This post summarizes some things I’m watching for/expecting at the ongoing APEC meetings. The long-rumored, finally confirmed planned meeting of Xi Jinping and Joe Biden has put much more focus on APEC than in past years. The meeting will be proceeded by several other high-level US China meetings, as well as other bilateral (watch US-Indonesia) and multilateral meetings. Overall, expect a lot of talk about talking, and new standards, but not a lot of new agreements that actually push forward trade and economic links.
While decoupling may be old news, derisking is still well on course, and most of the new initiatives focus more on restating policies and areas that are off-limits. The direction of travel points to more recoupling and creation of new supply chains. We may well be reminded that just like countries that wanted to pick and choose what capital flows they wanted to accept (FDI yes, hot money no), it may be harder to control what trade flows are ok and which are off-limits.
I’m of the opinion that talking is good, since it reduces the risk of tit-for-tat escalation, allows more clarity for business, identifies no-go sectors and sub-sectors, but it is important to be realistic about what issues can be addressed under this rubric. Communication is particularly useful when new and relatively untested policies are being put in place, including the export licensing being used by both countries as well as the valid concerns about the rising financing costs in both countries, which are playing out in very different ways.
The meeting(s) is the message. The Biden-Xi meeting seems more focused on the continuation of the communicate more policy, with a focus on establishing further government-to-government discussions, at all levels rather than major policy changes or concessions. Both leaders want to avoid accidental escalations, but neither seems willing to make meaningful concessions. Biden in particular has to balance avoiding yet more crises in 2024 with any signs that he is conceding to China or letting China set the terms of policy implementation given that ‘tough on China’ is a rare bipartisan issue.
Still, following months of China hawks complaining that US officials were going to China, Chinese officials are finally reciprocating, with several sideline meetings of Cabinet Secretaries and their Chinese counterparts.
The readout from today’s meeting between Secretary Yellen and He Lifeng bears this out. They agreed to much more and regular communication to “avoid misperceptions” and came up with a few global areas in which the two countries can work together – increasing the weight of emerging economies in global institutions, climate change and debt issues. This may be reiterated in the Biden-Xi meeting. That said, given the issues that have come up in recent and painfully slow common framework debt discussions that restricted restructuring of Chinese policy bank loans, benefits might be limited. Efforts on climate change too are likely limited by US willingness to fund projects abroad.
Trade Trends: IPEF – Indo-Pacific Economic Framework members are set to meet again and may announce some more measures on supply chains and other standards, but don’t expect it to be earth-shattering. The lack of Trade promotion authority in the US, and incremental approach of the Biden admin suggests these measures will be limited. The increasing trend of indirect trade between the US and China, which responds to tariffs, incentives, shifting labor costs and half-hearted friend-shoring efforts is likely to continue. Meanwhile key strategic sectors in both countries, but especially China are likely to continue to benefit from government support. The outlook for US industrial policy areas is less clear, largely because of the threat of first government shutdown and associated compromises on funding in the coming years but also the questions of policy areas post-2025. While a GOP-led government would be equally interested in boosting manufacturing in the US and reducing direct reliance on China, especially for chips and critical supply chains, they would likely be less willing to fund such projects. Clean tech projects in particular are likely to face clawbacks as a Maga GOP government relies more on export/import restrictions and less on balance sheet expansion and incentives. Some projects may benefit more from state-level measures, as many battery and chip plants are already.
Critical mineral supply lines: Looking beyond US China, there is a continued inconsistency in meeting US goals to reduce reliance on Chinese critical mineral supply chains and which countries the US is partnering with to try to do so. In particular I’m watching for potential areas of focus with Indonesia and potential producers in the Americas (Chile, Argentina and Brazil) and Africa. Indonesia, interested in accessing US EV supply chains seems stymied in doing so due to large Chinese role in the sector and concerns from the US about Indonesia’s interest in moving up the value chain. Overall, developed economies will need to grapple with efforts from producing nations in the Emerging world to vertically integrate and deepen processing chains at home – not all of this protectionism is bad.
Export controls: Both China and the US are much more willing to use export licensing as a tool – the US to restrict Chinese military access to cutting edge technology (chips mostly, but potentially also cloud computing and AI more generally) and China to have more oversight of the higher-value add processed items in clean energy supply chains. While the US has been at pains to focus on the targeted nature of these measures, and to facilitate more-consumption oriented trade. Nonetheless the direction of travel suggests more scrutiny in this area, and sector and university based coordination seems off the table. On the Chinese side, implementation seems to have led to temporary lags in exports of Germanium and Gallium, and future volumes may be less, but it remains to be seen how they will use this leverage.
I’m also watching for any environmental standards, sideline agreements and anything that might be building blocks ahead of the COP28 meetings. expectations are pretty low, though. Joint work on Climate has been a rare area of coordination for past administrations, but the US efforts to reshore and reduce Chinese participation in supply chains challenge this, as does the different timeline and focus on net zero targets.
Ziemba Insights 