On January 20, 2023, the Biden administration entered its third year, continuing to place China as the top priority for its foreign policy. While Russia has become an urgent issue since its February 24, 2022, invasion of Ukraine, China remains the preeminent foreign policy concern for the Biden administration as reflected in the strong focus of domestic economic and industrial policy on countering China.
For context, on October 21, 2022, the White House released its National Security Strategy, referencing China as "the most consequential geopolitical challenge," deepening its strategy of countering China by strengthening relations with allied countries. In this regard, the Biden administration policy direction toward China has evolved over the past two years.
Having inherited the policy dictate of “confrontation” with China from the previous administration, the Biden team initially commenced a policy realignment to likewise include “competition” and “cooperation”—the three C’s. However, the single principal focus that has emerged from the Biden administration is competition—specifically, “strategic competition.”
The Reduction of Bilateral Cooperation
Firstly, it is important to recognize that both the United States and China are finding it increasingly difficult to identify avenues for bilateral cooperation. The November 2022 U.S. midterm elections, which produced slim Democratic Senate and Republican House margins, provided little basis for expanding a cooperation policy framework with China. Even under this divided situation, there is bipartisan consensus on the need to compete with China, and that makes cooperation more difficult.
In January 2023, the House of Representatives passed two China-related bills with bipartisan support: Establishing the Select Committee on the Strategic Competition Between the United States and the Chinese Communist Party, and Protecting America’s Strategic Petroleum Reserve from China Act. The above-mentioned Select Committee is expected to play a significant role in monitoring the Biden administration's approach toward China.
In short, it continues to be difficult to find clues of cooperation between the United States and China. The lack of bilateral collaboration on such global imperatives such as Covid-19 and climate change reflects profound disconnects and an uncompromising competition between the world’s two major powers.
For its part, China has significantly complicated its own domestic and international standing. In addition to dealing with the effects of its major reversal of the zero-Covid policy, the urgent task of the Xi Jinping administration in its third term is clearly to rebuild and stabilize the domestic economy. Under these circumstances, the margin for further expansion of uncertainties appears to be narrowing. Furthermore, with Taiwan's presidential election scheduled for January 2024, it will be difficult for Xi Jinping’s administration to show a weak stance toward the United States.
Tougher toward China, but Carefully Avoid Confrontation
As noted above, the U.S. Congress has moved to assert greater oversight of U.S. policy towards China. In addition, since 2020 more than three-quarters of U.S. adults have expressed an unfavorable opinion of China, according to Pew Research Center surveys in September 2022. Some 79 percent of adults expressed an unfavorable opinion of China in 2020, 76 percent did so in 2021 and 82 percent did so in 2022. In this environment, the Biden administration's China policy is arguably tougher now than it was under the previous administration. However, on the other hand, the Biden administration seems intent on establishing “guardrails” to avoid confrontation.
The underlying reason the Biden administration initially moved from its inherited policy axiom of “confrontation” with China is its more realistic understanding of U.S. reliance on the global economy, specifically the role of China and the reality that complete decoupling from China would be both unrealistic and economically damaging.
The United States and China are deeply intertwined economically, and that will not change for the time being. In particular, since controlling inflation became an urgent policy issue, it has become clear that stabilizing energy and commodity prices throughout the world, including in China, is also in the U.S. national interest. The United States does not envision a “new Cold War” dynamic, and neither U.S. companies nor U.S. allies want a crisis.
While it is said that U.S.-China relations have reached a low point after what the United States described as a Chinese spy balloon was discovered—and shot down—over U.S. territory in early February, trade between the world’s two leading economics just hit an all-time high. According to numbers released in February by the U.S. Department of Commerce, two-way trade between the United States and China set a new record of $690 billion in 2022.
Concurrently, both the United States and China are tightening restrictions on exports of key emerging technologies, but both sides intend to continue their financial and market interdependence. In December 2020, the U.S. Congress passed the Holding Foreign Companies Accountable Act (HFCAA) in response to the escalating U.S.-China conflict and a series of accounting irregularities involving Chinese companies.
Specifically, if a company refuses to undergo an inspection by the Public Company Accounting Oversight Board (PCAOB) for three consecutive years, the company for which the auditing firm is responsible will be delisted from the U.S. market, and many Chinese companies could be shut out of the U.S. market in 2024. However, on December 15, 2022, the PCAOB announced that it can now inspect accounting and auditing firms in Mainland China and Hong Kong to check the audit status of Chinese companies listed on the U.S. stock market. The HFCAA sparked concerns that Chinese companies would be delisted in the United States due to their inability to ensure the "quality" of their audits, but this latest development has greatly reduced the risk of delisting. Furthermore, China is increasingly concerned about slowing growth and the impact of the global recession.
Unsurprisingly, China's economy has become more fragile as a result of two years of strict zero-Covid policies. The forced reduction of excessive debt and deteriorating homebuyer and market sentiment have halted growth in the real estate sector and depleted local government revenues. Defaults could spread to the financial sector more broadly.
Media outlets around the world have commented on the importance of the United States and China building “guardrails” to prevent conflict. Under the basic scenario of continued interdependence, it will be important to determine which countries will decouple or not decouple from China in the strategic competition between the United States and China as the United States strengthens export controls toward China.
On January 18, 2023, U.S. treasury secretary Janet Yellen and Chinese vice premier Liu He met face-to-face and agreed to communicate closely on macroeconomic and monetary policy, in light of the growing risk of a global recession and the spread of Covid-19 in China.
The Future of Strategic Competition
Given the above context, it will be especially important from this year through the U.S. general election in 2024 to determine the competitive situation between the United States and China, and how other countries, including U.S. allies, will position themselves relative to this competition.
For example, regarding economic decoupling, while the spotlight is presently on key emerging technologies such as semiconductors, biotech, quantum computing, and artificial intelligence, the positions of U.S. domestic industries may well change over time, whether toward China or U.S. allies. Once these emerging technologies yield new commodities, trade between the United States and China could increase.
Meanwhile, the Taiwan Strait crisis scenario has emerged as a hot topic in the United States, and it is worth observing how both the United States and China will manage tensions. President Biden has repeatedly mentioned the defense of Taiwan, but he has also emphasized the maintenance of the One China Policy. While this can be viewed as “strategic ambiguity,” the resulting uncertainty extends both to China and U.S. allies. The ultimate U.S. national interest regarding the Taiwan Strait may well be the status quo. In this regard, it will be important for U.S. allies to understand how the United States interprets China’s timeline for eventual reunification.
Japan's Realism Diplomacy
As the relationship between China and the United States becomes increasingly complex, it is more important than ever for U.S. allies to conduct their own dispassionate and realistic analysis of relations with China. In this context, the role of middle power countries will accordingly become more important, and, among them, expectations are particularly high for Japan, given its strong alliance with the United States. Meanwhile, business communities in those middle power countries, not least in Japan, need to be aware that their earnings will be affected by protectionist practices initiated by President Trump but continued under the Biden administration, which drive a major wedge between the United States and other trading partners in an increasingly uncertain world.
Last December, Japan released three strategic documents with various proposals to strengthen defense capabilities including the acquisition of "counterstrike capability.” Discussions on increasing the defense budget are also underway. From the perspective of deterring China, the role of the Japan-U.S. alliance is expanding, and it is accordingly necessary for Japan to strengthen its deterrence and self-defense capabilities and operationally become more aligned with the United States in preventing a Taiwan contingency.
China is becoming increasingly wary of Japan’s moves to strengthen its defense capabilities. On the other hand, Prime Minister Fumio Kishida has repeatedly commented on Japan's intention to promote "constructive and stable" relations with China, and it will be important to persistently demonstrate such a stance. Prime Minister Kishida has stated his pursuit of "realism diplomacy for a new era," and it can be said that the foreign policy of the Xi Jinping administration is also based on realism. The Kishida administration's pursuit of this foreign policy will contribute to building a balanced U.S.-China relationship that includes cooperation in the future.
To kick off this year, during which Japan will host the G7 Summit in Hiroshima, Prime Minister Kishida visited several countries in Europe and then Washington, D.C., for a bilateral summit with President Biden. Also, at the preceding 2+2 Dialogue, Japan and the United States confirmed their mutual understanding on modernizing the alliance, expanding alliance partnership, and optimizing alliance posture under the new era of strategic competition between the United States and China. In this context, it is expected that Japan's China policy needs to balance deterrence and interaction to maintain stability.
Japan's Role in 2023
Unfortunately, 2023 is expected to see increases in various global geopolitical risks. Scenarios for the resolution of the conflict in Ukraine remain uncertain. Authoritarian regimes still maintain real strength. The worsening global macroeconomic situation, with rising inflation and tightening U.S. monetary policy, is also raising fears of a resurgence of debt problems in developing countries.
The economic and social gap between developed countries and the Global South continues to widen, the same compounded by global energy shortages, which in turn obviously affecting climate change policy. The dysfunction of the G20 is also a major challenge. Both the geopolitical situation and the domestic political situation in major countries, including the United States and China, are different from those in 2008, when the world's economic powers came together in the G20 to overcome the crisis.
In 2023, Japan will have the heavy responsibility of hosting the G7 as strategic competition between the United States and China intensifies and global uncertainties increase. In this context, Japan is expected to play a role as a middle power and a compass, especially with regard to the global agenda, where cooperation between the United States and China has not yet appeared.
Specifically, Japan is expected to take measures related to global health, balancing climate change and energy security, and providing infrastructure development support. In addition, Japan is also expected to take a new leadership role in addressing debt problems of developing countries, including the economic recovery of low-income and emerging countries, and in strengthening global supply chains. In this context, the role of a bridge between the inward-looking U.S. market and the Indo-Pacific market will be particularly important.
In sum, with the United States and China at the point where domestic factors make it difficult to demonstrate a cooperative stance on global issues, it seems incumbent on Japan to provide leadership and fill the vacuum created by tensions in U.S.-China relations and global geopolitics.
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