Advanced economies such as the US and Europe are going to adopt fiscal stimulus in lieu of monetary stimulus. In other words, they will go from using financial stimulus to stimulating real demand. Economic stimulus, which predominantly involves building infrastructure, will generate demand in other related areas. This in turn gives rise to several questions. First, should the new demand be domestic or foreign? What is the relative proportion of the demand? Where will the demand move to? If a large portion of the demand is to be domestic, there will be ways to narrow price differences in international trade. It is just that the kind of in-your-face trade war waged by Donald Trump will not be repeated. Exactly to which countries demand will “flow” to is naturally also a factor to be considered.

Regarding the Xinjiang cotton issue, the US and Europe probably reckon that the Chinese Communist Party (CCP) will not take strong retaliatory actions. For if it does, these countries might remove China from the supply chain, in which case those Hong Kong artists who lost no time to show their support for Xinjiang cotton would have made a fool of themselves. Regarding various China-related issues, Joe Biden has been offering words of reassurance and showing his weak position. However, the actual actions that Washington is taking have not led to any improvement of Sino-US relations as expected. On this, we can refer to two recent events.

In the past, CCP diplomat Yang Jiechi was always in his polite way when dealing with foreign countries. Many commentators saw him as the man who did the nasty job and responsible for real negotiations. But during the Sino-US meeting the other day, he suddenly turned into a wolf warrior. Meanwhile, after the US joined forces with the EU to launch a new round of sanctions against China, Premier Li Keqiang met with representatives of US and EU companies. Shortly after the Xinjiang cotton controversy broke out, Li went to Jiangsu. During the trip, he visited a BASF chemical plant that supplies raw materials to Nike and Adidas. Does that mean Li is now the Chinese official who plays the good guy? If so, it would mean things have moved one level up.

The second event in question is the “two-plus-two” dialogue between the US and Japan held recently, during which the Taiwan Strait issue was mentioned. At the meeting, Japan’s Defense Minister Nobuo Kishi mentioned the need to study ways for Japan’s Self-Defense Forces to cooperate with US forces defending Taiwan in the event of cross-strait military conflict. In the past, Japan rarely took the initiative to talk about the Taiwan Strait, and even if the topic was ever brought up, the country’s defense minister was never involved. The fact that it was Kishi the Defense Minister who mentioned the Taiwan Strait at the US-Japan meeting indicated the issue has been elevated to a higher level. That amounts to a form of warning.

At a recent CCP meeting, Xi Jinping reportedly mentioned that in the near future “the East will be on the rise and the West in decline”. Last year, the world witnessed the problems surrounding the US presidential election. Therefore, whether in terms of its foreign propaganda or domestic narrative, the CCP likes to point out that Western democracy no longer enjoys a leading position in the world. With the East on the rise, China believes it is the one who has a say in the world, and with the West in decline, the world is not for the West to lead. Nonetheless, it is no big deal if the West still wants to lead. China can take it slow and negotiate with the West. At the same time, it will secretly strengthen its defense. As a result, mistrust between China and the West keeps growing, so that confrontation between both sides is quietly escalating. However, as many US think tanks have pointed out, the subtle standoff between China and the US may cause the CCP to misjudge things and think that as the world will be in chaos in the coming four years, it must take actions today without waiting.

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