CSRI Quarterly Briefing: Q1 2025 Fractured Relations: U.S. - China Developments in 2025
Beyond the headlines of Trump 2.0, trade wars and China’s economic slow down, what are some of the key issues underlying the new US-China geopolitical landscape for 2025 which policymakers should be monitoring?
Here are CSRI’s takes:
Circumvention of US sanctions through Hong Kong
There is no stepping back from Putin-Xi’s friendship of “no limits”. China is increasingly using Hong Kong as a hub to circumvent sanctions against Russia imposed by the US and EU, with Hong Kong’s exports to Russia having increased significantly over the last few years catching the eyes of US and EU authorities. This was raised by the presumptive nominee for Secretary of State Senator Marco Rubio, in his confirmation hearing in the US Senate. The Hong Kong government’s official position is that it does not enforce ‘unilateral’ sanctions, while turning a blind eye to trade and financial transactions between Hong Kong and Russian entities.
Furthermore, Hong Kong government policy is actively promoting more commodities trading (i.e. gold) which in effect helps facilitate Russia’s war effort. The USD-HKD peg will come under intense scrutiny both externally and domestically as the Hong Kong fiscal position maintains its worst deficit in decades, with roughly just 2 years left in fiscal reserves. Whether the peg can hold is now a live issue. There is talk in DC about the abolition of the HK Policy Act which partly guarantees the convertibility between the HKD and USD. If that policy guarantee is abolished, the peg will not disappear overnight, but there will be serious implications for the HKD in the medium term.
Further reading:
Lee, James. ‘HK Deficit to Double to HK$100 Bn, Finance Chief Paul Chan Warns’. Hong Kong Free Press HKFP, December 2024. http://hongkongfp.com/2024/12/03/hong-kongs-deficit-to-double-to-hk100-billion-finance-chief-paul-chan-warns/.
Reuters. ‘Hong Kong Sees No Need to Change US Dollar-Pegged Currency System’. Reuters, January 2025. https://www.reuters.com/markets/currencies/hong-kong-sees-no-need-change-us-dollar-pegged-currency-system-2025-01-09/.
Rooke, Jake. ‘Special Report: China’s Strategic Complicity and the Hidden Engine Behind Russia’s War Effort’. NATO Association of Canada, October 2024. https://natoassociation.ca/special-report-chinas-strategic-complicity-and-the-hidden-engine-behind-russias-war-effort/.
Samuel Bickett. ‘Beneath the Harbor: Hong Kong’s Leading Role in Sanctions Evasion’. CFHK Foundation, July 2024. https://www.thecfhk.org/post/beneath-the-harbor.
Splits in the chip wars
More export control on technology and semiconductor restrictions have been imposed in the latest list put out by the US Department of Defense. This will only continue and expand into other critical areas such as AI & biotech. Off-shore data centers outside the U.S. built on the back of U.S. technology is an area of concern as it allows Chinese entities to access advanced chips and circumvent US export restrictions. One of the final acts of the Biden-Harris Administration was to order new restrictions on which countries can import advanced GPU chips – essential for AI development – from the US. While the Netherlands, the UK, France and Germany and others are exempt, many European countries have been placed on a more restricted middle tier, with the PRC and Russia facing total bans.
Cybersecurity attacks on critical US infrastructures will be given a fresh look as more intelligence emerges on how PRC state-back hackers have installed malware to potentially disrupt the U.S. in its domestic sphere. As more export restrictions are imposed by the US, PRC retaliation by cybersecurity attacks and the number of IP-thefts will likely increase.
Further reading:
Horowitz, Michael C. ‘What to Know About the New U.S. AI Diffusion Policy and Export Controls’. Council on Foreign Relations, January 2025. https://www.cfr.org/blog/what-know-about-new-us-ai-diffusion-policy-and-export-controls.
The Soufan Center. ‘China Strategically Infiltrates U.S. Critical Infrastructure as Cyberattacks Escalate’, January 2025. https://thesoufancenter.org/intelbrief-2025-january-10/.
Growing vulnerabilities in undersea infrastructure
The repeated sabotage of undersea internet cables has plagued the Baltic Sea and Taiwan Strait in the last few years. Suspicious Chinese vessels were spotted in random and curious shipping paths leaving behind damaged undersea internet cables which are essential to the entire global internet systems. More evidence is emerging to show that these were not random accidents but a systematic attack on a critical global infrastructure.
The majority of the shipping fleets which could carry out construction and repairs of damaged cables and pipelines are controlled by China. The US and its allies are falling behind in ship-building capacity and coordination, while the pursuit of legal liabilities as international laws are inadequate in addressing these incidents. Furthermore, these sabotages are most likely a test by the PRC to see possible responses by Taiwan and others in the likelihood of an attack or blockade by the PLA. Energy pipelines are easily the next target. Rapid response to divert internet traffic and repair capabilities by allied countries is key. But in a scenario where a critical mass of cables are damaged, and repairs unable to be carried out, what are the solutions?
Further reading:
Mok, Charles and Huang, Kenny. ‘Strengthening Taiwan's Critical Digital Lifeline’. The Freeman Spogli Institute for International Studies, Stanford University. https://fsi.stanford.edu/publication/strengthening-taiwans-critical-digital-lifeline
Besch, Sophia, and Erik Brown. ‘A Chinese-Flagged Ship Cut Baltic Sea Internet Cables. This Time, Europe Was More Prepared.’ Carnegie Endowment for International Peace, December 2024. https://carnegieendowment.org/emissary/2024/12/baltic-sea-internet-cable-cut-europe-nato-security?lang=en.
Runde, Daniel F., Erin L. Murphy, and Thomas Bryja. ‘Safeguarding Subsea Cables: Protecting Cyber Infrastructure amid Great Power Competition’. Center for Strategic & International Studies, August 2024. https://www.csis.org/analysis/safeguarding-subsea-cables-protecting-cyber-infrastructure-amid-great-power-competition.
China’s grey zone threats against Taiwan
More arms sales and delivery of existing defence contracts for Taiwan is clearly a priority for US policymakers. However, grey-zone tactics employed by China are increasingly undermining Taiwan’s autonomy and increasing the risk of conflict. Using disinformation campaigns to undermine the Taiwanese government domestically, use of economic and military coercions, infiltrations and spying through the United Front Network are working in tandem to seriously undermine Taiwan’s national security and military capabilities. The ‘all of government’ approach deployed by the CCP and Xi’s orders for the PLA to be ready by 2027 should be taken seriously. The repeated rehearsals of small-island seizure and a blockade of the main island reveal the PLA's strategy, and is a serious security dilemma for Taiwanese and allied military planners. The Taiwanese government has recognised that Taiwan’s defence does not lie on advanced military equipment alone, but relies on a programme of ‘whole of society resilience’.
Further reading:
Masters, Jonathan, and Will Merrow. ‘U.S. Military Support for Taiwan in Five Charts’. Council on Foreign Relations, September 2024. https://www.cfr.org/article/us-military-support-taiwan-five-charts.
Yeh, Andrew. ‘Mapping out Europe’s Response to Grey Zone Escalations against Taiwan’. China Strategic Risks Institute, October 2024. https://www.csri.global/research/mapping-eu-response-greyzone-taiwan.
US/EU splits on China
Will the EU follow the US's China strategy? This is the consensus which the Biden administration hoped to build. Under Trump, fractures are likely to appear in the short term. The EU is undergoing political transformation with French and German politics up in the air. Despite the push by the ECB and EU Commission for an EU-wide economic security strategy, each EU member is charting their own course from securing Chinese investment to solar panels. It is unlikely that an EU-bloc consensus on China will emerge anytime soon. The lack of EUV tech continues to be China’s Achilles heels in developing its own advanced semiconductor chips. China will continue to use its divide and rule strategy over the EU. In one sign of EU unity, EU member states agreed to raise tariffs on Chinese electric vehicles (EV). However, the current tariff schedule (with the highest being around 38%) is significantly lower than the USA and will not fully eliminate the profitability of BYD and other Chinese brands in Europe. It remains unclear how long the tariffs will stay in place. Germany remains heavily against the tariffs, France is seeking to court Chinese investment in its own EV sector, and Chinese EV producers have announced planned factories in Hungary and Spain.
Further reading:
Atlantic Council. ‘Five Questions (and Expert Answers) about the EU’s Divided Support for Tariffs on Chinese EVs’, October 2024. https://www.atlanticcouncil.org/blogs/new-atlanticist/five-questions-and-expert-answers-about-the-eus-divided-support-for-tariffs-on-chinese-evs/.
Goodman, Sam. ‘Collision Course: Under-Pricing Chinese EV Risks in the UK’. China Strategic Risks Institute, September 2024. https://www.csri.global/research/underpricing-chinese-ev-risks-uk.
Goodman, Sam and Yeh, Andrew, ‘Building a Transatlantic Approach to Economic Security.’ The Wilfried Martens Centre. https://www.martenscentre.eu/publication/building-a-transatlantic-approach-to-economic-security/
Rhodium Group. ‘Trump and the Europe-US-China Triangle’, January 2025. https://rhg.com/research/trump-and-the-europe-us-china-triangle/.
Japan’s growing role in Pacific security
The Biden administration built an alliance between US-Japan-South Korea. With the recent political chaos in South Korea, the prospect of the opposition party coming back to power, a more pro-China / anti-US stance is likely to emerge. Trump is unlikely to support further expansion of AUKUS to include APAC allies, leaving Japan to take on more of a leadership role in the region’s security.
Japanese officials are deeply focused on economic and national security issues vis-à-vis China despite a much-weakened LDP government. Japan is sticking to its course in doubling its spending on defense. But it suffers from defense industrial capacity limitations and is likely to look to the US and EU for supplies. It will also push the Japanese industries into expanding their capacities and defense tech capabilities in serving its national needs. Japanese companies are still some of the leading tech manufacturers and shipbuilders in the world, with lots of potential growth in this area.
Further reading:
Kheir, Zane. ‘The US Pivot to Asia Reborn: Old Grand Strategies, New Challenges’. The Diplomat, January 2025. https://thediplomat.com/2025/01/the-us-pivot-to-asia-reborn-old-grand-strategies-new-challenges/.
Pozzi, Giacomo. ‘Japan 2025: Key Policy Goals Amid Political Uncertainty’. FiscalNote (blog), December 2024. https://fiscalnote.com/blog/japan-2025-key-policy-goals.
Resource competition in the Arctic
Trump’s interests in Greenland threw the Arctic region into the spotlight. The Arctic is key to the new global security arena. China and Russia are actively building their influence as more shipping routes are opening in the Arctic. Other Arctic countries such as the US, Canada and Finland are strengthening their Arctic security cooperation to counter authoritarian influence in this region. Many countries such as Japan are wary of China using its dominant position in critical minerals to retaliate against the US led coalition. Again – the resource-rich Arctic plays a critical role in rare earths and other critical minerals. Can an alternative and sustainable critical mineral supply chain be built for democratic countries who are looking to move away from its dependence on China.
Further reading:
Funaiole, Matthew P., Brian Hart, Aidan Powers-Riggs, Jennifer Jun, and Joseph S. Bermudez Jr. ‘China Makes Progress on Its Fifth Antarctic Research Station’. Center for Strategic & International Studies, December 2024. https://www.csis.org/analysis/china-makes-progress-its-fifth-antarctic-research-station.
McCuaig-Johnston, Margaret. ‘Opinion: Canada Is Getting Serious about Protecting Its Arctic Borders, but Will It Be Enough?’ The Globe and Mail, December 2024. https://www.theglobeandmail.com/opinion/article-canada-is-getting-serious-about-protecting-its-arctic-borders-but-will/.
For In-depth Briefings by CSRI and its team of experts on any of the above issues, please contact CSRI at [hello@csri.global].