Truce or Dare: Navigating US-China Relations

Panel Composition and Context

• Moderator: Steve, former Australian Trade and Investment Minister.
• Kok Song: Chairman of Avanda Investment Management, former President/CIO of GIC, led Singapore's reserves through the 1987 crash, Asian currency crisis, and dot-com burst.
• Weijin Shan: Chairman/CEO of PAG, former TPG partner, led landmark transactions including Korea First Bank and Shenzhen Development Bank acquisitions.
• Lord Peter Mendelsohn: Co-founder of Global Council, former European Trade Commissioner (2004–2008), former British First Secretary of State.
• Panel Topic: "Truce or Dare," analyzing US-China relations, trade dispute ramifications, and the probability of a bilateral deal prior to the 2020 US election.

Economic Data and Trade Impact (2018–Present)

• US Export Performance: American exports to China dropped 8% in 2018 (approx. $10 billion) and fell 24% in the first eight months of the current year.
• China Export Resilience: Chinese exports to the US rose 7% (approx. $34 billion) in 2018 but dropped under 4% in the first eight months of the current year.
• Trade Deficit Widening: The US trade deficit with China widened by 12% in the previous year and by 7.7% in the current first quarter.
• US Consumer Costs: The New York Fed calculates that "deadweight loss" to US consumers due to higher import prices totals approximately $80 billion.
• China's Tariff Strategy: China imposed tariffs only on US commodities it can source elsewhere (e.g., lobsters) while lowering tariffs on high-tech, pharma, and automotive parts, resulting in an average import price drop for China.
• Supply Chain Stickiness: A May 2023 American Chamber of Commerce Shanghai survey indicates less than 6% of US manufacturers plan to shift production back to the US, while over 60% intend to remain in China.
• Value Chain Reality: China contributes only 1.8% to the retail value of an iPhone ($18 of $1,000), meaning US tariffs on these goods disproportionately impact Apple (54% value capture) rather than the Chinese assembly sector.
• GDP Shifts: China's export-to-GDP ratio fell from 36% in 2006 to 18% in the most recent year, compared to an OECD average of 29% and a US ratio of under 4%.
• Private Consumption Growth: China's private consumption as a share of GDP increased from 35% to 39% over the past five years, driven by the domestic market rather than exports.

Strategic Decisions and Investor Behavior

• Diversification Imperative: Kok Song advises portfolio investors and multinational companies to diversify operations to mitigate "radical uncertainty" resulting from a US-China political reset.
• PAG Investment Strategy: Shan's firm (PAG) has avoided investing in China's export/manufacturing sectors for a decade, focusing instead on private consumption sectors where their portfolio achieved over 30% returns.
• ASEAN Benefits: Southeast Asian nations like Vietnam are expected to benefit from marginal manufacturing relocation, though their economies cannot absorb the full order of magnitude of China's previous trade contribution.
• Risk of Financial Sanctions: Panelists warn that if the US shifts from tariffs to financial sanctions (as applied to Russia/Iran), the global impact would be devastating due to the dollar's dominance in financing trade.
• US Corporate Exposure: Companies like Qualcomm are noted to generate more revenue from China than the US domestic market, creating mutual economic risks if sanctions are imposed.
• Political Calculus Change: Kok Song asserts Trump's strategy shifted from seeking a deal to boost the stock market to avoiding accusations of being "soft on China" ahead of the 2020 election.
• Fed Policy Impact: The Federal Reserve's pivot to monetary easing is viewed as a mechanism to maintain stock market levels, allowing Trump to sustain a hardline stance without immediate economic penalty.

Geopolitical Forecasts and Regional Perspectives

• Bifurcation Risk: Lord Mendelsohn predicts a future split into two distinct global systems (US-led and China-led) focused on technology, data, and information, eroding the 30-year globalization efficiency machine.
• European Stance: Europe is unlikely to join an "investment iron curtain" against China due to shared trade interests, though Mendelsohn cites a lack of unified leadership (beyond Macron) as a hindrance to a strong European voice.
• Global Integration Reversal: The panel agrees the era of deep global integration is reversing, leading to decoupling, lower global economic growth, and reduced living standards.
• Supply Chain Relocation Limits: Moving manufacturing to Vietnam or Indonesia is viewed as a marginal adjustment rather than a full replacement for China's manufacturing ecosystem.
• Lee Kuan Yew's Hypothetical View: Kok Song suggests Lee would be surprised that Western allies are not more vocal in defending free trade, given Lee's advocacy for it, though Trump's "meditation" deficit makes immediate de-escalation unlikely.
• Trade Surplus Distribution: Most of China's top 10 trading partners (Germany, Japan, Korea, Australia) hold trade surpluses with China, isolating the US as one of only two major nations running a deficit.

Closing Conclusions on a Potential Deal

• Kok Song Prediction: A formal deal by the 2020 election is unlikely; Trump will prioritize political positioning over economic compromise to avoid Democratic attacks.
• Lord Mendelsohn Prediction: An "uneasy truce" is probable where Trump claims victory, but this will not resolve the underlying geopolitical friction; trade and investment remain collateral damage.
• Weijin Shan Prediction: A deal is possible driven by economic imperatives when the US experiences its next economic down cycle, but the current expansion phase delays necessary adjustments.
• Cost of Inaction: Shan calculates the trade war has cost the US approximately 0.5% of GDP annually, a significant burden that will become critical during the next economic contraction.
• Long-term Outlook: The panel collectively anticipates a prolonged period of friction (at least four years) with enduring disruption to the rules-based international order and multilateral institutions.