President Biden’s style will be much more measured and strategic on US-China relations. But in substance, the new administration is likely to continue the trend of US-China strategic rivalry.
The last four years have been marked by a very visible and often unpredictable acceleration in US-China trade tensions. The result was quite a wild ride for investors trying to navigate these markets. Will President Biden’s approach prove less controversial and provide some much-needed balm to the often painful US-China relationship? While we expect a more predictable, strategic approach from President Biden, it won’t necessarily be one that leads to greater predictability or lower trade barriers.
Rebuilding friendships and playing by the rules
We expect Biden to rebuild European alliances after four years of uncertainty under Trump. The fact that one of Biden’s first actions was to sign the US back into the Paris Agreement illustrates not only his interest in climate policy but his belief in rules-based multilateralism. This should make for a much more stable EU-US relationship, although we should not assume that means perfect alignment at all times. The EU-China Investment agreement is a good example of the Europe showing their willingness to own their relationship with China separate from the US.
Indeed, we may see some minor trade disputes emerge. However, such disputes will go through due process at the World Trade Organisation and should not be cause for major concern outside the specific industries affected. Politics is much like friendship: you can have disagreements as friends but, importantly, you know you remain friends. Under President Trump, that underlying sense of friendship was called into question. This made every dispute feel more significant and even fatal. We expect that after four years of damage to the relationship, Biden’s commitment to the friendship and his own Irish roots will be evident in his efforts to work with Europe on the big issues and take a measured approach to challenges should they arise.
Rivalry with China under a different guise
We expect Biden to take a much more strategic approach to trade policy than President Trump, including when it comes to China. We are not expecting surprise tweets about new China tariffs to be the new administration’s style. Rather, Biden’s tone will be more moderate and considered. However, we shouldn’t assume that means the actual relationship drastically improves. While in the short term Biden may decide to suspend last-minute rushed-through Trump administration orders, we expect continued tension between the US and China, with trade relations gradually eroding in the coming years.
It’s useful to split US-China relations into three categories: political tensions, non-tariff barriers and tariffs.
The Democrats have concerns about allegations of Chinese human rights breaches. These are likely to be visible under Biden. We actually expect there to be more criticism of the treatment of minorities, Hong Kong, etc. in a way that Trump didn’t articulate as clearly because the ethics of the China regime were not his focus. Biden is likely to use traditional geopolitical tools like political sanctioning for perceived egregious abuses. He is also likely to work with a strengthened European partnership to mount a coordinated rebuke where alleged offences have taken place. That said, it’s possible that Biden may try to build some political bridges on specific issues like climate change and multilateral organisations.
- Non-tariff barriers
The escalation in non-tariff barriers (technology rules, investment rules, etc.) over the past few years has been a bipartisan effort as opposed to purely Trump-led. Democrats have deep concerns about the transparency and ethics of the Chinese administration. So, we expect the gradual erosion of ties in areas like technology and investment to continue. However, Biden would like to work much more with allies to try to build a multilateral approach to influence China.
Biden will probably leave most of the existing tariffs on Chinese imports to the US in place, and initiate some kind of strategic trade relationship review. That will take time to produce results. Recommendations would likely link in issues of political and economic transparency to any renewed discussion with China. Biden’s focus is much more domestic from the outset than Trump’s administration. Nonetheless, we expect he will have to deal with the China question at some point.
China is a rare case of bipartisan agreement
It’s striking that, in such a polarised political environment, US-China relations are unlikely to dramatically improve under the new administration – even if the situation feels a bit more predictable. Why so? It’s important to bear in mind that underlying all this is mistrust of China among American voters of all stripes (see Chart 1). This is why we still expect US-China strategic rivalry to continue to erode trade relations over time. However, investors should be spared the sudden tariff announcements that made the previous administration a source of market volatility.