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3: US-China global rivalry to deepen, mostly affecting technology and trade

Despite the efforts of US President Joe Biden and Chairman Xi Jinping to put a floor under their country’s expanding strategic rivalry during the G20 summit in Bali, fundamental differences remain. Although channels of high-level communication have been reestablished, including restarting a working group on climate, Beijing and Washington will continue to compete vigorously. Each will try to lay the foundations for it to “win” in their increasingly zero-sum race in the decades ahead. In 2023, the competition will develop along three major lines: technology, trade and military preparations in the Taiwan Strait.

The battle over dominance in critical cutting-edge technology like semiconductors, super­computers, AI, machine learning, biotech and new materials will be key. Doth China and the US view supremacy in modern technology as a prerequisite for long-term economic prosperity and modern military power. Through its plan to secure critical supply chains and by signing into law the CHIPS Act, the Biden administration in 2022 doubled-down on industrial strategy. It has also encouraged the “friend-shoring” of critical manufacturing and strategic minerals and limited the flow of advanced semiconductor technology to China. In 2023, the main focus will be the drafting and passing of legislation that will allow the US to monitor any outward investment that transfers high-tech manufacturing capacity to “hostile countries” such as China, Russia, Iran, or North Korea. Moreover, Washington will encourage European and Asian partners such as the EU, the UK, Israel, Japan, and South Korea to develop and enforce similar export control mechanisms. With two years left in office, Biden’s team will double down on an effort to build a lasting policy legacy, even though, no matter who wins the White House in 2024, tech rivalry with China will most likely continue to determine the US course of action.

In the year ahead, China will try to counter US moves. First, Beijing will try to divide US allies by offering preferential market access and cutting deals with individual countries and companies – German Chancellor Olaf Scholz’s trip to China in November is exemplary. Second, China will pour more money into import-substitution and indigenous innovation in critical technology, as a new State Council team settles in by late March 2023 and drafts its medium-term plans. Third, China will continue to lobby companies to obtain waivers and special licenses from the US government that would allow the flow of technologies and components within the legal framework set by the US executive order limiting the export of semiconductor technology

On trade, the US will proclaim its desire to sort out the tariff war with China, but is unlikely to give US Trade Representative Katherine Tai a proactive role, thus leaving trade talks on hold. The WTO will continue to review some Trump-era cases raised by Beijing, as it did with steel tariffs in early December. The US will be slow to implement these rulings, relying on legal push back. The Republican majority in the House of Representatives can be expected to bring new legislation to the floor, but the focus of this effort will likely be on even tighter controls on technology transfers - largely in line with the Biden administration's vision.

With regard to Taiwan, the probability of war in 2023 remains low. Beijing prefers to regain control of the island by non-military means, with a timeframe not set in stone. Nevertheless, a number of triggers could lead to an unintended escalation. For example, if the new Republican Speaker of the House visited Taiwan in 2023, China is certain to respond with an even greater show of force than it did when Nancy Pelosi did so in 2022. In turn, Beijing could feel compelled to take action, including through a naval embargo, if Taipei crossed a red line by, for example, announcing independence or definitely deviating from the rhetorical status quo with the mainland. Similarly, China could also become more aggressive if conlcuding that US efforts to strengthen Taiwanese self-defense capabilities would prevent it from using a military option to regain the island altogether. In such a case, Beijing could see a “window of opportunity” for earlier action than planned. In any case, China will continue to rapidly modernize its military and to create the capabilities needed to overwhelm Taiwanese defenses, while the US and its allies (most notably Japan) will continue to buttress Taipei’s military abilities. Although the likelihood of a military confrontation in the Taiwan Strait in 2023 is low, governments and businesses need to ensure that they have plans in place to disrupt maritime trade routes.


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