliant in tech.
Another big issue is cobalt, which is essential for making lithium batteries for electric vehicles. To secure supply from the Democratic Republic of the Congo, which produces 70% of world reserves, Beijing has lobbied powerful politicians in mining regions.
By 2020, Chinese firms owned or had a stake in 15 of the DRC’s 19 cobalt-producing mines.
As Beijing hoards cobalt supplies, the US seeks alternatives. GM is developing its Ultium battery cell, which needs 70% less cobalt than today’s batteries, while Oak Ridge National Laboratory is developing a battery that doesn’t need the metal at all.
So, as Sino-American relations have moved from building bridges in 1972 to building walls in 2022, countries will increasingly be forced to choose sides and companies will have to plan supply chains accordingly.
Those seeking to trade in both blocs will need to run parallel operations.
American companies wanting to serve Chinese firms will still need to manufacture in the country or other nations within that bloc. Chinese firms will need to do the same in reverse.
Interestingly, Chinese companies have been rapidly buying farmland and agriculture-based firms in the United States and elsewhere.
Yet though the new supply chains will almost certainly increase costs for Western consumers and dampen China’s growth, there will be benefits.
Supply chains should be more resilient to future crises and also more transparent, while reduced transportation should cut carbon emissions. This should help to meet the UN Sustainable Development Goals on environmental and social sustainability.
The cobalt and nanochips examples also show how the US-China rivalry is catalyzing innovation. And importantly, global trade will continue growing as countries depend on each other, even as trade links change.
It will certainly take time to find an equilibrium.
It took years for the USSR and the US to figure out how to co-exist without getting into direct military conflict. Hillary Clinton wrote in 2011 as Secretary of State that “there is no handbook for the evolving US-China relationship,” and that remains the case today.
At any rate, the businesses that thrive in this new environment will likely be those that plan for a divided world with “divisional” supply chains.
The recent Taiwan row will probably not lead to direct military conflict – rather it will reinforce a trend that has been gathering momentum for a decade or more.
ManMohan S Sodhi is a Professor of Operations and Supply Chain Management at the City, University of London and Christopher S Tang is a Professor of Supply Chain Management at the University of California, Los Angeles.
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy of China Factor.