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Read the headlines and the picture is clear: geopolitical tensions between the US and China have risen alarmingly and the world’s two biggest economies are decoupling fast. US investors have been hearing that message and knocked $200bn off the stock market value of Apple this month following reports that Beijing had banned the use of the US company’s phones by state officials.
Other US tech companies, including the chipmaker Micron Technology, have already felt the wrath of Chinese officials and seen their products cut from critical infrastructure. This appears part retaliation against Washington’s earlier moves to take an axe to some Chinese tech companies, such as Huawei, and ban US exports of leading-edge computer chips to China amid heated talk of trade war.
Study the trendlines, however, and a different picture emerges: overall trade between the two countries hit a record high last year, as did the stock of US direct investment in China. Unlike the US and the Soviet Union, which mostly operated in separate economic silos during the cold war, the US and Chinese economies remain intricately intertwined, especially in technology.
For the moment, at least, the Hot Peace between the US and China is marked more by the benefits of mutually assured collaboration than the spectre of mutually assured destruction. Despite the shouty rhetoric on both sides, the economic symbiosis remains strong, benefiting both US and Chinese consumers. Will it last?
Overt US decoupling from China began in 2018, when then president Donald Trump slapped restrictions on US exports of critical components and tariffs on selective Chinese imports. In spite of the antagonism between the two presidents, Trump’s successor Joe Biden has only doubled down on the approach.
Yet according to the Bureau of Economic Analysis, the total accumulated stock of US direct investment in China on a historical cost basis has risen from $108bn in 2018 to $126bn last year. Overall, US imports from China also climbed 7 per cent last year to a record high of $564bn (although falling as a share of total imports). While imports of some sanctioned goods have tanked, those of others have surged.
The continuing centrality of China to the US tech sector has been highlighted this year by the long line of chief executives trooping through the country. Prominent among them have been Elon Musk of Tesla, Tim Cook of Apple, Pat Gelsinger of Intel and Cristiano Amon of Qualcomm.
An analysis by Nikkei Asia found that China still accounted for a significant share of these four US tech companies’ revenues last year: 62 per cent for Qualcomm, 27 per cent for Intel, 22 per cent for Tesla and 18 per cent for Apple. Even in the highly sensitive field of microchips, several US semiconductor companies have continued to make strong sales in China. Although sharply down from 2016, majority-owned China-based affiliates of US companies still employed 1.2mn workers in 2020.
In spite of the harsh talk on both sides, Chinese officials have been careful not to drive out strategic foreign investors. Besides, shifting complex supply chains for electronic goods is the work of many years, not months.
That said, there are strong reasons for US investors to be extraordinarily wary of China. The economy is experiencing one of its roughest patches in decades. The costs of local manufacturing have risen fast. Intellectual property theft is an ever-present danger while the policymaking environment in both Beijing and Washington remains volatile. If the geopolitics turns uglier, no US business will want to be left with stranded assets in China as recently happened in Russia following the invasion of Ukraine.
It is a brave US executive who will sleep with a dragon by making big investments in China today. Most will prefer to hedge their risks by shifting additional production to India or south-east Asia. But many US companies will want to remain engaged to follow the country’s own technological innovation. In areas, such as digital payments, solar panels and electric vehicles, China has built a formidable (if often state-subsidised) presence. According a study by the Australian Strategic Policy Institute, China now leads the world in 37 of 44 critical technologies, including advanced materials, synthetic biology and quantum communications.
The era of collaborative competition will remain perilous to navigate but is likely to endure unless a true geopolitical crisis erupts.
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