On 07 May 2024, K2 Integrity hosted a webinar discussing how the U.S.-China rivalry affects regions around the world and the opportunities and challenges it presents to businesses and governments. The conversation included Jason Wright, senior managing director at K2 Integrity; Professor Rana Mitter, S.T. Lee Chair in U.S.-Asia Relations at the Harvard Kennedy School; Alice Shone, managing director at K2 Integrity; and Niklas Ponnert, managing director and chief strategy officer at eWTP Arabia Capital Management. To watch a recording of the full webinar, click here.
U.S.-China Relations, Potential Policy Shifts, and Geopolitical Tensions and Opportunities
The U.S.-China relationship will likely shift with the November 2024 U.S. election, regardless of its outcome. If President Biden is re-elected, many elements of the current administration’s approach—including a stronger clampdown on technology exports and increased pressure on U.S. investors not to invest in Chinese-driven technology enterprises—will continue, but there will also likely be an attempt to repair and strengthen relations between the United States and China. If Trump is elected, there will likely be heavy tariffs placed on Chinese exports, potentially upwards of 60%. There is also a level of unpredictability regarding whether the Trump administration would try to make some deals with China.
The U.S.-China tensions are contributing to geopolitical tensions in countries such as Singapore, Indonesia, Saudi Arabia, and the United Arab Emirates. The Singaporean government in particular has been briefing international banks about its plans for managing the tensions in order to convey the country’s stability as a financial and commercial hub. Countries want to keep the U.S. security umbrella but do not want to curtail their access to China’s markets, particularly its emerging middle class that is important in terms of regional and global supply chains.
The tensions between the United States and China also have certain benefits for these countries. One benefit for Singapore is that many multinational and Chinese companies have chosen to relocate to Singapore as part of an effort to hedge against geopolitical risks and broaden their reach in the region since Singapore has better relations with the West, a broader talent pool, and a more diversified economy; it also offers cultural and physical proximity to China, Southeast Asia, and India. There are some positives for countries in the Gulf region as well, and Saudi Arabia in particular, due to its young and well-educated labor force, large supply of capital, and its purchasing power. Due to the lack of industrial capabilities, there is an attraction for a partnership with China to leverage the capabilities coming out of Asia in the areas of technology and know-how to build value chains and industrial clusters in the region.
The Role of Technology
Restrictions on technology plus concerns that commercial ties could be disrupted in the future if companies were cut off from U.S. or E.U. markets have made decoupling/derisking a current focus of many U.S. and E.U. companies. However, moving production outside China is complex, especially for high-tech manufacturing, as other countries lack China’s scale and skilled workforce. China is focused on its own version of managing risk, known as dual circulation, where there is an international trade circuit and a domestic circuit that ideally operate separately. Some companies that have had substantial investments in both the United States and China have followed this example, making the decision to split themselves into separate businesses to lower their risk exposure.
There is concern that supply chains will potentially trap both sides. The CHIPS Act, among other acts passed by the Biden administration, has been effective in terms of preventing various types of technology being exported to China. Whether these restrictions will continue to be successful is still unclear, however, since in many applications—such as security, surveillance, military planning, or retail—having the highest level of technology isn’t necessary. China is finding ways to bypass restrictions by using alternative technologies, without necessarily reaching the highest tech levels.
Political calculus can blur the lines between legitimate security concerns and restrictions driven by political agendas. The increased tension between the U.S. and China on the technology front has led to the United States using its financial and legal powers to prevent “hostile entities” and China from prioritizing “security.” For example, there is more pressure on multinationals operating in China to accede to Chinese state security requirements, potentially leading to data handovers and increased tension with Washington and others.
With all of these considerations, it is important for commercial and governmental entities to develop contingency plans for different escalation scenarios involving China, e.g., a blockade or invasion of Taiwan or a change in U.S. policy. Geopolitical due diligence should be embedded in investment decisions, with risks continuously monitored. The U.S.-China relationship is incredibly complex and will likely continue to impact businesses and markets globally.
