Biden’s China Policy Chess Board
How is President-elect Biden perceived by world powers?
Where could he achieve consensus to advance new policies?
Which policies could alleviate ‘cold war’ tensions with China?
“We must once again have full faith in our country, and in one another. … in a spirit of individual sacrifice for the common good. … Our Nation can be strong abroad only if it is strong at home. … trust which our Nation earns is essential to our strength.” Inaugural Address of Jimmy Carter, January 1977
Welcome to a new discussion between Larry and Xin, two prominent economists from the Keynesian tradition, offering a bi-weekly US-Chinese debate. Today, Larry shares his perspective from Washington with two charts and Xin comments from Beijing.
Disclaimer: names are fictional but analysis should be realistic.
Larry: Happy Friday Xin, I am so relieved this election is behind us. Now we just need to rebuild our faith and our trust so that we can turn around the worsening pandemic and overcome the bitter divisions at home and abroad.
Xin: Hello Larry, nice to see you so relaxed, this has really taken a toll on all of us. Here in China, we are hopeful for the new administration, but comparisons between the one-term transitional administrations of Carter and now Biden are being made.
Larry: So let’s look at the election outcome: it looks like a clear vote but an unclear path forward, with more division and mistrust than I have seen in my life. President-elect Biden secured a record 78 million votes and a clear 51% majority with a 74-vote advantage in the electoral college. But Democrats lost the Senate, currently 48:50, although they still have a small House majority of about 225:210. Republicans also did much better than expected in state and local elections. Now we still have two Senate runoffs in Georgia in January, where Democrats may have a 30% chance of winning.
Xin: Here in Beijing we have three words to characterize President-elect Biden: decent, religious, and moderate. And we had the same three words for President Carter: decent, religious, and moderate. Both had a big win in Georgia, and they drew strength and values from their faith. Both start with a big deficit of trust in America, both were humble and folksy, and they prevailed against progressive challengers.
Larry: Just to continue our historical parallels; Teddy Kennedy fought against President Carter on universal health care and lost. His liberal VP Walter Mondale elevated the vice presidency with poise and decency. But then Ronald Reagan defeated them in 1980 due to a poor economic record and foreign policy humiliation. Now we have Bernie Sanders fighting for universal health care and a more united Republican Party is itching to point out weaknesses on economic and foreign policies.
Xin: Well, the Carter administration represented a decent transition between Nixon and Reagan. And China did quite well during that weak transition. And Russia was probably on its geopolitical zenith. But NATO weakened under defense budget cuts and the Middle East and Iran dominated often painful policy decisions in the US. Could we see history repeat itself next year? European allies and Iran being relieved, Russia and China plotting in the shadows, while US politics descend further into gridlock?
Larry: So let us look at the core of gridlock, which is the US Senate: it is bitterly divided and still has an arcane 60-vote filibuster threshold. Senators voting records can be illustrated comparing their business-friendly rating from the US Chamber of Commerce (x-axis) and their progressive rating (y-axis), as shown in chart 21. You see that Republicans are fairly united (five squares, lower right) with conservative and Trump factions, and only two outliers (ME and AK). Democrats are covering a much broader coalition (16 squares, upper left) with a smaller progressive and larger moderate faction, as well as three cross-over senators. President-elect Biden had built his record at the left edge of the moderate faction, with a much lower business rating than President Obama and President Clinton, while Vice-President-elect Harris is squarely in the progressive faction, pretty much at the opposite end of South-Carolina senators (indicative for potential 2024 nominees). Even in an unlikely 50:50 Senate outcome, the Democrats would have to reach out to five rather conservative peers (West Virginia, two Arizona, two Georgia) who would constrain their policies.
Xin: And we can already hear that Democrats are being branded for the next elections as being weak on foreign policy, ineffective on economic policy, and overbearing with central government mandates. But two priorities are shared between party leaders: A> the need to manage the pandemic, including some economic stimulus and some enhanced health care with testing, as well as B> a more muscular foreign policy, especially in the Middle East, and with respect to Russia and to China. However, there is NO consensus on institutional reforms, tax or structural reforms, and disagreement on how far to compromise on environmental and social justice agendas. A deadlocked Senate would also imply less appetite for fiscal stimulus, and by default, more need for additional monetary expansion. That would translate into a substantially weaker dollar, lower economic growth, higher unemployment, and a slower, less equitable recovery. So far, US equity markets view such deadlock as positive, but many traders believe that international equity markets, especially in Asia, stand to benefit most.
Larry: So we have enormous challenges for the incoming administration with a terrible public health crisis. And we have an extremely polarized political climate and ongoing gridlock in the Senate. So I agree that the next two years will mostly be focused on the pandemic, with an overbearing responsibility on the FED and the dollar, and potentially also some surprises in foreign policy. Just like 44 years ago under Carter, three flashpoints are crystallizing already: Iran and the Middle East remain unsettled, Russia remains a most aggressive military adversary as arms-control treaties expire, and China cum North Korea represent complex geopolitical challenges that will define our future generation. But can that “pivot to Asia” succeed this time under President-elect Biden with the still treacherous quicksands in the Middle East?
Xin: I do hope so and would urge him to make China his top foreign policy priority. Joseph Nye says that US-China relations today are “at their lowest point in 50 years” and Henry Kissinger believes we might already be in the “foothills of a cold war”. And Michèle Flournoy, possibly the new US secretary of defense, writes that the risk of war with China “is higher than it has been for decades, and it is growing”, especially with respect to Taiwan. However, President Xi has called President-elect Biden “my old friend” and views him as a rational establishment man with decency. Chinese state media are suggesting that “China and the US will resume pragmatic cooperation on vaccines, the anti-epidemic fight and climate change” but “that it will take time to rebuild mutual strategic trust”. It is encouraging that President-elect Biden has called China a “competitor” as compared to Russia representing a “threat”.
Larry: Well, we certainly have a lot of broken china to deal with after the past four years of nationalist US policies. President Trump visited China in November 2017 and lavished praise on the Chinese: “tremendous”, “incredibly warm”, “great chemistry”. The transactional relationship then quickly deteriorated when President Trump accused China of perpetrating the “greatest thefts in the history of the world" and stated in March 2018 that “trade wars are good, and easy to win”. Multiple rounds of tariffs followed, so did a technology decoupling with sanctions on Huawei, diplomatic frictions with consulate closings, media and students being expelled, and a whole-of-government policy to contain China. Notably, human rights in Xinjiang and Tibet and the democratic crackdown in Hong Kong went largely under the radar. However, the trade deficit with China kept increasing to a 14-year high in 2020, and the trumpeted trade deal has only been 54% realized for 2020. Not such an easy win, after all.
Xin: No doubt, China is winning the trade conflict with the US, and China is doing so much better in managing the pandemic. Still, Chinese leaders have been worried about the occasional rash, unpredictable, defeatist reactions from US leaders. And both China and the US appear to have undermined their reputation around the world. Pew research shows that unfavorable views of China have grown in most advanced economies, notably the US, Canada, Germany, France, Japan, and Korea, where now over 70% of the population distrust China, as compared to 50% four years ago. But the US image globally has deteriorated even faster over the past four years, with only 26% of German respondents in the Pew polls expressing a favorable view of the US and only 10% of Germans having confidence in President Trump, with most G7 allies having experienced similar disaffection. So both China and the US have become unpopular, whereas German and French leaders have stepped up to fill parts of the huge gap.
Larry: We have illustrated policy options for US – China relations in chart 22 with nationalist policies in the lower part and multilateral policies in the upper part. US policy options (printed in blue) are aligned with possible Chinese policy responses (printed in red). For example, the US so far has avoided crossing red lines on Taiwan that could have provoked a military conflict. Moreover, the US deliberately appears to have toned down criticism of Chinese violations on human rights and democracy, and in return, the Chinese appear to have muted provocations from North Korea and until recently avoided provocations with respect to Iran. However, US sanctions on Huawei and investment restrictions appear to have led to red-tape regulatory hassles for US companies in China and an increased technological de-coupling. Looking ahead, the question is whether policy makers can move up the curve to more multilateralism.
Xin: Our baseline scenario predicts a freeze of US-China relations for the next two years while the new US administration is preoccupied with managing the pandemic and the urgent US domestic priorities, like economic stimulus, improvements to health care, and healing of social and racial tensions. With its limited bandwidth for foreign policy, the priority will likely be a strengthening of European alliances, which in turn will demand new negotiations with Iran and an arms control deal with Russia. Although the phase-one trade deal with China is clearly off the rails, it is unlikely that major efforts for a reset of the relationship will succeed over the next two years.
Larry: On the upside of our analysis, there still is a possibility for more multilateral actions of the Biden administration, including rejoining the Paris Agreement and the WHO, re-committing to WTO rules, and broader collaboration on financial policies. Some tariffs under section-232 may be revoked, Chinese students may be welcome back to US universities, while collaboration on vaccines and global health initiatives may proceed. Ultimately, a new trade deal and a new climate deal may be possible during the second half of the new US administration, especially if President-elect Biden can strengthen his congressional clout during the mid-term 2022 elections.
Xin: I am afraid that our downside scenario is troubling, especially if the outgoing Trump administration were to miscalculate and provoked military action on Taiwan. China has little to lose in global public opinion nor with the US administration and has identified the January transition period as major vulnerability for the US. President Trump promised “to punish China” and President Xi promised to get “its sovereignty issues settled – that means Taiwan, Hong Kong, the South China Sea”, as Liz Economy from the Hoover Institution explained. Let us hope that rational heads will prevail.
Larry: Let me add an interesting footnote on President Carter, who first visited China with the Navy in 1949, but only returned to China in 2011, long after his presidency. However, it was President Carter who signed the formal recognition of China during Deng Xiaoping’s White House visit in January 1979, bringing to fruition the Chinese efforts that had started with President Nixon’s visit to China in February 1972. And President Carter described US-China relations as “one of the most important friend-ships in the world” – so let us hope to rekindle this friendship one step at a time. After all, the Carter-Biden parallels may bode well for the US-China relationship.