Why any US-China split is likely to be mild | AAG Wealth Management

Why any US-China split is likely to be mild

Posted: September 7, 2020

The world’s two biggest powers have plenty of reasons to cooperate, writes Michael Collins, an investment specialist at Magellan.

The ‘Line of Actual Control’ is the name for the unformalised border that separates Indian-controlled and Chinese-controlled territory in the disputed area where the Asian neighbours meet and where in 1962 the pair fought a war. In June, violence flared up again and at least 20 Indian soldiers were killed. The response of India’s government? New Delhi banned 59 Chinese mobile applications, including ByteDance’s popular video-sharing TikTok.
The incident was yet another strain on the relationships between China and the US and their respective allies. Tension between the two countries over data, Hong Kong, military reach, human rights, investment, the South China Sea, Taiwan, technology and trade is fashioning talk of a split between the pair.
If globalisation is the free flow of goods, capital, people, information and ideas, then what does a split look like? One extreme would be another Cold War-like separation between the world’s two most powerful countries and their allies where economic ties almost evaporate. The benign extreme might be a token split. The term could cover any division in between.
But whatever form it takes, even if their antagonism flares at times, the China-US separation is likely to be mild for five reasons:
  • First, their rupture is not an ideological clash like the Cold War of 1945-1989. The China-US tussle is more a mercantilist power struggle between economically interwoven and flexible countries that have different political systems and values. Such scuffles typically find an equilibrium where rivals coexist, even cooperate.
  • Second, it’s an oversimplification to view the world as settled into two groups. The US and Europe also have disputes over data privacy and the regulation and taxation of tech companies. It’s a simplification, too, to talk of the Belt and Road Initiative (a series of Chinese infrastructure investments around Asia) as a China-led bloc. The countries involved in that project have no common ideology.
  • Third, the fact that China and the US (and their allies) are so financially and economically entwined means it would be too costly, time-consuming and complicated for the powers to separate. The US relies on China to buy its government debt and for rare-earth materials. Western companies have production, commercial and investment ties to China. For its part, China depends on western banks, universities, agricultural produce, raw materials and tech parts such as microprocessors. Many Chinese companies depend on foreigners for much of their revenue. Chinese companies own or have stakes in many western household names.
  • Fourth is that China and the US face common financial and economic challenges. Both are keen to reinstall sustainable economic growth, repair their finances and trade with each other.
  • Fifth, the pair face common challenges away from finance and economics that can be better met in a cooperative fashion. These include the coronavirus pandemic, climate change, failed states, global terrorist organisations and nuclear proliferation.
Even though the split will be mild, it will consist of two noticeable tears. The first is broadly around technology and will be most noticeable in how the internet will segment. The fractured internet or ‘splinternet’ means that some countries might exclusively use US or Chinese tech for critical operations. But the internet was rupturing anyway because governments were always going to extend regulatory powers and security measures to cyberspace.
The other tear, helped along by the pandemic highlighting the importance of ‘health security’, is that production will drift from China because western countries and companies are unwilling to rely for critical supplies on a country with divergent interests and opposing values. Over time, such a production shift could be noticeable.
These tears come with costs. Western consumers will face reduced choice and higher prices as friendly companies producing essentials are protected and Chinese tech stars are blocked. Global production networks will be less efficient. Personal ties between China and the US will be lower than otherwise. The internet will serve national and regional interests, not global ideals. Cyberattacks might become even more common. Spikes in China-US tensions could trigger gyrations on financial markets.
Other tears in the China-US relationship could be the Chinese public boycotting US brands; Beijing targeting specific items over alleged trade breaches; and Washington, exploiting US dominance of the world’s finance system, expanding financial sanctions on the Chinese.
But the costs are likely to prove mild. People will know that, while insults and feints between China and the US might look like a divorce, the pair are likely to remain untrusting and squabbling competitors rather than turn into foes.
Michael Collins is an Investment Specialist at Magellan. Magellan is a fund manager for St. James’s Place.
The opinions expressed are those of the fund managers listed above and are subject to market or economic changes. This material is not a recommendation, or intended to be relied upon as a forecast, research or advice. The views are not necessarily shared by other investment managers or by St. James’s Place Wealth Management.

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