Ed Mills, Managing Director, Washington Policy, discusses how recent U.S. policy decisions are the foundation for an industrial renaissance aimed at building up the economic base and protecting it against certain geopolitical and supply chain risks.
Are the U.S. and Chinese economies decoupling, or are we seeing a more strategic approach to national security priorities and supply chain resiliency? The answer to this question depends upon the policy decisions over the next several years and could have massive implications for the global economy and equity market. We are of the view that a broad-scale decoupling and the formation of regional economic blocs is less likely, but a trend of reindustrialization and de-risking will be a market theme that investors will navigate in the years ahead.
U.S. and China at a Crossroads: A Shift in the global economic order
Concern over China’s longer-term geopolitical ambitions and the threat posed by China’s military to the U.S. and key allies has been a major focus of U.S. policy in recent years. During the Trump Administration, concerns about China’s unequal market access and intellectual property theft led to the 2018 “trade war” with tariffs levied against a broad set of China’s imports into the United States. A key concern was that U.S. technology designed for civilian use could be repurposed for military application. This led to U.S. policy viewing technology as a national security asset, thereby implementing new export restrictions and blacklisting various Chinese companies from receiving access to U.S. technology, especially in the semiconductor space. The flow of U.S. capital into critical sectors in China that finance China’s economic competition with the U.S. also came under enhanced scrutiny. While this economic confrontation was initially driven by national security considerations, the COVID-19 pandemic exposed additional vulnerabilities around global supply chains, particularly with technology components and medical goods that drove shortages and spiked prices. These conditions set the stage for a rethinking of U.S.-China economic relations that quickly became a bipartisan consensus in Washington.