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U.S.-China relations are going down a path of ‘great confrontation’: analyst

Ed Mills, Raymond James Washington Policy Analyst, joins Yahoo Finance Live to discuss how markets are faring ahead of U.S. President Joe Biden and Russian President Vladimir Putin meeting over cyberattacks and the outlook for U.S.-China relations.

Video Transcript

JULIE HYMAN: And as we talk about all of this, I'm thinking about another period in history, the one in more recent history when some governments around the world, particularly in Europe we're talking austerity. And obviously the pandemic threw all of that into disarray. And that is my segue to talk about the G7.

And as we hear the global leaders talk about what their plans are, their focus now is on rebuilding their economies and moving past the COVID crisis. Ed Mills is here to help us make sense of what they've been saying, Raymond James Washington policy analyst.

I mentioned at the top of the show that one analyst, and that was Paul Donovan at UBS, called it the "selfie summit" sort of deridingly, right? And I'm curious what you thought of it in terms of what substantive came out of it?

ED MILLS: Yeah I would not dismiss the last couple of days or this week. I think this is actually a very well choreographed event. We had the G7 meeting. Now we have NATO. And then the President is going to meet with the President of Russia, Putin.

And it is trying to lay the groundwork for a return to more traditional alliances of the United States with the rest of the world, that post-World War II traditional order, as well as dig deeper into what President Biden has called the "fight between democracies and autocracies" in trying to see what he can do to boost up the democracy, boost up NATO. And present the United States in a more traditional, forceful role for the world.

JULIE HYMAN: What do you think is going to be most important to markets from all of this, Ed? I mean, is it just a matter of that the sort of unpredictability and turmoil of the last administration that markets can almost safely ignore-- maybe ignore is too strong a word. But at least not be as obsessively focused on politics?

ED MILLS: Yeah Julie, I think the market is still going to look at these meetings quite closely. We probably removed some of the wildcard events.

I think the first thing that the market will look at is what does the NATO alliance look like under a President Biden, how much does the other countries continue to commit to fulfilling their defense spending initiatives, and how much does the United States spend on defense. I think secondly, it looks at how much does the United States get to re-change the conversation related to China.

We've seen a number of hawkish stances from the Biden administration, continuing a lot of the stances of the Trump administration. He's trying to convince Europe to come along. I think Europe is receptive, but is not as committed to the United States of an hawkish stance.

And then when the president sits down with President Putin, they will be looking to see how well that conversation goes, how much do we have to continue to be concerned about cyber attacks, ransomware attacks, especially as those attacks are focused on the reopening trade. We had an impact on fuel, an impact on food, an impact on some travel.

Does that continue? Or does that get ramped up? Or is President Biden able to convince President Putin, if he continues down this track, there are real consequences? And therefore, some of this slows. So those are three real important market impacts from this week's meetings.

MYLES UDLAND: And Ed, I want to go back to that US-China-- the status of US-China relations, because as you mentioned that first meeting that the Biden administration had with Chinese officials was quite contentious to say the least. It has been a continuation of a similar stance. There's no tweets, but it's a similar stance that the Trump administration took.

I'm just curious how you're thinking about what that relationship looks like through this administration? And if there's maybe some policy continuity on both sides of the aisle with respect to how future administrations will think of US-China relations?

ED MILLS: Yeah, Myles. So the United States Senate, last week, passed a bill that was beefing up US competitiveness, US domestic manufacturing, especially supply chains in the semiconductor industry. That vote was 68-32. There is a bipartisan view in Washington DC that we need to invest in the United States to confront China.

That is a strong message to China that this is a bipartisan issue. Last week, we also saw the president signed an executive order banning certain US individuals from investing in Chinese companies, and having to divest over the next two years.

That would have been unthinkable a couple of years ago. We've effectively weaponized our capital markets. Going forward, we continue to believe that China is going to retaliate.

Last week, we saw in China the passage of a foreign anti-sanctions act, essentially asking US companies to choose between following the law of the United States or following the law of China. That's not going to be a choice they have.

They are going to have to follow the law of the United States if they want to avoid criminal penalties. So this relationship is going down a path of great confrontation. I think we are going to see an increase in the conversation about the decoupling, and more conversations about, are we going into another Cold War between these two economies?

I think we probably need the relationship to deteriorate a little bit more before either side really ramps this up. But directionally, this has absolutely continued what started under the Trump administration. And you could see some of these policies have more bite as they get fleshed out under the Biden administration.

JULIE HYMAN: That's a really interesting way to put it, weaponizing the capital markets. I just want to finish, Ed, bringing it more domestically focused and ask about the latest on infrastructure, especially with the President now out of the country. What should we expect next?

Investors have been pouring money into various companies they expect to benefit from an infrastructure bill. And I don't know when we're going to get it.

ED MILLS: Yeah I think, Julie, we're going to get it by the end of the year. I think that's where the market wants. They would have preferred it earlier, but any time you're talking about timing in DC, betting that it's going to take longer is usually a fair bet.

Even though the President is outside of the United States, he's still talking about infrastructure. He's looking to see if the G7 can be a counter to China's One Belt One Road policy.

I think where this ultimately comes to a head is when the Senate has to pass the debt limit. That is the one thing that has to be done this year. That will be done through reconciliation. You have to do the whole process.

And so if you're doing the whole process just to increase the debt limit, adding some other provisions like infrastructure spending is a very high probability. There's a backup chance of a bipartisan agreement. I think that is less likely than not.

And so my view is once we know when the debt limit is going to be increased, probably sometime this fall, that's when we get the infrastructure bill. Our view, it's in the $2 to $3 trillion range. Some paid for taxes, some of additional deficit spending.

JULIE HYMAN: All right, we'll be keeping an eye on when that debt limit is on the agenda. Ed Mills, great to catch up with you, Raymond James Washington policy analyst.