2022 Outlook: China and the West

We are kickstarting 2022 with short conversations with some of our regular contributors about their outlook for the new year.

Here, we speak with Andrew Cainey, Senior Associate Fellow at Royal United Services Institute (RUSI) and Director of the UK National Committee on China, about the outlook for relations between China and the West, its implications for the business of global tech firms and competing narratives on governance and the future of the world.

Unravel: What is your outlook for relations between China and the West in the coming year?

Andrew Cainey: Relations between the West and China are going through a turbulent period. It is a period of adjustment and mutual recalibration: and this is set to continue, potentially for a very long time.  Where the ‘equilibrium’ lies is still unclear. China is increasingly confident in asserting its own perspectives and acting in a way that is arguably consistent with its position as the world’s most populous country and second largest economy. This is a change for the West, used to shaping the structures and norms of a rules-based world order in a global economy. In some ways, it brings back memories of the Cold War, hence those who talk of a New Cold War. But the world was a very different place then – much less integrated. Backward-looking analogies can mislead.

We will see continued tensions and some hardening of positions amidst continued economic engagement. Many western multinationals continue to invest and grow in China. Yet the Biden administration, the EU and others such as Japan, India and Australia are now pursuing more systematic China policies putting in place measures to respond to China, especially in the areas of technology, cyberattacks and human rights. This steady drip-drip will have a cumulative effect.

More specifically, China’s recent trade actions against Lithuania (that has taken a more active stance in engaging Taiwan) represent a challenge for the EU. After all, the EU has just published its ‘toolbox’ for responding to economic coercion. What will it actually do? The path that Germany takes post-Merkel is also key: Germany has historically prioritised commercial interests over other aspects in its China policy. But pressure has been building for change, recognising that US commercial interests continue to prosper in China despite its robust action taken on issues of security and values. If Germany hardens, it will shift EU actions too. Or smaller EU member states may end up shaping events more than before.

Unravel: Do you see the trade war peter out, or become a more prominent economic concern in 2022?   

Mr Cainey: The term ‘trade war’ is deceptively simple and actually quite misleading. Even if we go back to President Trump’s imposition of tariffs, it was a ‘war’ as much about technology as trade, though – yes, in part, about trade in technology.  This is not going away – and it’s a world of export bans and entity lists rather than negotiation of tariff levels. In fact, it’s better to think about continuing and variable trade ‘wars’ with the focus shifting between sectors and countries. That is itself a new normal.  China sees trade relations as a way of expressing displeasure with actions that others take. What we’ve already seen is Chinese trade sanctions on Australia and now Lithuania. Western countries increasingly review their own trade relations for security aspects that go beyond the commercial. This is on both the import and export side, so whether it is the UK sourcing Chinese technology or exporting technology to China, it can still be a problem.

Unravel: In your view, will the big tech firms be able to come to terms with geopolitical developments impacting the technology sector? Or have they already?

Mr Cainey: Big tech firms don’t really have a choice in coming to terms with geopolitics. Yet, in fact, for the biggest internet companies—both American and Chinese—the largest challenges are political rather than geopolitical. It is Chinese government regulation that is most affecting Chinese tech companies, not the actions of western governments. Equally, the big US firms worry about US (and European) regulation, not Chinese. Yes, Chinese firms have been blocked—for example, from India—but these are secondary level questions.

US-China tensions and geopolitical concerns really hit firms other than the biggest: Chinese tech firms face increasing pressure to delist from US stock markets and yet some may struggle to re-list in Hong Kong without changes in listing regulations. Firms in advanced technologies—especially in areas such as AI and quantum computing—will continue to be in the crosshairs of US, European and Chinese actions. Biotech too will get increasing attention. We’ve seen a much bigger focus on the security aspects of data in 2021: for example, Chinese concerns about Didi ride-sharing information being shared with US regulators. This will continue.

Unravel: What do you think will be two or three of the most defining China-related themes in 2022?

Mr Cainey: 2022 will see continued debate on how open or closed China will be – and what shape its engagement with the rest of the world is taking.

First, (when) will China reopen to travel in light of COVID – and even more importantly, what has been the impact of three years of closure? There is already a common view that there will be no significant relaxation of quarantine requirements until the end of 2022 or early 2023 – driven by aversion to any risks during the Beijing Olympics and ahead of the October 20th Party Congress that is expected to confirm Xi Jinping’s third term. Chinese vaccines have low effectiveness against omicron: where will things with COVID and vaccines stand by the time China is politically ready to consider opening? There is already a big gap between Chinese views that the world increasingly looks positively on China and survey results across developed economies showing increasingly negative views of China.

2022 will see more vocal and active competition between Western and Chinese narratives on governance and the future of the world. China responded to President Biden’s ‘Summit for Democracy’, not with silence or a rejection of democracy, but with extensive communication on the superiority of its ‘whole-process’ democracy. Biden and Xi both declare support for multilateralism – but differ as to what this means. Who writes which rules? Many western countries will not send diplomats to the Beijing Olympics, yet the Beijing Games will be a further demonstration that China is on the rise, with the world’s athletes in attendance and scores of political leaders lending support. Putin will be the first foreign leader to meet Xi in person since the start of COVID. China already seems to be learning from Russia in spreading its messages online. What comes next?

Finally, 2022 is the year to watch what Beijing actually does in the area of economic engagement – after some bold words in 2021. Just when President Xi has emphasised a focus on ‘internal circulation’ (the Chinese market), China also made significant decisions to engage in and shape ‘external circulation’ (the world economy). It stated its desire to join the CPTPP, the Asian regional successor to the US-inspired Trans-Pacific Partnership, that is more liberal than the RCEP regional trade deal China signed in 2020. China wishes too to join DEPA, the digital economy partnership between Singapore, Chile and New Zealand. At a time when the US is engaged in none of these initiatives, China’s statements put down a marker for engagement. Yet, economic reform at home will be required to turn these words into action – as well as overcoming potential resistance from countries such as Japan and Australia, where relations have been rocky. And China’s model for internet and data management is much more closed. Is there substance behind the rhetoric?