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May 2023 / BLOG

Three Themes Investors Should Watch in US-China Relations

Competition between these powers creates risk and opportunity

Lawmakers on both sides of the aisle increasingly view US economic policy through the lens of strategic competition with China. Continued US hawkishness would have important implications for markets and certain industries.

Lawmakers on both sides of the aisle increasingly view U.S. economic policy through the lens of strategic competition with China.

Let’s explore three themes we’re watching in US-China relations over the near to medium term and what they might mean for investors.

1. The US is focused on national security and gaining an edge in innovation.

This theme arguably runs throughout much of the major trade and economic policies that the US has pursued over the past half-decade.

Recall the Trump administration’s efforts limit China-based telecom equipment company Huawei’s access to critical components from the US and to encourage allies not to use the firm’s products as they built out their 5G wireless networks.

In a more recent example, the US Department of Commerce stipulated that companies receiving subsidies through the CHIPS and Science Act cannot build leading-edge semiconductor manufacturing capacity in China and other “entities of concern.”

This trend is likely to continue. Here’s what could be coming down the pike.

The US is considering expanding the list of technologies and Chinese companies covered by export controls. Here, surveillance and biotech could emerge as new areas of emphasis.

The tightening of outbound investment rules also bears watching. Over the medium to long term, this framework could evolve to the point that US companies need to seek government approval before making certain investments in key countries.

This development, were it to happen, would mark a significant shift for US investors in international markets. We will monitor the situation closely. 

2. The US may need to go its own way on some foreign policy issues.

The Biden administration has made a point of engaging more closely with traditional US allies in pursuing its foreign policy objectives.

Earlier this year, for example, the US reached an agreement whereby Japan and the Netherlands would introduce their own export controls on chipmaking equipment. These restrictions would reinforce the unilateral actions taken by the US to limit China’s access to advanced semiconductors and to impede its efforts to develop domestic capabilities in this area.

However, traditional allies may not be aligned with every new US restriction on China. Diverging interests on key issues could lead to further tension with these partners, adding to geopolitical uncertainty.

...traditional allies may not be aligned with every new U.S. restriction on China.

3. Hawkish US policies toward China may lead to a response.

China’s response to recent US export controls has been somewhat limited thus far, especially relative to the tit-for-tat trade tariffs that the two countries instituted while President Trump was in office.

However, at the end of March, China’s Office of Cybersecurity Review issued a statement that it would investigate products sold by Micron Technology, a US-based producer of memory chips, because of security concerns.

The details of this review and its outcomes remain to be seen. However, the announcement serves as a reminder that investors should be on the lookout for potential responses to US trade and economic policies.

Key Takeaways for Investors

The gradual decoupling of US and Chinese technology appears likely to continue. Investors should be clear eyed in understanding that a deterioration in relations between the two nations could increase the risk of further sanctions.

Still, these disruptive trends could create risks and opportunities for investors as the US and China seek to shore up strategically important industries.

Companies that provide the software and the highly specialized equipment needed to design and manufacture semiconductors, for example, should benefit from the push to build chipmaking capacity in the US and Europe.

We also see the potential for China to focus on expanding its capacity to produce less-advanced analog semiconductors, which could create the risk of that market segment becoming oversupplied in the medium to long term.

IMPORTANT INFORMATION

This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

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Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources' accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date noted on the material and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

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