Chinese spy ballon ‘adds a lot of strain’ to U.S.-China relations, economist says

Council on Foreign Relations Fellow for International Political Economy Zongyuan Zoe Liu joins Yahoo Finance Live to discuss reports that the U.S. has delayed Blinken’s visit to China, how the Chinese spy balloon could reset the U.S.-China relation, and the outlook for chip stocks.

Video Transcript

RACHELLE AKUFFO: Is it a bird? Is it a plane? Or is it a Chinese surveillance balloon? Well, according to the North American Aerospace Defense Command, the United States government has detected and tracking a high altitude surveillance balloon that was seen flying over Billings, Montana on Thursday.

Now a spokesperson for the Pentagon says they have been keeping an eye on the balloon for several days and say that it's traveling at an altitude well above commercial air traffic and does not present a military or physical threat to people on the ground. Now President Joe Biden was briefed on the balloon and took military advice to not take it down due to the risk to the safety and security of people on the ground from possible debris. Now Chinese authorities have confirmed it was a civilian air ship intended for scientific research.

Right, well, this comes, of course, as Secretary of State Antony Blinken was set to meet President Xi Jinping in Beijing in the coming days. But now the Biden administration has decided to postpone Blinken's upcoming trip to Beijing, following the news of that balloon. Now any future conversation between the two would make Blinken the first US Secretary to sit down with the Chinese leader in nearly six years and the first of President Joe Biden's cabinet secretaries to visit China.

Well, for more on this, we welcome in Zongyuan Zoe Liu, Council on Foreign Relations fellow for international political economy, as well as the author of "Sovereign Funds, How the Communist Party of China Finances its Global Ambitions." Good to have you on, Zoe. So, obviously, you have this complication here with this trip being postponed. What should we read into this when you try and sort of characterize it as to really this sort of disjointed relationship that the Biden administration has had with Beijing?

ZONGYUAN ZOE LIU: Yeah, thank you very much, Rachelle, for having me. This postponed trip-- to be honest, I'm not necessarily surprised, to be honest. Part of this is because on the one hand, neither China nor the United States have officially confirmed that Secretary Blinken is going to go to China. Even his trip is supposedly to have start tomorrow, right? Now, on the other hand, obviously, the complication of the balloon situation did not help at all.

But on top of this, remember, what has been happening in the background, there are a couple of things that I'd like to highlight. On the first hand-- on one hand, there is the schedule of House Speaker visit to Taiwan, and there is also a series of US export controls against Chinese entities, and in particular, highlighted Huawei. And then finally, as of yesterday, the United States announced that that would be an additional four additional base access in the Philippines. So a lot of this really did not surprise me. And this goes back to your point. This has a lot of strength to the bilateral relationship.

RACHELLE AKUFFO: So I mean, when you have a backdrop like that, and you have this visit that was supposed to take place, what really is at stake here? And what does this visit actually mean for the US-China relationship? Is it a resetting, or are expectations too high for that?

ZONGYUAN ZOE LIU: Oh, that's a great question, Rachelle. And I think "reset" is actually the word that many foreign policy communities, both here in America and in China, would be actually really looking forward to. And if anything, you remember when the President Biden came into office back in 2021, the Chinese officials were really looking forward to a reset in the bilateral relations.

But unfortunately, so far, we haven't seen this. And a lot before-- even before the Secretary Blinken postponed his trip, a lot of the public opinions and the commentators or state run media commenting the prospective of his visit was that expectations was very, very low because of all these things happening in the background.

RACHELLE AKUFFO: And so we're likely not going to see some of the more complex issues with this first visit when it does take place. But what is supposed to be on the agenda for this visit?

ZONGYUAN ZOE LIU: So, supposedly, I would say the bottom line is that both sides have very different expectations. In other word, the expectation gap is relatively wide. So, on the one hand, the United States would expect that there would be, on the one hand, mid to high level new generations of Chinese leaders, and we would also want to reaffirm the agreement to join the Biden-Xi meeting, alongside of the G20 summit last year. And they probably also would want to touch upon the issue of Russia's war against Ukraine, how to end the war, the role of China. And then probably they would also want to ask China to end the series of essential measures imposed on US entities and US individuals after House Speaker Nancy Pelosi's visit to Taiwan last year.

And, yeah, other word, a lot of these are meant to put a bottom line to prevent a crisis between US-China, the relationship between the United States and China. However, what the Chinese government and Chinese officials are really looking forward is to, on the one hand, making sure that, well, crisis management, putting a bottom line is not enough. We are really looking forward to have exactly as what you are saying, reset in the relationship, and more specifically, they want probably the United States to acknowledge or respect what China considers as its core interest, especially with regard to Taiwan and other sensitive issues, such as the Xinjiang.

RACHELLE AKUFFO: And when you speak of core issues, and you mentioned Taiwan, obviously, the biggest semiconductor chip producer in the world, but then you have the Biden administration tightening its rules of certain US technologies to China. It's starting to have talk of some limited investments in China as well. And then so what does that mean? I mean, I'm assuming we're not going to have that conversation at this sort of meeting if we want to see any sort of progress, but how does that dynamic, do you think, play out?

ZONGYUAN ZOE LIU: So that's a very interesting question you ask, Rachelle, and you are absolutely right. Semiconductor is really in the-- right to the core of the conversation right now here. However, I would say for us, the United States interest in Taiwan is not necessarily to protect Taiwan on its own. I've been arguing this for a long time that our interest in Taiwan is not Taiwan policy or Taiwan sovereignty or whatever. Our interest in Taiwan is really from our own interest, supply chain, and American business interests, and to what extent the semiconductor supply chain actually fit into United States National security interest.

And from that perspective, actually, China sees it very similar as well. But on top of that, in addition to semiconductor-- or let me step back. Regardless whether Taiwan has or has not a semiconductor, China's perception or China's interest in Taiwan has always been-- or the Chinese Communist Party, Chinese policymakers consider Taiwan as part of China. And that that is something that Chinese leaders would not negotiate.

RACHELLE AKUFFO: And as you mentioned there, coming from two very sort of interests there when it comes to Taiwan. But as we mentioned things like geopolitical tensions, one of the reasons that we're starting to see some of these companies, some US companies diversifying their supply chains away from China, but there are, obviously, other factors at play as well. Break some of those down for us.

ZONGYUAN ZOE LIU: So, oh, that's a great question, Rachelle, again. So in terms of-- I would say the core of your question really is about the factors at play that might have accelerated a decoupling, right? So on the one hand, in addition to all these geopolitics and all that, I would also say that actually from a business interest perspective, a pure market dynamic perspective, decoupling, or for that matter, supply chain relocation, already happened before US-China trade war. And the pure reason for that from a market perspective is really because labor costs in China has increased the land cost. In other words, what made the China attractive as a global manufacturing center is no longer there.

And then on top of that, there has also been a lot of major policy swings from President Xi Jinping's discussion of a common prosperity to the crackdown on the tech sector. A lot of these uncertainties made it seems that China is no longer welcoming international business, despite that the Chinese government under the NRC State Council consistently say, actually, we are still interested in international investment. So policymaker winds adds to business uncertainty, and businesses don't like that. And then finally, COVID really seals the deal in terms of major supply chain disruptions.

RACHELLE AKUFFO: So a lot at play here, a complex relationship. We'll have to see what happens if Secretary Blinken does eventually make it to Beijing. A big thank you there for your insights. Zongyuan Zoe Liu there, Council on Foreign Relations fellow for international political economy. Thank you so much.