U.S.-China Relations: A Shift Towards Long-Term Strategic Competition

A recent report by the U.S.-China Economic and Security Review Commission suggests that the relationship between the United States and China has entered a new phase of “long-term strategic and systemic competition,” requiring appropriate actions to address potential risks.

Changing Dynamics

This annual report signifies a growing consensus that the nature of the relationship between the two nations has fundamentally changed. It also implies that the upcoming meeting between Chinese President Xi Jinping and President Joe Biden at the Asia-Pacific Economic Cooperation summit is unlikely to alter this trajectory.

Foreign Policy Challenges

In terms of foreign policy, the commission highlights Beijing’s aggressive approach, such as providing nonlethal military aid to Moscow and conducting joint patrols in the Arctic. Moreover, China has significantly increased its military capabilities through an unprecedented buildup.

China is actively positioning itself as an alternative security partner to the United States on the global stage. This includes engaging in peacekeeping operations in African countries, where it has made substantial investments in critical minerals and energy resources.

Economic Struggles

Economically, China is currently facing difficulties due to a property slump that is contributing to broader instability in its financial system. Simultaneously, the Communist Party is opening up the financial sector to foreign investment, posing risks for those who invest in China through pensions and wealth management products.

Unsurprisingly, these economic challenges have had a negative impact on the iShares MSCI China exchange-traded fund (ticker: MCHI), which has experienced a nearly 10% decline this year.

Shifting Business Landscape

While many U.S. companies still consider access to China’s market crucial for growth, there is a growing trend of firms attempting to limit their exposure and explore alternative strategies. In fact, foreign direct investment into China during the third quarter has turned negative.

Some companies have already begun diversifying their supply chains by shifting to suppliers in other Asian countries. However, it is worth noting that many of these alternative suppliers are still Chinese-owned, leaving U.S. companies vulnerable to potential risks.

In conclusion, the report highlights the current state of U.S.-China relations, emphasizing the need for a comprehensive approach in addressing the evolving dynamics.

Assessing National Security Implications of the Economic Relationship with China

In its latest report, the commission formed in 2000 to evaluate the national security implications of the economic relationship with China has outlined 30 recommendations for Congress. These recommendations primarily focus on increasing disclosure to identify potential vulnerabilities.

Improving Corporate Disclosures

One of the key suggestions is to consider legislation for a framework that would require companies to disclose their risks related to China. This would include information such as the percentage of total assets in China, joint ventures with Chinese companies, the nature of research and development activities in China, and any influence that personnel with ties to the Communist Party might have on decision-making processes.

Evaluating National Security Threats

The commission also urges Congress to establish a framework for evaluating national security threats posed by electronic products imported from China. It emphasizes the need for Congress to leverage all available tools, including tariffs, to eliminate such risks.

Enhancing Due Diligence

To assist companies, universities, and others in conducting due diligence on potential Chinese partners, the report suggests the creation of an interagency group that would build a comprehensive database. This would facilitate informed decision-making when entering into partnerships or collaborations with Chinese entities.

Reviewing Investments with Technological Implications

Engaging with Allies for Sanctions Planning

Highlighting the importance of international cooperation, the commission encourages Congress to direct the administration to engage with allies in planning and preparing for sanctions on China. This collaborative effort would be particularly crucial in the event of a confrontation over Taiwan or other sensitive issues.

Persistent Concerns for Investors

Beyond China’s economic recovery, investors are increasingly concerned about the potential impact of congressional actions. This includes not only investments in China but also investments in global companies that have exposure to China.

With the commission’s report providing further confirmation, it is evident that this concern is likely to persist in the foreseeable future.