Biden-Xi Agree the US-China Relationship is Too Big to Fail

“For two large countries like China and the United States, turning their back on each other is not an option.” ~ President Xi Jinping

“We also have a responsibility to our people and the world to work together when we see it in our interest to do so. And the critical global challenges we face from climate change to counter narcotics, to artificial intelligence demand our joint efforts.” ~ President Joe Biden

In the first face-to-face meeting in a year marked by friction and escalating tensions, Presidents Joe Biden and Xi Jinping agreed on the sidelines of the APEC Summit that the US-China bilateral relationship was too big to fail. The highly choreographed leaders’ meeting signals to the public, investors, and the world that the two powers can manage to engage on important issues despite the competitive relationship. 

The domestic political environment in both the US and China prevented Biden and Xi from making any major concessions. But the leaders’ meeting – which followed months of intense diplomacy and high-level exchanges – advanced a bureaucratic system for ongoing communication and engagement. That alone is a win for the business community which craves clarity and predictability in the world’s most important bilateral economic relationship; US-China tensions topped the list of concerns in business climate surveys in recent years. 

Stability is in the interest of both sides as the leaders grapple with geopolitical instability and an array of domestic challenges. China’s leaders need to focus on the economy. Multiple headwinds including the ongoing property market woes, high rates of youth unemployment, and dimming private sector confidence are challenging Beijing’s ability to drive a broader structural economic shift. Meanwhile, Biden is gearing up for another intense presidential campaign where he will be challenged on his handling of multiple international crises, the US economy, as well as strategic competition with China.

There were outcomes, but agreeing to talk was the biggest

Opening regular lines of communication was the major outcome, both generally and on specific issue areas. But just as important was the lack of agreement by the leaders on issues related to trade. Below are some of the key takeaways for business: 

  • Resuming military-to-military communications reduces the risk of hot conflict. China’s military has undertaken increasingly assertive and provocative activities in the South China Sea and Taiwan Strait, including several recent close encounters with US forces in the region. The potential for a military mishap in the region is the biggest source of risk in the bilateral relationship and global supply chains – an estimated one-third of global shipping passes through the South China Sea. Renewed communications could prevent issues from unintentionally escalating into conflict. Particularly at the highest level – Biden and Xi also agreed to direct, open communication lines between them. 
  • Cooperating on counternarcotics is a win for Biden heading into the elections. The US continues to grapple with a severe opioid epidemic, and China is the largest source of precursor chemicals for making fentanyl, much of which enters the US illicitly across the US-Mexico border. Biden and Xi agreed to establish a law enforcement working group to coordinate on counternarcotics issues and that China would take steps to crackdown on Chinese chemical companies that make fentanyl precursors. In return, the US Commerce Department removed the Chinese Ministry of Public Security’s Institute of Forensic Science from its entity list. The challenge will be in ensuring enforcement in China – Xi and Trump made a similar agreement in 2018, which fell to the side as trade tensions escalated.
  • Agreeing to discuss AI governance is a good start. Biden and Xi agreed that the risks associated with AI systems warranted more talks. Though little additional detail was provided, the willingness to discuss AI governance builds on the Bletchley Declaration signed at the AI Safety Summit by both the US and China, along with 30 other countries, on the need for international cooperation on AI governance. It also comes just days after the US State Department released a declaration on the responsible military use of AI endorsed by 45 governments—a potential end post for US-China discussions.
  • Reviving the climate working groups was a pre-meeting win. Hours before the leaders’ summit, US Climate Envoy John Kerry and his Chinese counterpart Xie Zhenhua issued a joint statement announcing the resumption of bilateral climate cooperation to address a range of issues, including greenhouse gas emissions, plastic pollution, and methane. The statement will inject new momentum in the run up to COP28 summit at the end of the month, where the US, China, and COP28 President the UAE will also host a Methane and Non-CO2 Greenhouse Gases Summit.
  • Trade remains an irritant and issue for working level discussions. Both leaders acknowledged the importance of the economic relationship and aired concerns in the bilateral trade and economic relationship. Xi criticized US export controls and investment restrictions; Biden affirmed the US would not compromise on national security and called for a level playing field. Working groups managed by the US Department of Treasury and Commerce and China’s Ministry of Commerce and Finance will be grappling with these thornier issues in continued meetings.  

Business was eager to engage, but scrutiny was high

US business leaders were eager to engage with Xi and the Chinese delegation during APEC, underscoring that China is and will continue to be a significant market for global business. Despite recent challenges in China, the dinner saw high level attendance from top corporate executives. At the same time, China remains a challenging market to navigate. With leaders from Xi down signaling that China needs and is open to foreign investment, this is an opportune time for companies to engage with government stakeholders to build relations, work toward addressing regulatory challenges, and advance their long-term interests in the market. 

The demand for a seat at the table during the dinner with Xi points to the benefit of investing in platforms that create opportunities for engagement, like the business associations and chambers that traditionally co-host these events. But given the political climate in the US, companies need to be prepared for political scrutiny. Representative Mike Gallagher, Chair of the House Select Committee on China, requested a list of all individuals, companies, and institutions that purchased tickets to attend the dinner with Xi. 

Does the road ahead lead to more pandas?

The year ahead will test the strength of the leaders’ will and the systems’ ability to navigate political complexity in the relationship through communication. This is likely the last time Biden and Xi will meet face-to-face before the US presidential elections – and strategic competition with China will be on the ticket, particularly in another Biden-Trump contest. Taiwan will also have a presidential election in 2024 which is shaping up to be a referendum on the island’s future relationship with both China and the US. The business community will continue to be caught in the crosshairs. 

It will be important to see how strengthened people-to-people ties, increased flights and educational exchanges, and “panda diplomacy” buoy the relationship in the long run. Xi hinted that pandas may return to the US in the future, calling them “envoys of friendship between Chinese and American peoples.”