Unable to see, eye to eye,
One side, born of democracy,
Other side, born of communism,
The eagle, flashes its talons,
The dragon, bears its fangs,
Gauging each other’s eyes out,
And the world with it.

It was 1972 when a then-not disgraced President Nixon visited China and met with Chairman Mao. Nixon, in his black suit, and Mao, in his typical Mao suit (named after him in the popularization of his modest clothing), shook hands and kickstarted relations between the biggest economy and biggest population in the world then.

Relations haven’t always been smooth. When the world witnessed the mowing down of protestors at Tiananmen Square, it was apparent that the U.S. and China would clash in their ideologies. The U.S. valued democracy and freedom, while China valued equality and the greater good.

Fast forward to today in 2023, the U.S. and China seemed to be on a path of no return. As the title suggests, an eye for an eye makes the world go blind. Here are the important things that you should know about the impact of U.S.-China relations on the rest of the world and how your investments might be affected.

Both the U.S. and China make up close to half the world’s gross domestic product

You know what’s frightening? The U.S. is the biggest importer in the world, while China is the biggest producer/exporter in the world. They make the world go round, encompassing almost half the world’s economy.

The U.S. has been number one since the middle of the 20^th century, while China only recently got up to second place by producing most of what the world needs and exporting it to other countries.

Meanwhile, the U.S. pioneered breakthrough technologies that significantly improve how we do things in our everyday lives. Adequate regulations surrounding intellectual properties and a relatively free ideology spurred entrepreneurship in the U.S.

Are you starting to see the relationship here? Many U.S. companies (and also European) came up with breakthrough technologies that were commercialized successfully through the outsourcing of production to countries such as China.

Hence, part of China’s growth was driven by an influx of money to support the development of the local industries. Foreign technologies did help catalyse the reallocation of labour from the countryside to the cities and industrial regions.

Trump started the beef during his presidency. The world didn’t take sides yet.

Once Trump started his presidency, he went to town with China. He raised tariffs for China’s products in the U.S. and that led to China doing the same too. Not nice words were exchanged between President Trump and President Xi.

During this period, most countries stayed out of it, preferring to maintain a neutral stance. After all, some countries in Southeast Asia (Vietnam, Thailand, Malaysia) did benefit from companies in China relocating their production to these countries, and they are still dependent on trade with both the U.S. and China.

However, that led to more pain than gain. The tariffs didn’t really bring American jobs back as American companies still viewed China as more cost-effective to produce their products. Worse, Moody’s calculated that it led to 300,000 job losses and a 0.3% loss in GDP for the U.S.

The trade war came and went, and during the pandemic, Trump left a parting gift in 2020 by stating that he had ‘irrefutable evidence’ that Covid-19 came from China in one of the labs there. That of course soured relations even further.

Biden continued what Trump did. The world had to take sides now.

Biden focused on the U.S. economic recovery in the first 2 years of his presidency. After all, domestic issues always dominate politics first. China was also doing the same but continued to enjoy strong trade with the rest of the world.

However, on that fateful month in November 2022, Biden slapped a ban on high-tech exports (mainly semiconductors and software) to China. This was not entirely unexpected as Biden also increasingly introduced more Chinese companies into this sanction list before that.

The game plan was simple. Biden introduced the CHIPS Act which aimed to attract back U.S. companies to its own soil to invest. One part of the act includes language prohibiting U.S. companies from engaging with ‘certain’ companies (basically Chinese companies) that are deemed to be national threats.

Chinese exports crashed in the following months as many companies did not want to get on the bad side of the U.S. Then, the U.S. talked to the Netherlands and Japan and got them on board also to restrict these exports.

This angered China as its leaders went on a rampage in the press by criticising this as a form of imperialism and against free market principles. In typical eye-for-an-eye, China imposed restrictions on exports of gallium and germanium – critical components for the production of semiconductors.

The world was now divided. Russia was on the side of China, as China helped provide supplies to Russia. Meanwhile, most Western countries were on the side of the U.S. As a result of the loss of critical components for China to produce things, imports by China crashed.

This had severe consequences for other countries.

Countries started to see disappointing export numbers.

Since these tensions between the U.S. and China, trade for many countries in Southeast Asia and North Asia declined considerably.

Let’s start with the Southeast Asia region. Singapore’s exports declined by an average of 15.5% since the beginning of the year, followed by Indonesia (-8.3%), Thailand (-5.1%), and Malaysia (-5.0%). Meanwhile, in North Asia, South Korea and Taiwan registered average growth rates of -12.8% and -16.9% respectively.

The decline in demand from China was real as these countries’ top trading partner was China, and they are quite export-dependent. The whole world could be going blind if these tensions continue.

Conclusion

Relations between the U.S. and China doesn’t seem to be getting better. In the short term, we might see sharp pain coming to both economies as they don’t trade with each other that much. From there, other countries that export to both countries could also see their fortunes dwindle.

However, it is worth noting that in the long-term, things would eventually recover for everyone but that is assuming that the U.S. and China improve relations.