Navigating Global Trade Flows in the Shadow of COVID-19 and US-China Geopolitical Tensions
Global trade flows have had to be entirely reassessed due to heavy blows dealt by the COVID-19 pandemic. While the great power rivalry between the United States and China has played a major part in this, there are multiple factors reshaping the globalized trading system and the bilateral flows of goods, services, and capital within it. So what do Washington and Beijing bring to the table and how can we better understand their respective objectives amid the numerous networks of trade and investment they influence? And what does this mean for the future of sustainable trade in an era that has become increasingly defined by a pushback toward globalization?
Emily de La Bruyère
To learn more about this topic, the Association of Foreign Press Correspondents in the United States (AFPC-USA) heard from two experts who offered significant insights into where the U.S.-China trading relationship might go from here.
Emily de La Bruyère is a Senior Fellow at the Foundation for Defense of Democracies (FDD), and co-founder of Horizon Advisory, a strategic consultancy with a focus on China policy. De La Bruyère has pioneered novel data collection and analysis tools tailored to Beijing’s strategic and institutional structures. She has extensive Chinese language research and program management experience. She has testified before the Senate Banking Committee and U.S.-China Economic and Security Review Commission. Her work was the first Western analysis to document Beijing’s China Standards 2035 national plan.
Nathan Picarsic—Horizon Advisory’s co-founder—is a policy analyst whose commentaries on strategy, technology, and investment have been published in outlets ranging from Bloomberg to TechCrunch. He manages Futura, a fund that invests in early stage industrial innovation, and advises start-ups at Carnegie Mellon’s Project Olympus. Picarsic is also an FDD Senior Fellow.
Nathan Picarsic
The educational program took place on Thursday, August 3, and was moderated by Oheneba Ama Nti Osei, business journalist and Managing Editor at PYMNTS. This program was developed within the scope of AFPC-USA’s partnership with the Hinrich Foundation. The AFPC-USA is solely responsible for the content of this interview. Below, readers will find a summary of some of the most important takeaways from the presentation.
ON TRENDS THEY SEE IN OUR CURRENT MACROECONOMIC ENVIRONMENT
Picarsic says the U.S. and China are presently in the midst of a “long-term peacetime competition” that is “not dissimilar to the Cold War, but certainly impacted by the nature of today's information technology” as well as “the nature of today's macroeconomic, globalized world.” Global trade has largely recovered from the economic shock dealt by COVID-19, he says. Global trade volumes are “rising at this point relative to 2019.” However, the experience of COVID-19 has started to reshape certain trade patterns. Corporations and governments have had to “behave in a slightly new way” to understand their supply chains as well as “the risks that their trade patterns may have invited in the pre-Covid era.”
New “narratives” have emerged that have been impacted by the U.S.-China dynamic but this has not resulted in “broad decoupling” of U.S.-China trade. While select supply chains have shifted, there has not been “complete corporate abandonment of investment into China.” Strikingly, she observes that “the experience of the geopolitical tension we've seen in the Ukraine and the isolation of the Russian economy is not something that seems relevant or replicable in the context of China, even if you're adopting the most hawkish western view of Beijing.”
The U.S.-China dynamic in Washington is “not reaching some thaw” and remains filled both with tension and risks. At the same time, markets and market participants are “dealing with a range of potential technological disruptions, each of which on their own may parallel past shifts in terms of productivity and trade impacts.” While these trends to some extent operate “independent of the geopolitical features that are also placing pressure on the trading environment,” they do work in concert with geopolitical tensions to generate a “degree of instability” overall.
The macro level, notes Picarsic, “overlooks the bubbling underneath that may be presented by the confluence of geopolitical and technological trends” that create uncertainty for businesses, market participants, governments, and regulators.
According to De La Bruyère, China has remained a strong and dominant player while engaging with trading partners. Despite suggestions that China’s role in global trade and industry is disappearing in our post-COVID world, the country’s global export value remains high and “relatively consistent.” There are other factors that underscore these narratives, including U.S., European, and global regulations regardless of whether they apply to trade, human rights, or information protections. But China is a major force here as well because it has been very “adept at espousing publicly” a pro-globalization stance despite taking economic actions that drive deglobalization.
“China's entire economic model is based on establishing relative self-sufficiency,” she observes, noting that on one hand, from Beijing’s perspective, the world’s dependence on China has been “chipped away at.” On the other, Beijing is engaged in economic competition and “will use economic tools in order to impose costs on its adversaries” in a relatively aggressive fashion.
ON IMPLICATIONS ON THE MACRO LEVEL AND HOW THESE TRENDS MIGHT EVOLVE GOING FORWARD
According to Picarsic, the Chinese government has made efforts to “induce key global capital markets players and commercial banks who may have asset management businesses” in the country to embrace the Chinese market more moving forward by doing things like “changing the percentage that overseas operations can own of their businesses on the mainland.” Corporate strategy changes from there and China has encouraged engagement with other countries that supports a narrative of “asymmetric interdependence.” Political pressures have emerged in the U.S. and Europe and in the case of the U.S., “electoral realities” means we’ll see an increase in this rhetoric. Regulatory actions are still evolving.
ON THE SCALE OF EXISTING TENSIONS AND WHETHER THEY GO BEYOND SECURITY MEASURES
De La Bruyère points out that “security and economics are very much tied from the Chinese perspective.” Noting a previous point Picarsic made about digital regulations, she adds that these regulations are driven by China’s belief that if it can “control and have an advantage in international data flow,” it can “gain a competitive advantage economically across the world.” China’s backlash to tech companies, in a broader sense, was driven by China’s desire to show the rest of the world that these corporations serve as “tools to project power and to support the strategic ambitions of the Chinese government, not simply to make their own money.”
ON THE IMPACT OF RECENT EXPORT RESTRICTIONS
Picarsic says that the Chinese government sent a “fairly escalatory and clear signal” by restricting exports of critical minerals to show that they can and will use other nations’ dependence for coercive means.
De La Bruyère says that Beijing imposes trade penalties to “get its way with international partners.” Notably: “In some perverse way, Beijing's willingness to be confrontational over trade and economic relationships actually makes its relationships with the rest of the international system easier for Beijing to handle.”
ON THE “CORPORATE EMBRACE” OF CHINA
Picarsic says the “corporate embrace” of China underscores the “unique nature that Chinese economic and industrial policy has played in sowing the type of asymmetric and interdependence” they’ve had to come to terms with. Corporate leaders have come to understand that the Chinese market impacts them on “both sides of the balance sheet.” When business leaders speak about the Chinese business environment, they might express positive sentiments but that sentiment “signals the dependence they are in support of” because there are both cost and revenue drivers in the country. But these statements help their bottom line and do not necessarily reflect the path that regulatory policy makers might be taking. Regulatory escalation, from both Chinese and Western approaches, is about “possibly restricting or redirecting certain aspects of the trading relationship.”
He adds that fixing that would require “imposing reality and transparency” in the way capital markets treat this relationship. There’s a host of conflicts of interest that are never made transparent that “aren't ever factored into the way that capital markets assess risks around these businesses” and the general macroeconomic environment.
ON WHICH COUNTRY STANDS TO LOSE THE MOST TO DECOUPLING
De La Bruyère observes that the U.S. will be dealt a greater blow because China has “steeled itself” by taking steps to diversify away from dependents across the international system (i.e.: looking for other export markets, alternate supply sources, and securing partnerships within the international business community that help it evade regulations).
Picarsic adds to this by noting that China has a “stranglehold” over upstream supplies into critical supply chains (such as with semiconductors) and a competitive advantage that the U.S. market is “in a tough place to solve for.”
ON CHINA’S INDUSTRIAL AND TECHNOLOGICAL STRATEGY
De La Bruyère notes that China’s strategy has emphasized shaping international technological standards “to encourage the internationalization of Chinese products, Chinese technologies and Chinese norms.” In summary: “If Beijing can set the rules for how systems are going to develop then China can have an inherent advantage in competing for them.” This fits cleanly into China’s decoupling logic.
ON THE DIVIDE BETWEEN THE BUSINESS AND POLITICAL COMMUNITIES IN REGARD TO CHINA
The political reality is driven by national security concerns, notes Picarsic, because politicians have had an intimate view of the threats the Chinese Communist Party poses while business leaders are not factoring in those risks and how those risks can impact market dynamics. He also observes that the political perspective is shaped, to a degree, by the American people and popular interest more than the business community. However, though tension and rhetoric will increase, the business ecosystem in the U.S. and the Western world at large will likely be “more susceptible to the inducements that the Chinese government has at the ready” and has done a good job of leveraging.
ON WESTERN ECONOMISTS’ FORECASTS OF A STRUGGLING CHINESE ECONOMY DUE TO AUTOCRATIC POLICIES
According to Picarsic, Chinese regulators and economic planners “do have some degree of confidence in their state-led enterprise driven framework and model.” The Chinese government has shown it has a skillset that allows it to evade “most near-term and short-term risk.”
De La Bruyère says it comes down to a “perception play” because “so much of the Chinese economy is bolstered by the fact that there's confidence in the Chinese economy,” which in turn encourages capital inflow and investment.
