Don’t get too optimistic about Biden-Xi

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They’ll be together at the Apec summit in San Francisco on Wednesday, in a highly ceremonial meeting billed as an opportunity to discuss contentious topics — trade, security, Taiwan etc — and also to stabilise relations between the two countries. It looks like many big-time chief executives will be there too.

Certainly, there’s plenty for Joe Biden and Xi Jinping to discuss, including the US fentanyl crisis and China’s role in the trade of this highly addictive narcotic, a topic that the Financial Times covered in this wonderful graphic feature, and that I take on in my column today. Perhaps most importantly, the two countries are looking to re-establish military communications to avoid accidental conflict.

But while you’ll see a lot of cheery optics around the meeting, the core issues between the two countries aren’t getting any easier. I recently asked one White House official if they could imagine the two countries collaborating on any aspect of the clean energy transition, for example, something everyone has a stake in. This person, who is not a China hawk, started to sound off on how it was impossible to imagine any sort of co-operation there given decades of intellectual property theft by Beijing. Was there any global issue the two countries could conceivably work together on? Answer: maybe emerging market debt relief. But I’ll believe that when I see it, since China has its own massive internal debt problems as well as the Belt and Road Initiative writedowns to deal with.

Things certainly won’t get easier if Donald Trump is elected president, which many political analysts now see as a likely possibility (he’s already a shoo-in for the Republican nomination). But even if you assume there will be no 10 per cent US tariff on Chinese goods, and no conflict around Taiwan, core economic agendas of the two nations simply don’t work well together mathematically at the moment.

China and the US are decoupling, but that doesn’t mean that the Chinese economy is rebalancing away from manufacturing and towards more consumer spending. In fact, the country’s share of manufacturing GDP is rising, not falling, as it moves the fiscal stimulus that used to be doled out to the real estate sector into factories. That means that the Chinese economy is going to become more state driven, and more investment oriented, at a time when the US and Europe are also investing more fiscal stimulus into their own regions. That makes for an uncomfortable truth — not every country can grow its manufacturing sector at the same time (see economist Michael Pettis on this topic in the FT.

The Biden administration has made it clear that if China tries to dump more cheap stuff into the US market it will use tariffs to prevent this. You can say the same and more if we get Trump 2. Even Europeans are taking on the problem of Chinese dumping, with a new investigation into cheap Chinese electric vehicles. The US-EU clean steel talks will begin again towards the end of the year, which might provide an opportunity for the two regions to come together on shared supply chains that would create more synergies and reduce replication and inflation in the transatlantic clean tech market. But that won’t solve the core issue, which is that China hasn’t been able to stimulate its own consumer spending, and is still reliant on being a factory to the world, albeit in higher-margin goods. All of this seems to me like a recipe for more trade wars in the year ahead.

Ed, I’ve become a bit more optimistic that the two countries might be able to avoid a hot war, but less optimistic that any improvement in either the US or the Chinese economic imbalances is at hand. Would you agree? And what are your hopes, if any, for the Apec meeting this week?

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• Columbia University professor Anya Schiffrin and other academics have come out with a rather startling new paper on just how much platforms like Google and Meta would have to pay news publishers if the Journalism Competition and Preservation Act is passed into law: somewhere between $11.9bn and $13.9bn a year. Think of how much more great reporting work could be done if publishers could recoup that money, which comes from the unfair monetisation of their original content.

So much great stuff in the FT this week:

• And I was interested in this piece in The Economist about how Silicon Valley tech giants are enabling the rise of huge Chinese fast-fashion groups like Shein and Temu in the US. The US apparel industry has recently been complaining that such companies are avoiding restrictions on products made with forced labour (a good chunk of Chinese cotton comes from Xinjiang, where such conditions are endemic) by exploiting de minimis rules. These rules allow small shipments in single packages to come into the US without being tracked and tallied as large shipments do.

Edward Luce responds

Rana, I think Biden has done an effective job since the summer of stabilising US-China relations, as I wrote in a column a couple of weeks ago. Even if it is unlikely to result in dramatic breakthroughs, we should not underestimate the value of a quieter period in this most important of relationships. Aside from resuming his conversation with Xi, Biden’s most realistic goal in San Francisco will be to restore military-to-military communications, which will provide some reassurance that error and confusion will not lead the two giants into a first world war-style catastrophic miscalculation. Biden will also want help from Xi in restraining Iran and its proxies in Lebanon and Yemen. China would stand to lose as much as the US from a wider Middle Eastern war in terms of higher oil prices and economic disruption. 

China’s economic slowdown — specifically, its failure to rebound from the pandemic — is the other reason bilateral ties are improving. Xi cannot afford to add a foreign policy crisis to China’s domestic malaise. I doubt Biden will want to be helpful to him on the latter. For the first time ever, foreign direct investment into China has hit a net negative as companies increasingly repatriate their earnings, rather than plough them back into their Chinese operations. Whether you call it decoupling or de-risking, I think the pattern is now set. That would obviously be even more true in a high protectionist Trump administration, as it is under Biden. Apec was supposed to be about multilateral economic integration. It is a strange irony that its only real use nowadays is to provide cover for a US-China bilateral summit.