Biden must reach out to Xi before the US-China impasse becomes irreconcilable

At a time of considerable uncertainty about the global economy, one development is clear: There has been a marked slowdown in world trade over the past five years accompanied by slower global growth.

The shift began with tariffs imposed by the Trump administration and was exacerbated by supply disruptions linked to the COVID-19 pandemic. Russia’s invasion of Ukraine then resulted in trade sanctions by the U.S. and NATO members. The latest escalation is U.S. export controls intended to hinder Chinese advances in technology amid America’s growing distrust of China over national security issues.

In a speech last September, national security advisor Jake Sullivan stated that the U.S. government wanted to hobble China’s capabilities in “foundational technologies” such as artificial intelligence (AI), biotech and clean energy. Some have dubbed this the “Sullivan doctrine,” as the latest sanctions are more far reaching than previous ones in seeking to undermine entire industries.

The main technique the U.S. has used are export controls implemented via “foreign direct product rules” (FDPRS). They are orders issued by the Department of Commerce restricting the sale of not just goods produced in the U.S. but any item – including those produced outside the U.S. – that uses American intellectual property.

Thus far, the main application is an attempt to cut China off from the most advanced computer chips involved in machine learning. According to William Reinsch of the Center for Strategic and International Studies, the Biden administration is changing policies the U.S. pursued for the past 25 years to overtly degrade China’s military capabilities. U.S. companies believe it will be more difficult for them to sell products to China, and it could force a reorganization of supply chains for computer chips that would effectively split the world into two trade blocs.  

Another avenue is to block access of Chinese companies to the U.S. marketplace. The most noteworthy example is TikTok, whose CEO was grilled during his recent congressional testimony about the Chinese government’s influence in its operations. This has raised the specter that the U.S. could ban the popular app.

These approaches also pose risks for the U.S. One risk is that they will increase China’s determination to become self-reliant in science and technology. Another is that the U.S. government is moving so quickly that it has not managed to persuade its allies to agree on a united front. A third risk is that China could retaliate by issuing sanctions on American companies and products.

The challenge for policymakers is to find a way to ease tensions before fissures in the global trading system leave it divided. Thus far, the sanctions on Russia have not spilled over to the global economy, because Russia’s economy, accounting for only 2 percent of world GDP and world exports, is not important globally.

China, meanwhile, is an economic superpower. It is the world’s second-largest economy, accounting for 19 percent of world GDP, and the world’s largest exporter, with nearly 13 percent of total exports. For this reason, the consequences of imposing sanctions on China would be considerably greater.

At a recent seminar sponsored by the International Monetary Fund (IMF), Chinese deputy representative Li Xin warned that all countries would suffer from geo-economic fragmentation. Li said that in a hypothetical case, energy and high-tech decoupling among countries could cause losses of 1.2 percent of global GDP and 1.5 percent among Asian countries. This is significant considering that the IMF projects global growth to average about 3 percent over the next five years, which is the lowest medium-term growth forecast since 1990.

So, what can be done to lessen a fracture in the global trading system?

The Economist believes both sides should limit economic decoupling. This means that trade in non-sensitive sectors would be preserved and embargoes would be confined to sensitive sectors in which China is a monopoly supplier. In the case of TikTok, a compromise could be reached in which it is ring-fenced, sold or spun off but not forced to close.

The biggest obstacle to containment is the possibility that China will supply weapons to Russia. In a televised interview, President Biden said he has warned China there would be consequences for doing so. He also reminded President Xi Jinping of the many U.S. companies that have voluntarily left Russia since the fighting began.

Given China’s prominent role in the global economy, it would be a mistake for the U.S. to act unilaterally. The European Union (EU), in particular, has a big stake in the outcome, as it has borne the brunt of Russia’s invasion of Ukraine and is a major trading partner with China. While European leaders admit that the 2019 description of China as “partner, competitor and systemic rival” has been overtaken by events, the EU wants to “de-risk” its relationship with China but not “decouple” from it.

The outcome will have a major bearing on the global economy for years to come. As Martin Wolf of The Financial Times observes, what is transpiring could reverse the post-war order of an open and rules-governed trading system that created a more prosperous world economy. Considering what is at stake, Biden should reach out to Xi to hold a summit before the impasse becomes irreconcilable.

Nicholas Sargen, Ph.D., is an economic consultant for Fort Washington Investment Advisors and is affiliated with the University of Virginia’s Darden School of Business. He has written three books, including “Global Shocks: An Investment Guide for Turbulent Markets.”