THE COWEN INSIGHT
The U.S.-China relationship has irrevocably changed, exacerbated by COVID-19 and its aftershocks. Tensions will increase through the election, and the next administration & Congress could face immediate challenges. Washington policy risk is high across multiple sectors from executive orders, regulation, and legislation.
The Cowen WRG policy team and 12 sector analysts collaborated on a deep dive into the US/China strategic competition
This report illustrates how competition will change geopolitics, economics, security, and technology. We continue to believe there is a misunderstanding about how bipartisan Washington is about China.
US government policy toward China has touched almost every area in Washington. It stands to impact almost every industry in some way in coming years. It will be impossible to decouple the two economies entirely. However, a growing range of high-tech areas will be firewalled, competitive, and subject to M&A, foreign direct investment, and export restrictions.
U.S.-China relationship has become overtly competitive, not yet stabilized, and continues to worsen
We are pessimistic about the relationship and see risk of significant economic detachment. COVID-19 has acted as an accelerant/irritant to this competition. U.S. and China are locked in a cycle of tit-for-tat escalation beyond just a “trade war.” China’s decision to implement the Hong Kong security law implies it will not be deterred by U.S./ Western penalties.
A complete economic decoupling may not occur, but there is a very strong likelihood that competing economic-tech ecosystems will develop
Congress has been tougher and more consistent on China policy than Trump. Policy risk is increasing and broadening across more sectors. Blunting China’s dominance in 5G is the current front line. However, we expect to see tech separation in areas such as semiconductors, microelectronics, artificial intelligence, quantum computing, power storage, advanced materials, and other “emerging technologies.” Other industries (aerospace, air cargo, consumer softlines, energy, pharma, materials, industrials, semiconductors) will face new market dynamics, production shifts and costs, and export restrictions.
We see tension growing into the U.S presidential election due to new executive orders, regulations, and legislation in coming months
Other irritants to the U.S.-China relationship include:
- Geopolitics (Hong Kong, SCS, Taiwan, India)
- Trump/Biden campaign rhetoric
- Congressional legislative cycle
- State/ DoJ/FBI counter-China policies
- Commerce Depart export control regs
- Phase 1 trade deal adherence
- Potential COVID-19 second wave in the fall
- FY21 National Defense Authorization Act will contain anti-China provisions
- Reshoring/shifting supply chains is being encouraged by US government policy
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