Have the US and China passed the point of no return?

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The coronavirus pandemic has really sort of accelerated and intensified this anti-China investment agenda.

China's posture these days towards the US is to show no deference.

There's a strong public feeling in America that America shouldn't have its eggs in the China basket.

I don't know that China really cares that much if it's winning any new friends through this crisis. So how have we got to the point where the relationship between these two countries is unravelling so rapidly?

I like to think of it as like a divorce process. Here you have this couple that have been together for years, that have got rich together, that have become, in the last few years, increasingly verbally abusive towards each other with a hint of possibly worse. Yet because of their wealth and the fact that their assets are so deeply entangled, an actual divorce is not something their financial advisors would wish to see. The emotional side of this, though, is what's really dominating. And I know you, James, as a long time China observer - you've seen the change in tone.

What we have over here that's shocking all kinds of China observers is the emergence of these undiplomatic Chinese diplomats. Over here they call them the wolf warrior diplomats. And that name comes from Chinese films where special ops soldiers basically take out Western mercenaries. And some of the things that have been coming out of these guys' mouths is quite extraordinary. One Chinese diplomat, Zhao Lijian, who's the foreign ministry spokesman, suggested that this virus could have been brought to China by the US military.

So that old Chinese phrase from Deng Xiaoping, bide your time, hide your light under a bushel - that's clearly not true, right, since Trump was elected on the basis of China as ravaging, raping our economy, as increasingly through the trade wars in the last few years, but also through rhetoric, through this emotional idea that the world really is a zero sum game. And now we have very prominent champions like Tom Cotton, the Republican senator, talking about China as the new evil empire and China being alleged by Trump to have pretty much deliberately caused this pandemic, that not even 100 trade deals would be worth the innocent lives lost is something he tweeted the other day. This is beyond emotionally abusive. This is very aggressive language.

So unhappy couples tend to agree that they're unhappy. But when it comes to splitting the assets, that's when the real disputes come into action. How complex would this asset division look?

One of the things we have to realise is that the US-China commercial interaction has really been the most important commercial relationship in history. US companies have invested hundreds of billions of US dollars into China over the last 40 years. In many ways, they really helped engineer China's economic rise. And in recent years, China's economic rise has been absolutely vital for the global economy.

In fact, China has contributed more than just over one third of total global GDP growth. So this is an absolutely vital relationship in terms of the welfare of the global economy. But recently, we've just seen parts of this relationship just fall off a cliff.

The part I'd like to highlight is Chinese investment into the US. In the first quarter of this year, we saw it fall to just $200m. That's about 1/10 the level that we saw every quarter last year. And last year itself was the lowest year for Chinese investment into the US since 2009. Chinese companies these days seem to really fear to go to the US. Are you seeing that, Ed? Is that what it feels like over there?

There is a strong suspicion guilty til proven innocent label over any Chinese FDI of any description, particularly Huawei, of course, the big China telecoms giant. And I think the coronavirus pandemic has really sort of accelerated and intensified this anti-China investment agenda. There's a strong public feeling in America - Trumpian feeling, if you like - that America shouldn't have its eggs in the China basket. And then lastly, a federal government, a Trump administration move to disinvest public pension funds, will not allow public pension funds to invest in Chinese assets.

If that spreads to the entire financial relationship, then I think we're into round two or three of this decoupling. And the division of the assets will be really quite painful for the US economy, the Chinese economy, and everybody else.

I know Lawrence Summers, the former US treasury secretary, used to refer to the prospect of a financial decoupling as financial mutually assured destruction. And of course, that's what financial advisors of divorcing couples would say. This is crazy. You're going to both end up poorer. But I guess it all boils down to whether they hate each other more.

Another aspect of this, a really key one, is the impact of this decoupling on friends and neighbours, which I think we should talk about next. The anti-China rhetoric is kind of the main offshoot of the whole America First agenda. And the America First agenda isn't just aggressive towards China.

It's aggressive towards any multilateral body. It's aggressive towards any alliance. It's sceptical of any alliance. It's really predicated on Trump's view that the world has been ripping America off for too long, China being the top of that list but the whole world being on it basically.

So I think it's alienating allies who would ordinarily be sharing America's fear of a rising China. The most egregious example of this has come really during the coronavirus pandemic. And that is with Trump's suspension of funding to the World Health Organisation and then his threat to Dr Tedros, the head of the WHO, that America would withdraw within 30 days unless it ceased to be dependent on China.

This is exactly the kind of thing that alienates America's friends and allies. There are a myriad of examples before the pandemic. I guess my question to you is, is China picking up friends and allies at the rate that America is alienating hers?

You know, my feeling is that I don't know that China really cares that much if it's winning any new friends through this crisis. It seems to me that China's posture these days towards the US is to show no deference. As far as China sees it, this crisis is more about the decline of the West than it is about the rise of China. I think it's showing a new confidence, a new sense of conviction in international relations.

And the other thing is I don't really think that China is directing its charm offensive mainly at the West these days anyway. I think China's charm offensive is being directed at developing nations. As you well know, Ed, China has this huge plan to build infrastructure in developing countries all over the world called the Belt and Road Initiative. China's been lending hundreds of billions of US dollars to that end. And I think it's there that China wants to build long-term relationships. Whether it's succeeding at that at the moment is really hard to say.

But let me come back to you. So far in this discussion, we've spoken about this rather messy divorce. We've spoken about the emotional impact. We've spoken about the division of assets, and we've spoken about who the friends and neighbours are siding with. But tell me, Ed, does this divorce ever really happen? Does it in fact ever go to court?

If there's going to be a courtroom battle, the presidential election campaign that's brewing up here in the United States looks like a courtroom battle. Donald Trump's got this whole argument that he's not to blame for the coronavirus. Trump's saying, no, China is to blame. China is to blame for it. It covered up. It lied, boldfaced lying. It's bigger than Pearl Harbour. There are more American deaths.

And not only is China to blame for covering it up and originating the pathogen, but it also has in Joe Biden, the democratic nominee, a big friend of China, a big friend, an apologist for China, somebody who wants to normalise relations between the US and China. Trump sees this anti-China, completing the divorce with China, as his re-election bid. So I guess my question to you, James, in this pretty troubling context of relations between the two countries and this election where China is going to be front and centre is, can a divorce be avoided if Trump is re-elected on that basis?

I think it'll be very difficult. I think the advent of a second term for Donald Trump would be greeted in Beijing by something close to horror. The main problem with the relationship right now is that it's very difficult to see a natural break in the unravelling of these ties between the two countries. It's very difficult to see a way in which the US can reach out to China and China can reach out to the US to put a floor under this fast deteriorating relationship.