What’s next for US-China relations?

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Future of US-China relations
Tensions between the US and China are rooted in geopolitical rivalry. So while an interim deal should help de-escalate the trade conflict and boost market sentiment in the near term, the strategic competition will likely persist in the years ahead. Technology and finance are potentially the next focus of the conflict.

Trade deal no panacea
The relationship between the US and China may never be the same. Patience for Beijing to acquiesce to Western rules has run out in the US, and China is unlikely to jettison its governance model to appease the White House. A confrontational stance against China has gained bipartisan support in the US, making it likely that the spat started by the Trump administration will continue into the coming years regardless of the party in power. Likewise, President Xi’s proclamations that China will not bow to foreign pressure have made it difficult for the central government to backtrack and agree to key US demands without “losing face.”

So how will this relationship evolve going forward? While they may never be best friends, we think self-interest dictates that a full-on cold war is also unlikely. A case in point - as growth deteriorates in both economies, the two sides agreed on 11 October to cease tariff escalations and to work toward an interim trade agreement. As the timeline for the November 2020 US presidential election approaches, a Phase 1 agreement covering lower-hanging fruit could be reached in the coming weeks. This allows the more intractable issues relating to technology transfers and role of the state in the economy to be pushed to future stages of the negotiation.

Meanwhile, China is already toning down the ambitions of its industrial policies. Unusually, Premier Li Keqiang didn’t mention the “Made in China 2025” project in his annual policy address to the National People’s Congress in March, while the domestic media has stopped trumpeting the project. We think China might also dial down the pace of the Belt and Road Initiative, in part because its foreign exchange reserves have stagnated as external trade slows and outflow pressures persist. What’s more, to boost productivity and innovation, Beijing is incentivized to open up its domestic capital markets and seek better intellectual property  protection – both align with Washington’s key demands.

For now, the two sides may also play down their differences over the South China Sea. With the presidential election in sight, there is not much for the Trump administration to gain by picking fights over hot-button issues that Beijing has clearly delineated as “red lines.” As for President Xi, the incentive is to reduce tensions to ease the headwinds facing China’s economy.