Trade relations look set to “build back boring” in 2022 and become much less volatile. It’s not just about trade – the focus is on competition for technological superiority and China’s state-led development policies in the tech sector. If anything, we would expect the focus of tensions to shift more hawkishly towards tech, with the overall rules of engagement emphasising competition rather than tariffs.
Recent US rhetoric suggests there will be continued enforcement of the Phase I trade deal, with no intention of removing existing tariffs and continued marshalling of US allies on a coordinated China trade policy. But coordinated action and a common agenda against China will be difficult given different countries’ hugely varying bilateral exposures to Chinese trade, as well as the risk of persistent supply chain shortages.
Geopolitical tensions are likely to persist, but they should remain contained. But China’s more assertive foreign policy (especially in its own backyard) will mean that regional tensions are likely to persist and will represent a source of headline risk. Issues such as Taiwanese independence, the South China Sea, and relations with the Australia, UK and US alliance could be particular focal points. Despite this, we don’t think escalation into open conflict is on China’s agenda, as we expect that it will stick to its current diplomatic playbook of hawkish rhetoric and posturing instead.