Confrontation Between the U.S. and China is Beginning to Heat Up

By John Banks

Relations between the United States and China are on a downward slope, and tensions are on an upward slope. This has been true for a while now, enough so to fuel talk of a “new Cold War” between the U.S. and China, alternately known as “Cold War 2.0.”

The original Cold War played out between the United States and the Soviet Union, beginning shortly after the end of World War II and lasting until the Soviet Union’s collapse in 1991.

It was called the “Cold War” in part to distinguish an absence of hot war, meaning, tensions were high but no missiles were fired (with a handful of extremely close calls).

In some ways, though, Cold War 2.0 is a bad description of the U.S.-China relationship. In the original Cold War, the U.S. and the Soviet Union were true rivals who shunned the notion of doing official business with each other; the U.S.-China situation is not like that at all.

Instead the U.S. and China are intertwined in many ways, with finance and commerce links that would be incredibly painful to sever. For instance, China relies on American demand to help power its export-driven economy, and some of the most valuable American companies in the world (e.g., Apple and Tesla) have a substantial share of revenues, profits, and future growth prospects tied to China. 

This makes the U.S.-China relationship more like a bad marriage than a Cold War.

It’s a relationship that once had better days, but has increasingly gone sour; it has a significant amount of shared commerce and property interests in common; there are multiple third-party relationships to consider (e.g., countries being asked to pick a side, America’s or China’s); and unless things get catastrophically bad, a full divorce is probably not in the cards.

A common characteristic of a bad marriage is the tendency to hide one’s true feelings. For the sake of keeping the peace — or avoiding a downward spiral — both parties keep their real opinions hidden.

Keeping real opinions hidden is also standard operating procedure for foreign diplomacy.

As a general rule, the skilled diplomat does not speak bluntly on controversial issues. Instead, he or she maintains a careful protocol of civility and decorum, while delicately addressing the controversies behind closed doors.

That is the way it typically goes. At a certain point, though, a bad marriage can deteriorate to the point where confrontation is inevitable. Once that point is reached, it is mainly a matter of how the confrontation is handled — with results that can range from civil and productive to ugly and disastrous.

The U.S. and China are now in the blunt confrontation stage of their relationship. The last shreds of formal civility and tip-toeing around hard issues are gone. Now it is about blunt talk, harsh words, and the question of whether U.S.-China conflicts will be resolved with dialogue or violence.

The change was on display at a high-stakes, two-day diplomacy meeting between the U.S. and China in Alaska last week. It was the first official contact between China and the Biden administration — and the Biden administration chose to play hardball.

Antony Blinken, the U.S. Secretary of State, began the talks with harsh criticisms of China’s actions in relation to human rights violations in Xinjiang, authoritarian actions in Hong Kong, and saber-rattling toward Taiwan.

“Each of these actions threatens the rules-based order that maintains global stability,” Blinken said. “The alternative to a rules-based order in which might makes right and winners take all,” Blinken added. “That would be a far more violent and unstable world.”

Under normal circumstances, that kind of blunt talk would be unheard of from a foreign diplomat — let alone from the U.S. Secretary of State. But the U.S.-China relationship is not in a normal place.

Yang Jiechi, the top diplomat on China’s side and a right-hand man of President Xi, responded with equal force. Whereas the schedule allowed for two minutes of opening remarks on each side, Yang spoke for roughly 16 minutes.

Yang accused the U.S. of having a “cold war mentality,” questioned the health of American democracy, and more or less accused the U.S. of being a bloody-minded imperialist power. “We do not believe in invading, through the use of force or to topple other regimes… or to massacre the people of other countries,” he said.

In diplomatic talks, it is standard procedure for members of the press to listen to the opening remarks, and then leave the room before the high-level discussions begin.

But this time, in a further display of norm-shattering, U.S. Secretary of State Blinken asked reporters to stay in the room after Yang Jiechi’s 16-minute speech, so that the media could note the U.S. rebuttal to China’s response.

The whole thing was quite remarkable — in some ways like a marriage counseling session where both parties are encouraged to let it all out, ripping into each other as they do so.

Two days prior to the talks, the Biden administration had placed sanctions on 24 officials in China and Hong Kong, relating to China’s decision to strip Hong Kong of its autonomy with a new election law.

The harsh tone that kicked off the Alaska talks was part and parcel of that sanctions decision; it is very clear the days of friendly discussion are gone.

The Biden administration has likely calculated that, at some point, an effort has to be made to forcefully push back against China — and there is no time like the present.

To that end, the U.S. is simultaneously seeking to rebuild alliances within “the Quad” — a four-way partnership between the U.S., Japan, India, and Australia — as a means of countering China.

The state of the U.S.-China relationship is high stakes for investors, too, because of the direct impact it can have on global markets generally and various companies specifically.

Tesla, for example, looks quite vulnerable to retaliatory Chinese actions — with two extra helpings of risk because first, so much of Tesla’s growth story is predicated on China-based sales; and second, because China has a natural incentive to ambush Tesla anyway, once it has gotten what it wanted (a transfer of knowledge and competitive know-how to its home-grown EV industry).

We’ll dig more into the growing Tesla risks later this week; for now, the main takeaway from the Alaska talks is that the U.S.-China relationship is entering a stage one could consider the opposite of boring: No matter what happens, there are going to be more fireworks.

And because the U.S.-China relationship is so intertwined — like a bad marriage on a global scale, touching countless aspects of commerce, technology, finance, geopolitics, and more — there will almost certainly be some volatile and surprising outcomes ahead.