The Chinese Balloon Incident Has Raised the Stakes of Global Trade to New Heights

Near the end of January and at the beginning of February, a Chinese-operated high-altitude balloon floated into American airspace, kicking off a diplomatic crisis which prompted Antony Blinken, the U.S. Secretary of State, to cancel a trip to Beijing, which was to be the first by a secretary of state since October 2018, when Mike Pompeo traveled to the country in an effort to ease deteriorating bilateral relations. 

On February 4, the U.S. shot down the balloon over the Atlantic Ocean, a move that received bipartisan praise. However, the Chinese government made clear it views the Biden administration’s response as an unnecessary provocation and said it reserves the right to retaliate. One thing is for certain: the fallout from Blinken’s decision not to travel to Beijing offers a chance to assess the future of the U.S.-China relationship and the probable success of President Joe Biden’s China strategy.

Blinken’s approach to China is built on “three prongs,” according to Stephen Olson, a Senior Research Fellow at the Hinrich Foundation, a Singapore-based non-profit focused on sustainable global trade. Earlier this week, Olson offered insights into the future of the U.S.-China relationship in an article titled, “Will Spy Balloon Derail Biden’s China Strategy?” which served as a segue into the following interview, which expands on his viewpoints.

So what are these “prongs”?

The first is investment, which “calls for the US to make substantial investments in cutting-edge industries crucial to economic and strategic preeminence.” The second is alignment, which focuses on cooperating with partners that share a common vision for the Indo-Pacific.” And the third, competition, “identifies economic, strategic, and philosophical ways the US should challenge and compete against China.” According to Blinken, these pillars are in no way designed to isolate China but rather to uphold the rules of global trade governance that facilitated China’s ascension, a topic which Olson has spoken about at length with the team here at foreignpress.org.

There were once hopes that China’s entry into the global trade system would benefit the U.S. and the Western world at large. This has not come to pass in part because of China’s record of either ignoring or bucking the rules of international trade, and its decisions have raised many questions about the viability of the World Trade Organization (WTO). The U.S. has tended to view China as a “threat” to American preeminence, says Olson, a belief which has colored and will continue to impact its relationship with the European Union (EU), which has sought to “maintain” and even “expand” its trade relationship with China even while the U.S. has made attempts to get the bloc on the same proverbial page. 

The U.S. is not blameless here, and its response in East Asia, where Chinese trade and investment are interlinked, has been lackluster in large part because of its failure to listen and “understand and accommodate” the interests of its East Asian partners. More of that could certainly be explored at a later date but It’s evident the issues between the two diametrically opposed nations go much deeper than the Chinese balloon saga.

Olson’s interview with foreignpress.org is within the scope of AFPC-USA’s partnership with the Hinrich Foundation. The AFPC-USA is solely responsible for the content of this interview. 

The following conversation has been condensed and edited for clarity.

How could the evolution of Washington's understanding of the Chinese military's goals generate friction with the European Union in regard to trade?

Although there are a range of opinions on both sides of the Atlantic, broadly speaking the U.S. has tended to view China more of a threat, both in economic and strategic terms, than the E.U. has. The E.U., at least thus far, appears more committed to maintaining and even expanding the economic relationship with China, while there is a growing consensus in the U.S. that a certain degree of decoupling, especially in the technology sector is inevitable. This has sometimes created friction as the U.S. has tried to establish a common front with the E.U. in confronting China’s trade practices—in particular through export controls on technology products and equipment.

How has China "not played its cards perfectly" as this diplomatic crisis has unfolded? What could it have done differently and how might its actions further fragment the global trade system and impact its foreign policy?

Since long before the balloon saga, China has played its cards less than perfectly, alienating its neighbors and throwing its economic “weight” around. For instance, when Australia had the audacity to suggest that it might be useful to learn about the origins of the coronavirus, China responded with sharp criticism and the imposition of draconian trade restrictions on Australia’s exports that were extremely damaging to a number of Australian companies. These restrictions have only recently begun to be lifted. These heavy-handed tactics by China have lent credence to the argument advanced by some that we are heading towards a trade system fragmented along geopolitical lines.

In what ways has the U.S. miscalculated its response in East Asia, where trade and investment with China are interlinked?

The U.S.’ chief mistake has been in not listening well enough. The U.S. has articulated very clearly what it wants but has been less willing to understand and accommodate the needs and interests of partners in East Asia. Most countries in the region would welcome a more robust engagement from the U.S., but no one wants to be “forced to choose” between the U.S. and China. Granted, there is a certain amount of apprehension in East Asia over China’s sometimes overbearing conduct, but China is recognized as an economic and strategic reality in the region that must be engaged and cannot be ignored or shut out.

Semiconductors have been described as "the brains of modern electronics." How could the U.S. "jeopardize access" for countries which choose Huawei to build 5G networks or other telecom infrastructure?

There are a variety of legal or regulatory measures either in place or under discussion in the U.S. which are intended to get third countries to cooperate with and participate in U.S. export restrictions on sensitive technologies to China. There are various ways this could be accomplished but the general idea is that parties that do not comply with U.S. export restrictions will have their own access to U.S. technology and tools cut off or constrained.

If the U.S. continues to run afoul of its WTO commitments, could Secretary Blinken's "three prong" approach be dead on arrival? What does this mean for the future of free trade?

There isn’t necessarily a strong linkage between the U.S.’ conduct in the WTO and the success of the “three prong” strategy. The problems besetting the WTO have been slowly brewing almost since the organization’s inception and for the most part the WTO has not played any meaningful role in the U.S.-China trade battles. The success of Biden’s strategy will be driven more by the degree of cooperation in the U.S. (among both political and business leaders) and the amount of support that can be secured from partners and potential partners.

In terms of impact on the future of free trade, we appear to be headed towards a more fragmented trade system, divided along geopolitical blocs. Global trade governance will be increasingly bypassed, and countries will resort more frequently to unilateral measures.