By Aaron Pressman and Clay Chandler
January 4, 2019

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Rising tensions between the United States and China was one of the biggest stories of 2018. That rift promises to dominate global headlines again in 2019. Apple CEO Tim Cook cited it this week as one of the reason’s for Apple’s problems.

Herewith, eight predictions for relations between the world’s two largest economies in the coming year:

  1. Trump and Xi will agree on a trade deal that forestalls further tariffs—but the accord will neither eliminate China’s trade surplus with the U.S. nor put an end to the trade war. The two sides are actively engaged in negotiating terms of a settlement. A final deal may well include substantial concessions from Beijing. Even so, the trade math hasn’t changed. There’s virtually no way China can buy enough American soybeans, jets, or natural gas to achieve Trump’s goal of reducing the Chinese surplus to zero. And it remains unlikely Beijing will commit to specific verifiable targets for measuring China’s performance in protecting U.S. intellectual property rights.
  2. Xi will stage a tactical retreat from his Made in China 2025 industrial policy—but hold fast to his oft-stated goal of reducing China’s dependence Western technology. Xi dispelled any doubt of that in two recent speeches, one commemorating the 40th anniversary of Deng Xiaoping’s economic reforms and another outlining his economic priorities for the new year. Both stressed “self-reliance.”
  3. Xi will reject calls for a more market-oriented approach to economic development and instead double down on support for state-owned enterprises and public investment projects. (See speeches noted in 2.)
  4. China’s leaders will tighten their grip on China’s technology sector, obliging public and private tech firms to prioritize governance and regulatory compliance over growth and innovation. Beijing recently ended a months-long clampdown on new online games. But China’s old policy of benign neglect for disruptive technologies is over. In recent months, the state has expanded censorship of the Internet, imposed new restrictions on tech companies’ involvement in financial services, stepped up oversight of ride-hailing giant Didi Chuxing, and demanded more patriotic content from Beijing Bytedance’s Toutiao news aggregator. The Chinese scientist who boasted late last year of making genetically edited babies has been detained.
  5. Cross-border investment between the U.S. and China won’t return to past highs, thanks in no small part to the new Foreign Investment Risk Review Modernization Act approved by Congress last August.
  6. The inevitable consequence of items 1-5 above: China’s economy will continue to slow, its debt to GDP ratio will grow and its domestic stock markets will languish. Martin Wolf, in a recent column, makes the case that China, like 1980s Japan, could fall victim to “ultra-high investment and rapid debt accumulation.”
  7. Huawei Technology will have to fish or cut bait on a strategy for gaining entry to the U.S. market. In a rare meeting with global press last month, Ken Hu, one of Huawei’s four deputy co-chairmen, challenged officials from the U.S. and its allies to document claims that the world’s biggest telecommunications manufacturer poses a cyber-security threat. But those perceptions are unlikely to change—and Huawei unlikely to participate in 5G rollouts in some of the world’s most important markets—unless the company’s leaders do something more than just fulminate about how unfairly they’re being treated.
  8. Despite the above, Chinese tech companies will continue to innovate, and many will do so in ways that encroach on global competitors in markets outside China. (See this excellent piece by The Information’s Shai Oster on how Bytedance will start competing with Facebook for ad dollars in India and Southeast Asia.) Regardless of continued tumult in U.S.-China relations or or the travails of China’s macro-economy, American tech companies ignore Chinese competitors at their peril.

Happy new year!

Clay Chandler


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