Differences between the US and China come down to a perception problem

Of the most significant geopolitical issues in the world today, the disconnect between the United States and China (rather than the Russia-Ukraine conflict, or the threat posed by Iran and its proxies) is arguably the most important from a global perspective. A week spent in Beijing recently, including absorbing meetings with senior ministry, party and regulatory officials has made me feel that there is no obvious way to resolve the differences between the US and China, whoever is elected to the Oval Office this November.
What became clear to me is that at the heart of the issue is a kind of branding or perception problem: the Americans’ view of China is not how the Chinese see themselves; and China’s image of the United States is similarly at odds with that country’s perception of its own standing. Americans see China as expansionist, but from what we heard the Chinese say that’s not their objective; they want to be an equal and respected partner. The Chinese think the American policy, meanwhile, is to build strong military power and political alliances and partnerships that exclude and surround them, such as the ‘quads’ grouping with India, Australia and Japan.
Americans, in my experience, are super-competitive by nature and see everything as an NFL game they have to win, even to the extent of an inexplicable scuffle between American and Chinese agents that took place in 2018 in the Great Hall of the People. China sees that as overly aggressive; whereas the US defines the relationship as one that is structurally competitive. The overall effect is that they are like two ships passing in the night, and it’s hard to see a way through to some form of resolution. I left the People’s Republic feeling more concerned about the potential outcome than when I arrived.
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Historically it is true that China has not been geographically expansionist, although a graphic view of their soft power influence in the world today tells a more nuanced story. The newsletter Semafor produced a map of South America a few months ago in which the countries whose major trade partner was the US were marked in blue, those with China as the lead partner were marked in red, and Brazil in green. The whole map was red, with the exception of Argentina, which traded mainly with Brazil. When the map was revised this year the main change was that Mexico was the first country now blue.
But there’s no evidence that China wants to invade any country. They see Taiwan, like Hong Kong and Macau, as part of China and seek reunification. I think they will continue the current Taiwan policy politically and militarily until the existential threat to the West of chip production disruption is removed by alternative sources of supply — which could take up to ten years more — before moving more firmly.
President Xi Jinping clearly sees Taiwan as part of China and his legacy, and he follows the philosophy of Mao Zedong rather than that of Deng Xiaoping; his approach is Marxist-Leninist and he is happy to put the brakes on the private sector. He has put restrictions on tech, on gaming and on private education. He is even asking bankers to reduce their bonuses and give back salaries and bonuses they earned previously.
Every company we saw during the visit to China shared that the economy is not in great shape. The second quarter was particularly tough; the challenges facing businesses and the population as a whole include falling real estate prices, a stock market in decline hurt by declining foreign investment and deflation, which means money kept in banks is losing value. The state-owned enterprises are heavily indebted and there is significant youth unemployment.
The Chinese do have a bit of fiscal firepower; they are heavily indebted at the local level, but there’s a little bit more wiggle room at the centre and they could certainly reduce interest rates, currently around 2 per cent. With deflation of 2-3 per cent that means real interest rates are around 5 per cent. The private sector feels the government should be spending money and reducing interest rates, but the general view is that they are holding fire on that until they see the result of the US election, since the former president Donald Trump is threatening 100 per cent tariffs across a range of goods, which would put further strain on China’s economy.
On the US side, the Americans see their policy as de-risking rather than decoupling. The US embassy in Beijing, located just north of the Forbidden City, is symbolic of this attitude. Built at a cost of more than $2 billion and completed in 2008, it was constructed entirely with labour and materials — right down to the cement — shipped in from outside the country. Suspicious of any compromise to security, a senior executive from a major US biotech company told me they are effectively barred by the US from buying any raw materials from Chinese companies.
So what does this mean for global businesses based in the UK or elsewhere? If you have ambitions to operate globally, then the first lesson is that you have to pick your geographies very carefully in what is becoming a more fragmented world.
China represents $18 trillion out of $106 trillion of worldwide GDP, compared with $28 trillion in the US; but that means $60 trillion is outside those two countries. If you’re already big in China, defined as 15-20 per cent of your sales, you don’t necessarily want to be bigger; population forecasts from the United Nations suggest that China’s population could drop from 1.4 billion to 770 million by the end of this century. India’s population is forecast to continue increasing for several decades, doubling from 1.4 billion to 2.8 billion by 2085. Many of the best opportunities will also be in other Asian countries beyond India: Indonesia, Vietnam, Thailand, Philippines, Malaysia, Singapore and so on.
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One thing made clear to us was that, if Trump does win the US election, and those threatened tariffs are put into place, then China will further alter their trade flows towards non-US markets. The focus will be the global south and the Brics, the alliance of major developing countries such as Brazil, India and Saudi Arabia. The emerging seven (E7) economies already outdistance the G7. And don’t underestimate the dislike the global south has for the global north and what they see as the ruling US and western European hegemony.
I went back and looked at what Henry Kissinger said about China. He didn’t believe they were geographically expansionist as such, but he thought what you had to do is to find areas where there are common interests and work on them. Climate change would be one example, co-operation on stopping the flow of harmful opioids like fentanyl would be another. Formulating rules for the governance of AI is a third example. So continued, intense communication will be key and there’s also clearly room for other nations, like the UK, to act as mediators in the relationship to bring closer relationships to the benefit of all.
What’s clear is that there is not going to be any serious thaw in US-China relations any time soon, in the absence of any Nixon/Kissinger type of diplomatic initiatives — and that is going to make the economic going a lot more challenging in the years to come.
Sir Martin Sorrell is founder and executive chairman of the digital advertising and marketing services business S4 Capital