U.S. and China relations will take time to mend

But the complexities of the current relationship mean that it might take longer than one presidential term to achieve some kind of détente, if indeed that is possible.

Relations have soured dramatically during the Trump era.

But it is important to remember that some of the issues at stake, such as IP, technology and the desire to protect sensitive personal data, pre-date President Trump’s tenure and it was always inevitable that they would rise to the surface at some point. They are now in full bloom.

Retaliatory trade wars

As the trade war between the two countries has intensified, we have seen both sides clash on a range of issues, such as:

• capital market controls
• currency
• export controls and sanctions
• technology
• national security

China, still intending to continue opening its economy, has matched the U.S. in implementing measures allowing it to retaliate. Recently, in the wake of the forced sale of TikTok, it set up its own sanctions regime and introduced tech export controls.

The new U.S. administration is expected to pursue, at least in terms of engagement and communication, a more conventional diplomatic approach.

Nevertheless, Biden still has to take account of a sizeable domestic constituency that is hawkish about China and the legacy positions of the Trump administration. The difficult fundamental issues over which the two countries have clashed will need hard negotiations to reach an understanding. In future it's unlikely, for instance, that  will be any less scrupulous.

Three possible scenarios

We see three possible ways the relationship could develop in the coming years:

1. antagonistic rivalry escalates, with severe impact on the tech sector and the global economy
2. two countries enter a fragmented engagement, the most likely outcome in the short term
3. cooperation in areas of mutual concern (i.e. climate change)

Conflicts may continue in contentious areas and move into new sectors such as finance. But China’s response would likely remain measured to protect foreign investment and pursue its long-term goal of moving from an export-orientated economy to a green, hi-tech and consumer-orientated one.

A Biden focus on developing a team of seasoned veterans to prioritise and concentrate on China will be crucial to setting the tone. From the appointments already announced, this approach seems to be playing out.

Implications for deals

The President-elect’s determination to re-join the Paris climate accord and re-engage with the World Health Organisation are two areas where consensus may be found and are hopeful signs of a more multilateral approach.

Meanwhile, we expect Chinese outbound investors to become more active in the U.S., in non-contentious sectors that are likely to withstand Committee on Foreign Investment in the United States (CFIUS) scrutiny, if a cooperative environment can be created.

China will also seek to continue attracting inbound investors as its economy transforms. Companies operating in different markets could be caught between the two giants, as we saw with the Huawei/5G scenario.

For those operating in Asia, securing supply chains is key. Singapore offers a centre to target Southeast Asian markets, and Hong Kong SAR acts as a gateway to Mainland China. Notwithstanding the potential for continued flare-ups, we expect a modest easing of U.S.-China tensions to create a more receptive deal environment in the short to medium term.

Worst case: antagonistic rivalry

• accelerated decoupling and bifurcation
• equivalent retaliation
• multi-polar tension
  
  

Medium case: fragmented engagement

• sustained tension over technology, IP and other sensitive areas
• cooperation over areas of mutual interest
• no comprehensive framework of cooperation
  
  

Best case: partial agreement and accommodation

• active cooperation on shared global issues
• compromise reached over difficult issues (technology and trade)