The Wednesday summit between President Joe Biden and General Secretary Xi Jinping met the modest expectations that both sides had set in advance, consistent with our preview note (link HERE). Simply put, this was a meeting about the need to manage risks in the relationship and avoid a crisis, not an effort to achieve ambitious outcomes or tackle core issues. The main implication for investors is to somewhat lower tail risks around flashpoints such as Taiwan.
Biden’s press conference, US background briefings, and China’s official readout all suggest an active, frank dialogue between the two presidents on bilateral issues as well as the global hotspots of Russia/Ukraine and Israel/Hamas. Given the risks of misunderstanding and miscalculation, that is a positive.
The media, not surprisingly, gave prominent treatment to Biden reaffirming (in response to a media question at the press conference) his previous characterization of Xi Jinping is a “dictator.” While not the ideal ending to an event meant to lower tensions, the remark will not fundamentally alter an overall constructive vibe.
The main deliverables from the meetings were:
- Resumption of military-to-military dialogue. This is a key priority for Biden and has become more urgent amid the Chinese military’s close challenges of US ships and planes in the South China Sea.
- Increased cooperation to reduce China’s export of fentanyl precursors. Domestically important to Biden, this is an issue in which Beijing’s previous pledges have fallen short. There will be significant attention in the US on whether compliance improves.
Secondary outcomes include:
- Pledges on climate, announced the previous day between the two climate envoys. These do not break much new ground but add momentum to the upcoming UN climate conference (COP 28).
- Dialogue on safe use of AI, particularly in military applications.
- Efforts to increase direct commercial flights between the two countries, as flagged in Beijing’s readout.
Beijing’s official readout was positive in tone, continuing a recent re-calibration of China’s rhetoric towards the US – including from Xi Jinping himself – as the summit approached. China’s poor economic situation is one of the factors that has motivated this change of tone and carried forward into Xi’s meetings with US CEOs last night. By playing down tensions, Xi is seeking to reassure a domestic audience, for whom geopolitical risks are one factor behind fragile confidence in the outlook. It is also a message for the foreign business community as direct investment into China continues to slow. These are notable nuances from Xi and reflect his re-focus on economic issues of late, but do not represent fundamental shifts in his domestic or foreign policies.
The two leaders discussed but did not make new commitments on economic issues. Xi pushed the US on its policies of “technology containment” (export controls) and de-risking, and Biden raised long-standing US complaints with the investment environment in China. Further discussion of bilateral economic issues will now move to the lower-profile dialogues that the two sides have announced in recent months. Any progress on key issues will be very incremental, particularly ahead of the US presidential election.
Taiwan is the most sensitive issue for Beijing, and recent US efforts to turn down the temperature helped secure Xi’s participation in the meeting. Biden emphasized to Xi that there has been no change in the US’ One China policy, while warning Beijing not to interfere in Taiwan’s January elections. Xi appears to have emphasized that Beijing does not have infinite patience when it comes to pursuing its goal of political reunification. In short, Taiwan will remain the most important flashpoint in the relationship, with the upcoming election playing a key role in just how high those tensions are (see below).
What happens next
This is likely the last meeting between the two leaders, at least with this level of preparation, before the US presidential election next November. It sets the parameters for the relationship over the next year – a primary focus on maintaining stability and re-establishing normal dialogue, while looking for incremental progress on key issues when it comes. Anything more substantive will need to wait until after the next US election. It will only get tougher for Biden to be seen as conciliatory to Beijing as the campaign heats up. Xi Jinping will balk at major commitments until he knows who the next US president is.
In the meantime, we expect this state-of-play over the next year:
- Marginal progress at best on the most contentious issues in the relationship, such as tech tensions.
- The constructive tone from both sides will make it easier to make progress in less contentious areas such as resuming direct flights.
- We would not be surprised to see Beijing announce a plan to resume orders for the Boeing Max plane. As noted in our preview, China needs the planes. This would not mean a flurry of Chinese imports of other US goods, as Xi Jinping remains intent to reduce dependencies on the US, particularly in critical supply chains.
- Taiwan. As we flagged yesterday (link HERE), an agreement this week by Taiwan’s two main opposition parties to form a coalition is a major development. It increases (to an extent still not clear) the probability of a win by a candidate that favors engagement by Beijing – an outcome that would lower China-Taiwan tensions at least temporarily. On the other hand, a victory by current front-runner William Lai, Taiwan’s vice president, would be deeply concerning to Beijing. A Lai victory would not mean a sudden crisis but would keep China-Taiwan and US-China tensions over Taiwan at the current high level over the next four years.
- Tariffs. As expected, there was no prominent mention of tariffs by either side. A related development of note in this area came on the margins of APEC meetings, with a last-minute decision by the US to pull back from finalizing the trade pillar of its Indo-Pacific Economic Framework (IPEF) due to opposition by Congressional members of Biden’s party worried about the optics of any announcements on trade – even a relatively unambitious one. The decision surprised the countries participating in this US initiative and is a major diplomatic victory for Beijing in the US-China rivalry in the region. In our view, the extreme sensitivity on trade issues for Biden and his party have a direct bearing on internal deliberations underway as to whether to tweak the Section 301 tariffs imposed under Trump. Any move to lower tariffs on consumer imports from China, should it come, is likely to be extremely modest in scale. The Biden administration is undertaking a statutory review of the Section 301 tariffs, with a decision as to the way forward likely to come later this year.
