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The FiscalNote Executive Institute partnered with the Meridian International Center to host “Predictions for the U.S.-China Trade War and Opportunities in the Asia-Pacific,” an interactive virtual discussion featuring Kevin Rudd, President of the Asia Society Policy Institute and 26th Prime Minister of Australia. The closed-door event was moderated by Andrew Shapiro, Founder and Managing Director of Beacon Global Strategies and former Assistant Secretary for Political-Military Affairs at the U.S. Department of State on February 10, 2021.

Kevin Rudd

Andrew Shapiro

The Asia-Pacific region believes the balance of power has shifted in China’s favor since the Obama Administration was in office.

A lot has changed in four years both globally and in China. Various regional governments in Asia have observed China more freely maneuver within the region and, as a result, China has gained both objective power and subjective influence, according to Rudd.

Rudd said the good news is that Biden’s senior leadership team has a granular understanding of how external regional perceptions have changed. Also, most regional governments in Asia believe Biden’s team has the experience, diplomacy, and competency to manage relations within the region.

East Asian regions currently have a “wait-and-see” attitude toward the U.S. and its new administration.

According to Rudd, leaders in East Asia aren’t putting a lot of weight on Biden’s campaign commitments, but instead are waiting to see how the Biden administration handles trade relations in the region. Specifically, regional governments are waiting to see what kind of staying power the Biden administration will have, its mainstream view of the Asia-Pacific region beyond the next two years leading up to midterm congressional elections, and whether or not the U.S. will pivot from the isolationist worldview adopted by the Trump administration.

To demonstrate its commitment and improve confidence in the Asia-Pacific region, Rudd said the Biden administration will need to:

  • Turn a corner on its domestic crises, namely the COVID-19-induced recession and the great dislocation of politics that has occurred.
  • Move away from the binary and “megaphone” approach of the Trump administration to a more sophisticated and traditional diplomatic approach.

U.S. allies will likely play a key role in America sustaining a power advantage over China.

For the first time since 1945, Rudd said the U.S. will need the help of its allies to maintain a balance of power over China. This, he said, will require the U.S. to revisit three major issues:

  • Decisions around the Trans-Pacific Partnership
  • The advancement of American economic engagement into the major free economies of East Asia and South Asia
  • The opening of American markets to free and open economies worldwide

Opening up America to free trade could bring substantial benefits.

Rudd said that the U.S. should move away from the protectionist approach of the Trump administration and open up free trade. Citing an article published by the Peterson Institute for International Economics, Rudd said metrics prove that Trump’s U.S.-China phase one trade deal fell short. He also said Trump’s unprecedented tariffs against China produced a significant widening in the U.S.-China trade deficit and in America’s deficit with the rest of the world.

Rudd said Australia has seen free trade benefit local economies by improving the cost of living for the average family. He also said that Western democracies should not fear activist industry policy. When done correctly, he has seen this help industries by allowing them to remain in a permanent stage of re-transformation and move up the value chain.

Rudd added that it will be critical for the U.S. and its allies to vigorously and effectively prosecute China if it violates global trade rules.

The U.S. should continue to expect a high level of competition from China in the high-tech and biotech sectors.

In its Made in China 2025 report, China announced plans to become a major global player in the technology sector throughout the 2020s. Not surprisingly, there has been a massive mobilization of Chinese state resources toward the IT, high tech, and artificial intelligence research sectors.

Although Trump’s success in the trade war caused China to step away from large-scale national industry policy in favor of industry champions, the region has not backed down from its technology goals. On the contrary, this has caused China to “double down,” Rudd said. A significant policy document released by China in the second half of 2020 lists a whole new range of national policy goals, not just in information technology but in biotechnology as well.

As a result, Rudd anticipates macros strategic competition between China and the U.S. in the domain of physical trade and tariffs, capital and foreign direct investment, and to a lesser extent, capital market flow.

A nuanced approach to China relations could help avoid major conflict, encourage global competition, and produce collaboration opportunities.

Rudd believes the U.S. “can walk and chew gum at the same time” when it comes to stabilizing its relations with China. As described in his recently published article, “Short of War: How to Keep U.S.-Chinese Confrontation from Ending in Calamity,” Rudd’s joint framework calls for “managed strategic competition” between the U.S. and China that should check three major boxes:

  1. There must be a mutual understanding of and management of each other’s strategic “red lines” or areas of acute sensitivity (i.e., Taiwan).
  2. Once red lines are drawn, Rudd said there is a huge space for rolling strategic competition in every other domain. This could include foreign policy, national security policy, human rights, and trade policy, as well as investment capital markets and the future of the dollar.
  3. Finally, both parties should leave room for strategic cooperation around issues that could be mutually beneficial. Climate change, vaccine distribution, and nuclear proliferation could all fall under this category.

Related resources:

“Short of War: How to Keep U.S.-Chinese Confrontation from Ending in Calamity,” by Kevin Rudd, Foreign Affairs, March/April 2021

“Anatomy of a flop: Why Trump’s US-China phase one trade deal fell short,” by Chad P. Brown, Peterson Institute for International Economics

2021 Global Policy Report: Your Guide to the Top Policy Issues Around the World, FiscalNote