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Season 4

Episode 6: Can the US and China find common ground?

Abstract illustration depicting US and China relationship

Transcript: Season 4, Episode 6: Can the US and China Find Common Ground?

Disclosure: The opinions expressed by Eurasia Group analysts in this podcast episode are their own, and may differ from those of Citigroup Inc and its affiliates.

David Bailin: I think we're entering into a period when it will be more attractive to invest outside of the US and to invest in China and Pan-Asia than we've probably seen in the last few years.

Ian Bremmer: What we see is a lot of countries around the world that want more access to American military equipment and know-how, but also want more access to Chinese investment and the Chinese marketplace. I see both of those trends continuing at the same time.

Shari Friedman: Welcome to Living Beyond Borders, a podcast from Citi Global Wealth Investments and GZERO Media. On this podcast, we examine global risks and opportunities from the angles of both politics and economics. I'm Shari Friedman, Managing Director of Climate and Sustainability at Eurasia Group.

It's a topic we discuss frequently on this podcast and arguably the biggest geopolitical showdown of our time, the US and China. As the COVID-19 pandemic took hold in early 2020, an already rapid move toward a decoupling of the two nations in the technology sector threatened to become a much larger risk to each nation's respective economy.

And the Biden administration has made some bold and hawkish policy moves to further curb China's influence in tech, including last year's CHIPS and Science Act. But in recent weeks, we've heard what sounds like a softer, more nuanced message.

Here's President Biden's National Security Advisor, Jake Sullivan, discussing an evolving relationship in China in what has become a very talked-about speech delivered at the Brookings Institution in late April.

Jake Sullivan: Now, when you zoom out from economics, we are competing with China on multiple dimensions, but we are not looking for confrontation or conflict. We’re looking to manage competition responsibly and seeking to work together with China where we can. President Biden has made clear that the United States and China can and should work together on global challenges like climate, like macroeconomic stability, health security, and food security.

Shari Friedman: So, is the Biden administration lowering the temperature in the simmering relationship with China? And what does that mean politically and economically? Today, we're welcoming back to the program David Bailin, Chief Investment Officer at Citi Global Wealth. Hi, David.

David Bailin: Thank you for inviting me.

Shari Friedman: And Ian Bremmer, President and Founder of Eurasia Group and GZERO Media. Hey, Ian.

Ian Bremmer: Great to be with you both.

Shari Friedman: Ian, I want to start with Jake Sullivan's remarks and get your take on what they mean. Is this the US signaling a substantial shift in policy and strategy or is this just a new way to describe the status quo?

Ian Bremmer: It's reflecting what has become a substantial shift in policy, starting with the Trump administration and continuing under Biden. It's a focus on industrial policy, which means the global economy through more of a national security lens, which is hard to do for an administration that doesn't have great relationships with CEOs. A little easier to do because the administration is closer to most American allies than its predecessor had been. But the big point here is that Biden has been trying to put, as he says, a floor under the US-China relationship because he doesn't want a new Cold War, but that floor is being tested by politics among both the Democrats and the Republicans to take a harder line against China.

And I do think that Jake Sullivan's remarks in this regard were rather more hawkish than we saw from Treasury Secretary Janet Yellen just a week before and shows that the administration continues to not fully agree on what the state of its China policy should actually be.

Shari Friedman: Moving over to some of our partners also, when you look at Xi Jinping's meeting with Emmanuel Macron or European Commission President Ursula von der Leyen saying that the West should de-risk but not decouple, does it sound like the US is standing alone on China? Is this part of why the tone may have changed, at least in parts of the US administration?

Ian Bremmer: When you look at the last year, the highest priority for US foreign policy has been Russia and the war in Ukraine, the invasion. There is almost 100% alignment between the United States and all of its G7 allies on that policy. China is continuing to become more important over time. I would say that right now, it is battling with Russia for top priority among all of the US policymakers.

But on China, the US is not standing alone, but I would say that the alignment among the Japanese, the South Koreans, the Europeans, really everyone but Canada and Mexico who have no choice but to follow US policy is maybe 60 or 65%. It's not 90, 95%. These are countries that are closer in orientation to US corporations and banks than they are the foreign policy establishment and the Biden administration. I think that that is a challenging thing for the US administration to try to balance.

Shari Friedman: So David, Ian described this much more complex, nuanced approach of the countries. It's not all in, all out. It's a much more subtle alignment. I'm wondering if there is this policy shift happening inside of the US, what does this mean for the broader economy? How do you view it?

David Bailin: Well, this is a profound change and we have to go back a few years to really understand how big a difference it is. We used to use the word globalization all the time. We used to assume that the benefits of globalization, which were the single supply chain, lower cost, lower inflation, that is where we were a decade ago and even actually predominantly five years ago. Now, we have policy associated with the idea that technology is directly related to national security and therefore how it's developed and how it's procured and how it's protected has become predominant as you've already talked about and as Ian discussed.

And that has changed the trading dynamics between the countries, because essentially, what the US did in cooperation with all of its allies ultimately is to have a policy that really draws a hard line on what is allowable, what can be transferred in terms of technology and IP, how it can be produced, where it can be produced under the presumption that it is in the West's benefit not to transfer that technology for lots of different reasons.

That has had two, I think, large impacts. One is it's called into question the nature of the trading relationship and the economics of that trading relationship. That is going to make it more costly for both the East and West, because you have to build a new supply capability for building CHIPS, for developing IP, and you also have to put up walls to protect that between the US and China. Those walls include limiting investment, for example, by venture capital firms in China. So, as a result of that, you have this bifurcation or de-globalization taking place very specifically in technology and in the investments associated with that.

And now, you've had the spending policies change both in China and the US where China has committed to developing its own technology base, it has to do that, and where the US and Europe and others have also agreed that they're going to shift where they build chips and other key elements back closer to their homelands.

So, this has created I think an investment opportunity on the one hand, but also I think higher friction and therefore higher inflation. That is a profound change. Then there are the attendant knock on impacts simply about how China is viewed or how China views the US as their reliability as a training partner.

And then lastly, there are the demographic issues, which is the fact that in changing the supply chains, you're going to see all of the South Asian countries be beneficiaries of the fact that not everything should be produced in China from a reliability standpoint.

So, these are profound economic changes. We could talk about what it means for markets, but between just the technology change alone I think is going to really be the story of the next 10 to 20 years in terms of what actually happens in China's ability to produce the technology that it needs in order to sustain its rapid economic growth.

Shari Friedman: So Ian, Xi Jinping, in addition to the economics, seems to be making diplomatic inroads in Europe, Latin America, and in a lot of emerging markets. So, building on what David has been saying about their maybe tempered economic growth, do they have the ability to be able to be dominant in some of these markets? What impact does this have in the US? Is there a reordering of influence and power taking shape here?

Ian Bremmer: Well, there's a bifurcation of influence and power. On the security side, the United States is the dominant power globally. The US outspends the next 10 countries in the world combined on defense spend. China, of course, is becoming a much more powerful military country in Asia, and that means that American allies that need the US security umbrella are relying more on the US, not less.

And by the way, China only has the ability to project military power in Asia, nowhere outside Asia to any extent. The Americans are the only country in the world that can send their soldiers, their sailors, their military equipment everywhere. So, that matters, but that doesn't translate into economic and trading power.

And the fact is that on the commercial side of things, the Chinese dominate the United States in trade and investment, particularly across the entire global south. So, what we see is a lot of countries around the world that want more access to American military equipment and know-how, but also want more access to Chinese investment and the Chinese marketplace. I see both of those trends continuing at the same time. So, no one gets to be truly dominant except with some countries like Mexico and Canada for the US like Cambodia and Laos for China. But if you were to make a broad statement, if you wanted to make a judgment on this, you would say that in the global south, the Chinese have been increasing influence.

That's particularly true in the Middle East where the United States is playing less of a role, where the Americans are major energy exporters themselves. So, they're competitors now with the Middle East and with the Middle Eastern economies, where because of Biden's orientation more towards human rights rule of law, they're seeing less political alignment with the Americans and the Chinese are becoming by far the most important consumers of their product and investors. I would argue that the Chinese are starting to displace the American role in the Middle East.

Shari Friedman: Honing down on one area, specifically the technology space, David, I'm curious to know how you see the battle over CHIPS going. In the US, the 2022 CHIPS and Science Act provided $280 billion in funding to develop the American semiconductor industry. So, what is the purpose of this, and is this going to have a big impact?

David Bailin: Well, Ian talked earlier about the fact that people perceive this as an unfriendly government to business. I would say in one way, it's unfriendly, because it created this uniform tax regime where there were going to be minimum taxes so that US corporations couldn't avoid them by moving money around the world. On the other hand, there's this CHIPS and Science Act that I think is a direct involvement by the US government in industrial policy in the United States.

And they're not offsetting to one another. I'm sure the taxes are probably more onerous, but the fact is that the passage of the CHIPS and Science Act is designed to both onshore the production of CHIPS, but also to provide resources to ensure that there's adequate investment in the actual IP.

And the US already had a lead, of course, in this area before. The idea is to create a sustainable lead that goes way out into the future. So, the different aspects are different amounts of money that are being allocated through this, but it's a direct benefit to industry and a direct benefit to venture capital that I think is going to have a profound impact in the future, both in terms of being able to more rapidly move the production onshore, but also to ensure that the way this technology gets integrated, the way it's actually utilized is very much to the US advantage or to the advantage of the West I would say more broadly.

And specifically when we take a look at how this technology is going to be used, it has two very large benefits. One, industrial, in other words, commercial interests, which is the idea that we'll have a better infrastructure, technology infrastructure, which in the land of AI and in the land of what's coming in the future in terms of the need to protect and create an infrastructure that's resolute, I think that's important.

But the second has to do with military. This is an act that actually is in my mind directly related to the need to have a better and more prepared military technologically. We've read about a whole variety of different single technologies that the Chinese and others have developed, but the fact is that there was the perception that the US was behind in certain key military technologies and this act is one way of bringing industry and military alignment.

Shari Friedman: So Ian, aside from these economics, we've talked so far about this trend of US and China decoupling and Eurasia Group has scenarios where this is likely to continue perhaps at an accelerated rate and there's a few things that could accelerate it. One of them being Taiwan. Where are we right now with the potential for a war in Taiwan and what are the signposts that we should be looking at?

Ian Bremmer: I've been rather more sanguine about the prospects for relations over Taiwan than the headlines. Certainly, we saw when Kevin McCarthy decided not to travel to Taipei instead meet President Tsai in California, which was at her request, because she didn't want to be bearing the brunt of Chinese punishment for such a trip the way that she had in her country had after the Pelosi visit to Taiwan a year ago. What we saw was that the Chinese diplomatic response, economic response, and military response, Taiwan was dramatically more intentionally incremental. This was not a crisis. Both sides signaled very clearly that they don't want unnecessary provocations in this relationship, and I think that's helpful. I think Biden also supports that.

Now, the proximate danger in the relationship is next year's Taiwanese elections. If the Kuomintang, which is the more I would say pragmatically, do more business with the mainland Chinese party, comes into office, then frankly, the likelihood of conflict and confrontation over Taiwan in the coming several years will diminish significantly from what it has been.

If the DPP, the present party comes in with the new president and turns out to be more nationalist, more pro-independence and inclination, then I think we have a more substantial risk. That's a coin flip. That's 50/50. But I want to be clear, one more point is that the principal risks over Taiwan are not military risks. The Chinese have seen that it's very difficult to engage in an amphibious successful operation across a 100-mile straight.

The Taiwanese are well-trained. They're well defended. The Americans, the Australians, the Japanese, and others are standing up their military support for Taiwan. TSMC, the most important strategic company in the world, the Taiwanese semiconductor manufacturing company, would be devastated by such a military conflict.

So, if there were to be an escalation of tensions, it would be the Chinese government using their extraordinary commercial leverage over Taiwanese business interests that do enormous amounts of business much more than with the US in the mainland, to say, "If you don't change your way of doing business, if you don't support, become politically loyal to the Communist Party, we're going to put on export controls, we're going to sanction you." I think that that will be a very effective way for the Chinese to change the status quo in their favor.

Shari Friedman: Would that trigger a US response?

Ian Bremmer: I think it would trigger a US response, but the US response is also not going to be about war. So, yeah, at the margins, could we see some level of targeted sanctions against the Chinese? Sure, but the Americans are going to be reluctant to do that, because keep in mind, between China and Taiwan, there are asymmetric economic interests that are dramatic and yawning. So, it's much easier to put tough sanctions against the Taiwanese if you're China.

It's like the Americans, it's easy to put tough sanctions against Russia, because the Americans don't rely on the Russians for anything. Where when you talk about the US and China, the interdependence is much larger. The dangers of a tit-for-tat escalatory Cold War style economic posture is much more dangerous for both sides.

Shari Friedman: Another factor that could incite a US reaction in terms of the China relationship is China's involvement in the Russian invasion of Ukraine saying that it's a friendship with no limits. How do you see this potentially playing out and is this a threat to a more accelerated US-China decoupling?

Ian Bremmer: It's been one of the most quoted statements of the last year and a half when Xi Jinping and Putin got together February 4th a year ago and said that they had a friendship without global limits. I would say that that relationship now that Xi Jinping has made his three-day state visit to Moscow a month ago, that relationship is very much back to where it was before. It is a strong strategic partnership. It is the Chinese providing the Russians with a lot of cover in terms of the war, but the Chinese also feeling like they want to be seen as the statesmen who can eventually get a ceasefire, can promote negotiations.

Keep in mind, Xi Jinping has now also had a one-hour phone call directly with the Ukrainian President Zelensky on the anniversary of the Chernobyl disaster. So, Xi Jinping can now plausibly say, "I'm the only leader of global stature that can speak with both the Russian and Ukrainian leadership at the highest level and maybe get something done." I mean, the only other person that really can say that is Turkish President Erdoğan, who's had major health problems and is fighting for his life in a very tight run election right now.

So, Xi is in a better diplomatic position. One place that you could see the US relationship with China get unhinged by Russia is if the Chinese decide that they are going to proceed with sending military equipment directly to Russia, something had they had been thinking about doing, maybe planning on doing covertly, but the Americans, the UK and NATO publicized that intelligence much to the Chinese chagrin and embarrassment.

I think the only way the Chinese would do that is if the Russians were to substantially lose militarily on the ground. If the Ukrainians were able to break their land bridge between Russian Crimea or threaten Crimea in a more existential way. That is very unlikely. So, for the coming, let's say six months, China's position on Russia-Ukraine actually looks a lot better than it did six months ago.

Shari Friedman: So there are a few red lines to watch. Just shifting a bit, the US Treasury Secretary Janet Yellen recently said that the US and China need to find common ground on key global issues for the sake of the world. Ian, you had referenced this a few minutes ago. Do you think that this is possible, given everything you guys have spoken about, and where are some of the areas that you might see this loosening up?

Ian Bremmer: Well, of course, it's possible. It's just that both sides don't really want to talk about it, because the politics are so toxic that showing that you're cooperating with each other has domestic negative consequences. It's very perverse, but that is where we presently are.

Having said that, Kerry, Climate Envoy is planning a trip to China now. It is very obvious that on global climate change, the response needs to be coordinated between the two largest carbon emitters in the world, the United States and China - by the way, not in that order. Secondly, of course, the pandemic, a response to a global pandemic and to future pandemics, you need a robust US-China relationship in the World Health Organization. That's profoundly broken right now.

You may have seen recent news about the China anti-espionage law. The Chinese and the Americans need to coordinate in having good economic data on what the two largest economies in the world are actually doing and how they're performing. Unfortunately, that's not happening now either. In fact, the Chinese are tightening up and they're not producing remotely close to the amount of data they were producing 10 years ago, even though their economy is much larger. So, yes, there needs to be common ground in some areas. There are plenty of aspects of common ground that I can see playing out, but the trajectory is bad and the willingness to talk about it is virtually non-existent.

Shari Friedman: David, do you agree with this?

David Bailin: First of all, I guess that the answer is yes, and I think that the war will eventually end. And what Ian said, if you project it out, right, the President Xi is able to broker the war, that's the end of the war, that is a good outcome depending on what the terms of that are. There's a huge economic benefit to the end of the war.

And then things get back to the economics of the world, in which case lots of opportunities for benefit and climate change is actually an investment that the world has to make in saving itself. If you take a look at one of the benefits of higher energy prices as an example, it's been the benefit to those producing alternative energy products of every single kind that are now without any subsidization valuable in their rollout. Just as an example, you know, Germany is going to change its entire energy policy in terms of how it utilizes existing technologies to reduce its reliance on natural gas.

And there's benefit there for climate change as an economic matter, right? Forget about a social issue matter, to become something that's addressed by both China and the US And again, had the Trump administration not come in, that cooperation may already have been signed by decree, when the United States backed away from the accords. So, once the war is, God willing, behind us, I think that will open up opportunity in this area.

And frankly, one of the real benefits, if you take everything that Ian's talked about, of having the war be over is it creates enormous common interests. I think that's remarkable.

The one thing that we didn't talk about briefly, which is the West's response in support of Ukraine, which has been wildly substantial, ever-increasing. It's a huge sign to China about the willingness of the West to respond in a unified way with extraordinary amounts of money and with considerable effort, logistical effort.

And I do think that that message, which was probably unanticipated two years ago, is also a benefit net to the world, because the cost of a Chinese action against Taiwan is now demonstrably higher. So, if you think about it, the end of the war, the West response in support of Ukraine and its resolve, I think, are backdrops to what could be better times ahead once this war ends for both countries. I'm curious as to whether or not Ian agrees on that.

Ian Bremmer: Interesting. The Chinese, they have a relationship with Iran. The Americans don't. The Chinese have a better relationship with Saudi Arabia right now than the United States do, and the Iranians and the Saudis essentially allowed their diplomatic entente to be brokered by the Chinese. They didn't need the Chinese, but they let him do it. The American response to that was, "Well, it's better to have the Chinese engaged than not because we like the outcome." That's a pretty mature response. It's unclear that that's going to persist over time. If the Chinese engagement in Russia-Ukraine were to get a ceasefire, on balance, I would say there are a lot of Europeans that would like that outcome because they're paying a lot for this war.

I'm thinking particularly the French, the Germans, and others. But you mentioned before, David, a lot of that depends on what the outcome specifically is going to be. My concern is that any ceasefire that comes will not lead to overall diplomatic breakthrough like we presently have with the Saudis and the Iranians. It will not lead to the Russians paying reparations for war damages. It will not lead to trials for war crimes that have been perpetrated in Ukraine and will also not lead the Russians to leave all of their territory that they've occupied even since February 24th, never mind previously occupied territories, illegally occupied territories in Ukraine.

All of which means that the outcome of a China brokered "deal" means that Russia is still a rogue state. Russia is still having hundreds of billions of their assets frozen by the Europeans, the Japanese, and the Americans, still has their gas cutoff, still treated as a pariah by the West. In that regard, I am less optimistic about what the future of US-China relations will be on the back of what the Chinese may or may not be able to get done with Russia and Ukraine.

Shari Friedman: Following onto that, both of you had noted the great need for the US and for China to be collaborating on climate change. So, my question is, which is going to be the driving factor? Will that need to collaborate drive a better relationship or will the deterioration of the relationship harm their ability to collaborate?

David Bailin: So I would say that if you think about the interest of both countries, right? There are now harder lines about where cooperation can and can't happen. But if you take a look at the US political system and the chaos that's going on here right now, the fact is that only if the US can develop some consistent policy toward China can there be a real efficiency, if you will, in the outcomes. Meaning beneficial outcomes for both require some type of consistency. The Chinese, of course, in a one-party system have much greater ability to have a long-term view on how they're going to build relationships.

A lot of what Ian's talked about today is the fact that they can build these alliances in part because of the fact that the US itself is fractured in terms of its foreign policy and its ability to execute that policy. So, I would say that the inconsistency of the US and the consistency of China and the ultimate fact that there are lots of economic benefits that attended in regular markets, right? The trade of all sorts of things, being normalized and well-handled, plus certain common interests that you've talked about today in climate change would seem to me to be beneficial if you were to look out over time and actually more stabilizing.

Ian Bremmer: It's such a hard question. I guess I would say, because I believe that the baseline US-China economic integration is going to persist the trading relationship, the exposure of China to US treasuries, the recognition that that interdependence cannot be broken apart, that creates more space for both sides to continue to play politics in lots of other areas. It makes me more pessimistic that there is an action forcing event that a crisis of sufficient magnitude that suddenly builds trust and forces more alignment on the broader issues that I was discussing, where we really need global US-China alignment.

I mean, you think about the fact and no one's talking about it really, where China's about to go from 400 nuclear weapons to 1,500 nuclear weapons by 2035 in just over a decade. The Russians are exporting all the enriched uranium China needs to make that happen. There are no arms agreements of the equivalent between the US and China on nukes that the US set up with the Soviets and that the Russians have now walked away from. There's very little direct military to military coordination at a high level between the US and China. I mean of all the things that the world has tried to ensure over the last 50, 75 years, it's been avoiding mutually assured destruction with these thousands and thousands of nuclear warheads.

China's now going to do more than any other country to add to that danger globally. The likelihood that the Americans and the Chinese cooperate for the purposes of making the world a slightly safer place seems to me de minimis over the next say 5 to 10 years. So, yeah, I think it's precisely because the relationship is at base very strong and resilient that both sides feel like we can take it for granted. I think that's a problem.

Shari Friedman: So things are changing very fast and a lot of these power shifts and economic developments happen over years, if not decades. You spoke a lot about the opportunities around climate. And heading into the third quarter of 2023, what should investors be looking at in terms of the US and China competition in economies?

David Bailin: I'm going to put the answer to that question in a larger context. We haven't talked about the fact that the dollar is in its third largest rally in the last 50 years. So, it's a currency with a lot of value. And after the Fed does its thing and raises its rates to a maximum, we're going to see a period, I think, of the dollar declining in value, and that is going to make the attractiveness of investing outside of the United States in general better.

The United States at its peak was 62% of the total market capitalization of world indices, which is ridiculous if you think about the need, the actual value of what's being produced and where it's being produced.

The Chinese have had the exact opposite experience. Their actual capital markets have shrunk. The interest in the West and investing in those markets has become much smaller. The willingness to invest in a country which manipulates both what its companies can do and where its inhabitants can invest has clearly deterred capital formation. And in that regard, the Chinese are going to have to make a decision, which is to eventually either tilt toward markets in which case capital gets attracted to China, which I think ultimately is in its strategic interest or not.

From an investment standpoint, we've been overweight China and like that market, because we presume that that market would open, that they would make those policy shifts.

So, we believe that ultimately, that's where the ball's going to go and that money will return to China, but that's not assured. And our confidence level is obviously less than it was 5 or 10 years ago. So, if you think about it from a policy perspective, again, I think open capital markets benefit China. The ability to raise capital for their own companies from other investors around the world would be a boom to them. That is something that's not happened for years now.

And then secondly, we've talked a lot about this today, whether it's the CHIPS Act or the bifurcation of this technology competition that we've discussed, that is I think an investible theme. We've talked about digitization for the last four years as being a major unstoppable trend.

I think we're entering into a period when it will be more attractive to invest outside of the US and to invest in China and Pan-Asia than we've probably seen in the last few years.

Shari Friedman: This has been fascinating. I think people often talk about this US-China relationship in binary terms. It's all good, it's all bad. It's decoupled, it's not decoupled. I think you guys both brought in a much more nuanced view with opportunities in different places depending on where you're looking.

So, David Bailin, Chief Investment Officer at Citi Global Wealth, and Ian Bremmer, President and Founder of Eurasia Group and GZERO Media, thanks to you both.

David Bailin: Thank you very much.

Ian Bremmer: Thank you. See you soon.

Shari Friedman: That's it for this episode of Living Beyond Borders. Check out all of the season’s episodes by heading to and click on the Living Beyond Borders tab, or you can find the episodes in the GZERO World Podcast feed or wherever you get your podcasts.

For GZERO, I'm Shari Friedman. Thanks for listening.

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