Country Risk: The Impact of the U.S. Presidential Election on China
As American citizens home and abroad cast their votes for the next President of the United States of America, the rest of the world must wait for results along with those who participated in the election. There remains a lot that can happen between now and the final outcome, and this group of sovereign rating experts are not in the business of predicting political outcomes. We are, however, keenly interested in how a second term for Donald Trump versus a Joe Biden administration could impact economic, social, and foreign policy. This piece is a composition of views from the RMA Country Risk Steering Committee on how their differences in policy and approach could impact other countries or regions.
The outcome of the U.S. Presidential election may make the biggest difference to East Asia and China but neither outcome offers easy hope of improved relations between the two countries. The big question is whether the worsening trend in the US-China relationship over the last three and a half years can be altered or if it has reached a kind of self-perpetuating momentum. Trump portrayed China as a tough economic competitor that doesn’t always stick to the rules at the beginning of his term; currently, he portrays China as incorrigibly adversarial and responsible for any number of the US’s ills (e.g. the extent of the US COVID-19 outbreak). President Trump has also invited a group of extreme China hawks into the White House who have re-calibrated China policy to relentless confrontation at every level. The combination of Trump’s rhetoric and the shift to an across-the board anti-China stance among the Washington establishment (intelligence, state department, defense etc.) has led to a similar shift of mainstream political and public perception. For many, China has gone from being viewed as an emerging competitor to posing an existential threat to the US and its way of life.
Joe Biden on the other hand, as recently as May 2019, preferred to characterize China as still far behind the US and the challenge posed by its rise, as one of many foreign policy challenges but certainly not the most important. For example, climate change and relative U.S. economic decline loomed far larger. However, the public shift in opinion especially over recent months has risked making that position look naïve. Therefore, Biden has pivoted to a position on China which – rhetorically at least – has become almost indistinguishable from Trump’s about the severity of the problem posed by China. The difference lies in the mode in which he intends to deal with the perceived threat.
If Trump wins
Scenarios of relations with China in a second Trump term require less discussion because they will likely be some kind of extension of the trends of the first term. The base case is a continuation of Trump's first term focus on “trade numbers” with much accompanying rhetoric and bluster. There would be talk of a Phase 2 trade deal but chances of that are quite slim due to the deterioration of relations since Phase 1 and the low probability of the Chinese fulfilling their obligations under that deal. At the same time, hawks in the cabinet continue to sharpen policies on defense and intelligence, but particularly economic and technological decoupling. A continuous deterioration of the relationship does not lead to actual conflict but is clearly headed that way.
There is however a tail risk of a second term Trump supercharging the China confrontation with an even more aggressive push on multiple fronts. Catastrophic economic decoupling and even military skirmishes especially in the South China Sea become a distinct possibility. This scenario becomes more likely if Trump wins the coming election by escalating tensions with China, and as a result comes to believe that he has received a hard-nationalist mandate. Confronting China becomes both his political fuel and his political objective. The unlikeliest scenario is that of Trump getting exhausted or bored of constant confrontation with China and focuses instead on other topics. He appoints a new cabinet with fewer China hawks. This results in slight improvement in the tone of the relationship but is essentially a mini détente. This scenario becomes slightly more likely if the COVID-19 situation gets worse again. Trump may simply lack the political capacity/resources to continue maximalist confrontation with China.
If Biden wins
Biden’s China policy is far from clear cut and is still evolving. However at the core his approach would likely seek to recalibrate US policy, de-emphasizing public rhetoric and “trade wins”, focusing instead on multilateral economic containment of China in which some of its more controversial policies (e.g. IP theft) would be opposed by a US-led group, but in a way that is less disruptive to the global economy. He would also seek to leverage his personal relationship to Xi. While Biden is very likely to attempt to revive the post-war US-led coalitions, this model faces some quite significant challenges, such as US and European growing disagreements that pre-date Trump; mistrust from Asian allies regarding the extent of US commitment to Asia in the long term; and a China that is unwilling to engage even when faced with broad-based pressure. In addition, both the US and its allies may have to come to terms with the ongoing diminution of relative US power. The US still enjoys primacy in a number of aspects, including the ability to project military power over large distances, its position at the very apex of the development of key technologies (although this is also under threat), and through its control of the US dollar. However, in relative terms, it simply no longer has the broad-based economic might, the administrative capacity (as demonstrated with COVID-19) or the moral high ground it once enjoyed.
There is also an upside scenario where China turns out be interested in re-setting relationships with the rest of the world in the attempt to avoid having to face another Trump in the future. In this scenario, the US and its allies strike some sort of uneasy “grand bargain” with China. Great powers have been able to do so at times in the past, think “detente”, “concert of Europe” or the “holy alliance”. In some cases, delaying deterioration of relationships for decades. Unfortunately, a formal division into spheres of influence is unlikely, mainly for military reasons. China will not sign anything that accepts continued US military presence on it its doorstep and the US is unlikely to loosen its commitments to Taiwan, which would be a key Chinese demand. More limited agreements such as the 2015 Obama-Xi cyberwarfare ceasefire are eminently possible. However, such agreements are also unlikely to last if that one did.
Whom would China prefer?
Throughout the first three years of the Trump presidency, a counterintuitive view took hold in Beijing, namely that Trump was good for China. Gradually it was becoming clear that Trump was unable or unwilling to inflict any real immediate economic damage on China. The trade tariffs were largely self-defeating, and despite threats to the contrary, there was going to be no abrupt decoupling. However, Trump’s wholesale undermining of US alliances in Europe and Asia as well as his weakening of multilateral institutions (WTO, WHO etc.) has affected China far more than the headline grabbing rhetoric and minor trade balance shifts. It has become increasingly clear that China has grown powerful enough to resist bilateral economic pressure from any country including the US, and the only hope left of containing China is by setting clear limits and enforcing those limits with a united global front.
Since the pandemic broke out at the beginning of the year, Trump’s rhetorical attacks have stepped up, US naval operations in the South China Sea have increased and the pace and aggression of techno nationalist decoupling has accelerated (TikTok and Wechat bans). To be fair, the most destructive initiatives do still seem to be on hold; Chinese leaders need to engage with the possibility that Trump could set something in motion from which it is impossible to step back.
Hence, the Chinese government probably has no strong preference of presidential candidate right now. A Biden presidency could be the beginning of a much tougher international environment for China (if the revival of US alliances is successful). On the other hand, a second Trump term is looking more and more like it could do irretrievable damage, not only to the bilateral US-China relationship but to the international environment that has been instrumental to China’s success.