This paper is the second in a two-part series exploring how Chinese President Xi Jinping’s vision for a “new era” has changed incentives for key groups in China and beyond.

Xi Jinping heralded the dawn of a “new era” for China at the 19th Party Congress in 2017, declaring that after decades of “tireless struggle,” China stood “tall in the east.” Since then, changes in Beijing’s approach to foreign relations have dramatically altered incentives for other nations as well as global companies straddling a world that is now facing up to the challenge of China’s resurgent assertiveness. 

When China embarked on its reform era, it dropped the Maoist doctrine of “exporting revolution” for a low-profile strategy summarized by Deng Xiaoping as “hide your strength and bide your time.” In March 2023, Xi coined a new 24-character formula for the conduct of foreign policy, elaborating on Deng’s “hide and bide” formula with an attention-grabbing coda: “dare to fight.”

Xi believes that foreign policy is a critical battleground for promoting national security and the Chinese Communist Party’s interests. Under his rule, China began to take a more combative approach to diplomacy, encouraging “wolf warriors” whose strident outbursts appealed to nationalists at home but alienated other countries. Xi has also overseen the “Party-fication” of the Ministry of Foreign Affairs, reversing the emphasis on professionalism seen in the aftermath of the disastrous Cultural Revolution.

China’s economy is now the largest in the world by some measures, which has emboldened Beijing to become more assertive in challenging U.S. “hegemony” in Asia and around the world. China has called into question the validity of the U.S.-led global order, undermining U.S. credibility where it can and offering alternatives to the international order on its own terms. It has sought to reshape the priorities of multilateral institutions and, wherever possible, establish new ones. But in contrast with the United States, which spearheaded the creation of new institutions after World War II, Beijing floats vague concepts and then allows bilateral relationships to accrete around them.

Xi has talked about his vision for a better world — “a community of common destiny for mankind” — since the start of his rule. During his first term, Xi rolled out the Belt and Road Initiative, an infrastructure export program that tied host nations more closely to China, accompanied by a China-led international financing mechanism. More recently, three new “global” initiatives exemplify China’s ambition to displace Western-dominated institutions (see the appendix for details).

China’s overarching aim is to replace the U.S.-led system with one that purports to be more “democratic” by accepting different political and value systems, but aims to undermine existing alliance structures and expand Chinese spheres of influence.

China is the only competitor with both the intent to reshape the international order and, increasingly, the economic, diplomatic, military, and technological power to do it. Beijing has ambitions to create an enhanced sphere of influence in the Indo-Pacific and to become the world’s leading power.

— 2022 U.S. National Security Strategy 

At the same time, China has stepped up its diplomatic outreach to countries of the Global South. The Chinese Communist Party has championed itself as the leader of the developing world since Mao’s time. China’s new economic clout provides a prime opportunity to advance this goal.

A key aspect of China’s relationship with the disparate Global South is Beijing’s policy of noninterference in other countries’ domestic affairs. China strives to be an “ideologically neutral trading partner,” in contrast with the United States, which has historically been vocal and interventionist in support of human rights and freedom of speech. It is to China’s benefit that for many countries, it is the only investor on the horizon or, at the very least, offers the most economically appealing terms.

In addition, the leaders of some countries in the Global South have historical grievances over Western colonialism and other injustices. China has bestowed agency on anti-Western agendas across the Global South and given voice and support to their agendas — as long as they are perceived to erode America’s global power.

The most prominent shift has been China’s embrace of Russia, sealed by the mutual admiration between Xi and Vladimir Putin, along with Western financial sanctions that left Russia a junior partner to an economically dynamic China. Chinese officials claim that Xi did not know in advance of Putin’s plans to invade Ukraine, but the conflict has bound the two countries even tighter. “We are experiencing changes the likes of which we have not seen for one hundred years, and we are the ones driving these changes together,” Xi told Putin during a visit to Moscow in March 2023.

The more China challenges the West and rallies the Global South with its confrontational stance and economic support, the more authoritarian regimes will be emboldened to pursue their idiosyncratic policy goals, creating even more uncertainty.

However, without stepping into an effective leadership role or defending its interests amid waning U.S. global power, China risks destabilizing the environment that it needs to thrive. The world has already become far less safe. As widening global conflict starts to undermine China’s interests, Beijing may adopt a more pragmatic frame of mind about cooperating with the United States.

Western governments have pushed back against Chinese assertiveness by rewriting the global rules of economic engagement and placing national security above the economic gains of globalization. Geopolitically, China supports whatever erodes America’s global power, while the United States struggles to maintain influence in every corner of the globe.

"The PRC remains our most consequential strategic competitor for the coming decades. I have reached this conclusion based on the PRC’s increasingly coercive actions to reshape the Indo-Pacific region and the international system to fit its authoritarian preferences, alongside a key awareness of the PRC’s clearly stated intentions and the rapid modernization and expansion of its military,” U.S. Secretary of Defense Lloyd J. Austin III said.

Donald Trump’s election as U.S. president in 2016 and Xi’s more assertive stance during his second term spurred a fundamental change in U.S. attitudes toward China. Both Republicans and Democrats agree on the need to adopt a tough stance on China. The United States has no intention of quietly relinquishing its role as global hegemon, and it remains committed to the defense of global systems that have been dominant since the end of World War II.

The United States has also leveraged Western liberal democracies’ revulsion over China’s bumptious behavior to rebuild and strengthen its strategic alliances. It has reinvigorated the Quad strategic security dialogue with India, Japan and Australia; agreed to provide Australia with nuclear submarine technology; and ramped up military cooperation with the Philippines. Following Washington’s lead, NATO and the G7 are now much more pointed in their criticism of China.

The rapid evolution of China’s military and Xi’s aggressive assertion of its sovereignty claims over Taiwan and the South China Sea, where it has ramped up gray-zone activity over the past few years, have prompted the U.S. military to redouble its efforts to secure a free and open Indo-Pacific and invest heavily in changing its way of war, adopting a more dispersed and resilient form of power projection. The contestation between China and the United States is set to be prolonged and complex and risks triggering a full-blown conflict.

Economically, China is determined to achieve self-sufficiency across critical parts of its industrial supply chain and in technology, while the United States is focused on eliminating critical interdependencies and strategic vulnerabilities. These competing ambitions are carving out separate spheres of economic activity and disrupting global integration.

As Beijing doubles down on state-directed industrialization, digitalization, and self-sufficiency, U.S. economic policymakers feel compelled to respond with defensive economic policies that are detrimental on a global level. Despite these measures, China’s ability to live with restrictions and even make progress will likely trigger further U.S. action to constrain China, irrespective of who wins the next U.S. presidential election.

The “Great Decoupling” of the U.S. and Chinese economies and the decline of Washington’s global influence pose complex, multifaceted challenges for global business leaders. Multinational corporations are aware of the fundamental issues, but they do not seem to have internalized their impact. After decades of strategic planning focused on maximizing profits and shareholder value, multinationals are struggling to respond.

Multinationals have been the main beneficiaries of globalization, but they are ill-equipped to deal with this formidable challenge. Many find it difficult to contemplate how decoupling would work in practice, especially as Western governments have offered no clear or coherent blueprint. Meanwhile, Beijing continues to claim that it welcomes foreign investment while simultaneously remaining committed to an all-encompassing concept of national security.

Multinationals faced challenges operating in the Chinese market even before the United States imposed tariffs on hundreds of billions of dollars of imports from China. Rising costs, subsidies to state-owned firms, and fierce local competition combined to lower multinationals’ share of corporate revenues earned in China from 16% to 10% between 2006 and 2020.

Subsequently, the severe disruptions of the COVID-19 pandemic highlighted the precarious state of a global industrial production chain based on just-in-time manufacturing and inventory management. The realization that resilience means accepting redundancy and higher costs started to sink in. Multinationals began to accelerate the “China Plus One” strategies they had introduced about a decade ago in response to China’s eroding cost advantage, moving some production to lower-cost manufacturing centers in cheaper labor markets while maintaining a presence in China. Western firms followed Japanese and Korean companies that had been spooked into diversifying their operations by economic coercion and rising nationalism in China.

The introduction of new Chinese laws regarding data security and the detention of Chinese employees of foreign businesses provided another wake-up call. For its part, the Joe Biden administration made a concerted effort to slow China’s technological advance, not only continuing Trump’s restrictions but ramping them up and broadening their reach.

Technology became a major battleground in the trade war, and U.S. tech companies were among the first to get caught in the crossfire. Both China and the United States are pouring money and resources into achieving technological dominance, knowing that the winner will have a clear advantage in the future. “Given the foundational nature of certain technologies,” the United States must maintain as large a lead as possible, National Security Adviser Jake Sullivan said.

The technologies at stake revolve around the advanced logic and memory chips that are critical to the development of artificial intelligence applications. The United States has enlisted advanced industrial allies to obstruct Chinese access to these technologies through sanctions and other measures.

In response, Beijing has doubled down on its domestic chipmaking industry. Breakthroughs such as advanced packaging (combining three chips with different functions) bring the performance of China-made chips closer to the advanced semiconductors blocked by U.S. restrictions. But China’s progress comes at a great cost, and it is not clear whether these products are commercially viable.

More broadly, the omnipresence of technology and the importance of data in today’s economy mean that the battle lines in the tech war are constantly widening, upending corporate strategic plans and making it hard to manage globally dispersed operations. Nonetheless, the “too big to ignore” attraction of China’s market and the complexity of global supply chains have kept many multinationals engaged with both sides.

None of this makes the job of global business leaders any easier, and multinationals have struggled to incorporate geopolitical analysis and the realities of decoupling into their business strategies. As China and the United States rewrite the rules of their economic and financial engagement and global conflicts mushroom, companies with operations that straddle the two worlds will find it hard to avoid picking a side.

At the beginning of his second term, Xi said that “it is time for us to take center stage in the world and to make a greater contribution to humankind.” China’s growing global economic clout has allowed it to expand its presence diplomatically and economically, but the more explicit China becomes about its ambitions, the more alarmed Western governments are likely to become — and the more determined to contain it. Although China has toned down its wolf warrior rhetoric, any attempt by Beijing to adopt a more emollient approach, as it has done recently, is unlikely to change perceptions fundamentally.

China and the United States recognize that decoupling in today’s highly interconnected world will be costly, but both are working hard to reduce their interdependence and turn the current global system in their favor. The global economy is becoming less efficient and less productive as national security is prized over economic gains. Unless these incentives can be realigned, the world may find itself in a “Kindelberger trap,” in which an emerging global power lacks the capacity to assume the role of hegemon while the incumbent power is no longer able to maintain order. 

Belt and Road Initiative, 2013/Asian Infrastructure Investment Bank, 2016

China’s most widely publicized global platform to date is the Belt and Road Initiative (smoothly rebranded from the ominous “One Belt, One Road”). This ambitious effort to deliver much-needed infrastructure and connectivity to the developing world started with ports, railways, roads, and factories but soon expanded to include digital infrastructure. Around the same time, China announced the Asian Infrastructure Investment Bank, modeled on the World Bank and Asian Development Bank. Clumsy U.S. diplomacy and European eagerness to hitch a ride on Chinese growth ensured that both initiatives initially seemed successful.

Both have since lost momentum. China’s desire to export excess industrial capacity exceeds host nations’ ability to pay. Mounting debts scared off potential recipients. China has reduced the number of Belt and Road projects and devoted more resources to loans for countries struggling with repayment. But the fact that the Chinese Communist Party incorporated the Belt and Road Initiative into its constitution in 2017 indicates its importance.

Global Development Initiative (GDI), 2021

The GDI aims to accelerate the UN’s Sustainable Development Goals through “balanced, coordinated and inclusive growth.” It would deploy foreign debt suspension and development aid “to help developing countries, particularly vulnerable ones facing exceptional difficulties.”

The GDI emphasizes that development does not equate with Westernization — in contrast with the U.S. homage to the values of free speech and democracy.

Two years on, Vice President Han Zheng announced that more than 70 countries had joined the Group of Friends of the GDI at the UN. A special fund of US$10 billion would be used to implement the initiative, he said, with 200 projects in the pipeline involving poverty reduction, food security, and green development.

Global Security Initiative (GSI), 2022

This common security initiative embellishes China’s Five Principles of Peaceful Coexistence with the concept of indivisible security, under which no state can achieve security at the expense of another.

The GSI framework is short on operational detail. It has received “support and appreciation” from more than 100 countries and organizations, and it has been written into many cooperation documents, an assistant minister of foreign affairs told the Xiangshan Forum in October 2023.

Global Civilization Initiative (GCI), 2023

Stressing the importance of respecting the diversity of world civilizations, Xi said that countries must appreciate different civilizations’ values and refrain from imposing their own and stoking ideological confrontation.

China frames the GCI as an urgent response to troubled times and a salve for the “clash of civilizations,” which it blames on trouble-making Western politicians.

The weakest of the three global initiatives, the GCI attempts to change the global consensus built on Western norms and promote Beijing’s stance in key areas such as human rights.