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U.S. & China: Next Phase of Decoupling & Competition About to Start

THE COWEN INSIGHT

We see a new phase in U.S.-China relations that will have a profound impact on geopolitics and security, international trade, financial markets, and technology ecosystems. Relations remain tense and have not achieved a new strategic equilibrium. Both sides continue to pursue internal and external policies to prepare for a long-term global competition. The next three months will be critical.

New U.S.-China Policies Have Broad Implications

New U.S.-China policies continue to have a broad impact and long-term shaping effect on international security, diplomacy and trade, domestic economies, financial markets, and technology. While some in the U.S. continue to see reasons for optimism and opportunity in China, we believe both governments will continue to implement policies that will disappoint pollyannaish hopes.

The Biden Administration has made progress in rallying allies in Asia and Europe to get tougher on China. The U.S. Congress has queued up a slate of highly bipartisan legislation that will enact laws to challenge China. Friction points are expected to heat up over the next three months, possibly through the 2022 Winter Olympics in Beijing. This report discusses the changing dynamics in Washington policy and includes sector and stock-specific contributions from 23 Cowen Research analysts.

Key Policy Catalysts

Biden Administration China Policy Review

The Biden Administration is conducting a “whole of government” review to establish its China policy. Expected to conclude in the fall, it includes USTR, Commerce, State, DoD, Intelligence and others.

Congress has been pushing to restart 301 Tariff exclusions to ease tariffs, but the Administration is not expected to do so at least until the review is complete. Given events to date, we do not anticipate the review will result in an overall softening of U.S. policy and China will react accordingly.

Congress is finishing a slew of China-targeted legislation that we discuss in this report. It USICA, EAGLE, NDAA, etc. Those bills are expected to include the Uyghur Forced Labor Protection Act (banning imports from Xinjiang) and a diplomatic Olympic ban. The Chinese Communist Party (CCP) has been very critical of these bills and said they will damage relations.

U.S.-CCP Direct Dialogue

Since the first meeting in Anchorage to recent talks in China, relations have been tense. Both sides have expressed criticism of the other. China’s “Three Demands” and “Two Lists” set a very high bar for U.S. acquiescence. Given Biden’s Afghan pullout and subsequent domestic/international criticism, there may be little room to ease. It has been suggested that trade can be an area of cooperation and while everything else is competitive. We remain skeptical this is possible.

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