US President Joe Biden has used the term “extreme competition” to describe it. This is a topic we have studied extensively, in recent pieces such as “Pivotal November? The future of US-China engagement” and “US-China ADR saga: Sword of Damocles removed for now.”


In our analysis, tensions seem unlikely to abate in the years ahead given Beijing’s increased focus on self-sufficiency, bipartisan support in the US Congress for a hawkish China policy, and fundamental differences between the two nations regarding the Taiwan issue.


The UBS Chief Investment Office is fortunate to have access to some of the leading experts around the world who have been living and breathing the US-China relationship for years. We invited Robert Daly, Director of the Wilson Center’s Kissinger Institute on China and the US, to our New York offices last week to stress-test our views. Here’s a summary of our conversation:


Solita: After a very tense 2022, the US and China seem to be seeking to find a floor to the bilateral relationship in the near term. Does this constitute a lasting improvement?


Robert: This is a moment when there is a break from a rapid decline in USChina relations. But I think we need to be a little bit careful. It’s a good thing that we're having dialogue again. But if you go back and look at the Bali discussions, neither (Chinese President) Xi Jinping nor Biden changed their strategies, their basic beliefs.


China wants a timeout from tension to develop its economy and to try to recover from COVID and to look inward. The US is looking to establish some red lines, in order to pursue vigorous competition, which is exactly what China wants a break from.


So the dynamics that brought us here are still in place. It's a better place than we were several months ago in terms of the atmospherics. But I think it's going to be a short-term phenomenon.


Solita: Let’s now move on to the challenges. The US and China have been clashing in a growing number of areas. Where are we headed?


Robert: We are already in the middle of a trade war, a technology war, a capital war, and a situation in which the US is trying to prevent extreme competition from becoming a hot war. We have a name for this, and it's called a cold war. This is going to be a long-term competition that is manifest all around the world at both poles, the cyberspace, and in outer space. It's going to be extremely costly, wasteful, and dangerous.


That isn't to say that there aren’t opportunities. It's a cold war, not the Cold War. One of the things that's going to distinguish this one is the degree of integration that we have going into it. It will be played out primarily as a competition to shape a shifting world order. And if we can keep it cold—and we should be able to—it will primarily be played out in the economic and technological spaces.


Think about the October 8th semiconductor export controls the US put in place—that was a major move. If that's not evidence of a cold war, I don't know what is. We said essentially to the Chinese people that we are going to openly hamper their ability to develop AI and advanced computing because their government is such a threat that we don't want those new technologies to go into weapons that could target the US. And I think that most Americans would support this rationale. We're not going to sell you the rope you use to hang us. But another way to think about it from a Chinese point of view is anytime you read an article about what AI or quantum or nano or synthetic biology promises—all of that for education, for transportation, for

agriculture, for medicine—the US has said to China, "Not for you, not if we can help it."


I don't think this relationship has found bottom yet. The Biden administration has already said that things like CRISPR-style technologies and other emerging biotech tools are something else that has to be included.


Solita: Republicans have taken over the House. Could this lead to more hawkish China policy coming out of Washington in the coming months?


Robert: We will certainly see an even more hawkish policy coming out of Washington. The Republicans are more hawkish rhetorically, but it's actually a bipartisan agreement. We have this new Select Committee in the House. That's a committee of committees which is looking at some 500 proposed pieces of legislation aimed at somehow limiting or countering China over the last several years. And so their job is to try to accentuate those and to pick winners and losers.


But it's not just Congress. Certainly (for) the Department of Defense, there is really only one China narrative, and that's that China is our pacing threat, and part of that narrative is also that we may have to fight in the Taiwan Straits sometime in the next four to 10 years. I'm in a minority that's a little bit more optimistic on that. I don't think that Xi Jinping is chomping at the bit, but the odds, the chances, of a catastrophic collapse in relations have gone up.


Solita: Environmental sustainability has been one area of potential collaboration between both countries. Have we seen concrete progress in this area?


Robert: We're now having some more discussions, but you asked whether they're real and make a difference. People usually say, "Oh, well, you know, we must cooperate on climate change." And of course that's true, but we're not really speaking about cooperation so much as we are of coordinated parallel action. Only we can lower our emissions, and only they can lower theirs, which they're doing for their own reasons. What we really need to see is cooperation that involves real involvement and the co-investment and co-provision of global public goods. That will be the sign that this competition has a mature cooperative aspect.


This publication contains views that originate from outside Chief Investment Office Global Wealth Management (CIO GWM). It is therefore possible that the views do not reflect those of CIO GWM.


Main contributor: Solita Marcelli, GWM Chief Investment Officer Americas


Content is a product of the Chief Investment Office (CIO).


Original report — Stress-testing our views on the future of US-China engagement: A conversation with Robert Daly, 30 January, 2023.