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The US strengthens alliances and challenges China

There is much emphasis on increasing national resilience amongst the major countries and blocs. The west plans to rebuild crucial technologies and capabilities to not rely on China.

| 4 min read

The west is responding to the Made in China strategy with plans of their own to cut imports, increase national capacity, secure crucial raw material resources and control their own technology.

President Biden has found rare cross-party support for legislation to increase US spending on research and technological development and to increase US capacity in semiconductors and 5G communications. He has extended President Trump’s plans to restore US manufacturing and technical leadership and widened it into a general challenge to China.

In the Second World War, the US and UK were joined by Russia in defeating a German takeover of Europe and assisted by China in reversing a Japanese takeover of much of Asia. The Axis threat to western democracies and their freer system of trade was then replaced by fear of communism.

The second half of the twentieth century saw a cold war in Europe between the West and the Soviet Union led by Russia, and a hot war in Korea, Viet Nam and neighbouring territories between communist forces looking to China and the advanced democracies led by the US.

This century US diplomacy attempted to bring China into the fold of world organisations set up by the victorious allies of 1945, hoping that membership of the World Trade Organisation would mellow China and make it a good world partner. Meanwhile, internal change in the Soviet Union allowed the EU and NATO to gain influence in much of Eastern Europe that had before been occupied by Russia. It has left Russia antagonistic to the West.

Expanding conflict

President Trump started a trade war to get China to remove its tariffs and other barriers in what was a one-sided arrangement with the west. The State Department and Pentagon, not usually notable friends of Mr Trump’s approach, were egging him on. They thought China was becoming a more general strategic threat and that the US needed to respond. President Biden, a more establishment figure, has broadened the disagreements with China to encompass human rights, style of government and attitude towards the South China Seas as well as the narrower trade and manufacturing issues that mainly preoccupied his predecessor.

Our central scenario rests on a growing digital divide between a Chinese led system and the US one. It assumes that the US, the EU, The UK and others will wish to challenge more unfair trading practises and repressive governance and will do more to subsidise and regulate in ways favourable to domestic output.

The US Innovation and Competition Bill which this week passed a Senate vote has as its aim a wish to confront China’s influence and to reassert US supremacy and self-sufficiency in crucial technologies. It offers $190 bn more state funding for research, and $54bn to increase US semiconductor capacity, which has slipped from 37% of world output in 1990 to 12% today. There is money to provide an alternative to Huawei in 5G.

The legislation, which is likely to be welcomed in the House of Representatives, establishes a Directorate for Technology and Innovation. It requires a list to be drawn up of Chinese state enterprises that are thought to have behaved badly over western intellectual property. It establishes a Made in America office to make more at home and will prohibit the purchases of items such as drones from Chinese companies.

Beijing bristles

China has responded by condemning the measures, offering “strong indignation and resolute opposition”. The Bill includes the provocative permission to representatives of Taiwan to display their flag when meeting with the US government, which China will see as a worrying step on the way to recognising Taiwan as an independent country.

Investors need to consider the growing rift between China and the west. The political hotspots include Taiwan, the islands and atolls in the South China Sea, the issue of Chinese suppression of dissent and treatment of minorities, and the distrust over digital systems, cyberattacks and data security.

Led by the US the west will spend state and private money on rebuilding crucial technologies and capabilities in everything from communications and data processing through batteries and semiconductors to rare earths and lithium. It will probably mean a discount on Chinese valuations given the questions over Chinese governance and global motives. US investors will be discouraged from placing funds in Chinese ventures. It will also mean more investment opportunities in crucial materials and technologies in the US and friendly countries, with government cash as well as orders to support new capacity.

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The US strengthens alliances and challenges China

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