Strategy Note /

China and US trade sanctions and jibes on their path to decoupling

  • Tit-for-tat sanctions between US, EU, Canada, UK (not Aus or NZ) and China over alleged human rights abuses in Xinjiang

  • Follows public US-China spat in Alaska and consistent with a path towards decoupling (eg China-EU trade deal at risk)

  • When does decoupling turn into hotter flashpoint (eg HK, Taiwan, South China Sea) and how many allies can Biden muster?

China and US trade sanctions and jibes on their path to decoupling
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
24 March 2021
Published byTellimer Research

The Biden administration is doing what was expected of it on China: adopting a confrontational approach, referencing human rights, and rebuilding relations with international allies with military presence near China (the "Quad" partners Australia, Japan, India) and significant trade with China (the EU). A full-blown cold war between the US – and whoever it can pull into its orbit – and China is not feasible when there is such economic interconnection with China. But the path towards decoupling, at least in terms of trade and investment, if not climate and health polices, appears the one favoured by both Biden and the bipartisan Congressional consensus in the US. China's unhesitant response to US Secretary of State Antony Blinken's opening remarks in Alaska last week and to sanctions this week demonstrate China also fully expects this.

Much has been written about potential beneficiaries of this decoupling, eg low-cost alternative manufacturing locations to China, such as Bangladesh and Vietnam in Asia, Ethiopia in East Africa, Romania in East Europe, or Mexico on the US' doorstep. Much has also been written about potential losers, eg mega Tech companies from the US or China subjected to increasingly nationalistic regulation, or Tech hardware companies incurring duplicated capex to establish separate supply chains. The topic of which countries welcome China and where it might "double-down", eg Pakistan, has also been widely discussed in the context of the Belt and Road Initiative.

Less attention is paid, either because of complacency or because of the inability to predict with any precision, to two other questions:

  1. Do sanctions expand to a point where they inhibit investment in the constituents of widely-followed benchmarks like the MSCI EM Equity and JP Morgan EM Bond indices, where China's weight is about 40% and 4%, respectively?

  2. How soon will the flash points occur that define the limits of confrontation, in the manner of the 1962 Cuban Missile Crisis in the US-USSR cold war, (the list of candidates for where this might occur is long; eg Hong Kong, Taiwan, South China Sea, the Himalayas)?

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