Investing.com -- The prospects of a meaningful reset in U.S.-China relations are dimming as both countries accelerate efforts to dismantle remaining economic ties, according to a new note from Capital Economics.
“U.S.-China decoupling is going into overdrive,” analysts wrote, pointing to the rapid escalation of tariffs and new non-tariff barriers that signal a shift from strategic friction to broad economic disengagement.
“The elevated tariffs now levied in both directions are consistent with most bilateral trade ceasing within the space of a couple of years,” wrote the firm.
While former President Donald Trump has expressed openness to negotiating a deal with China, Capital Economics remains skeptical.
“Trump has repeatedly signaled that he’s keen to do a deal, though he wants China to make the first move,” the firm noted. “We wouldn’t count on any substantive deal that resets the U.S.-China relationship, however.”
The latest developments include tighter U.S. export controls on advanced semiconductors and China’s response in halting Boeing (NYSE:BA) deliveries and suspending postal parcel services to the United States.
“The risk is that the tariff fight now broadens out to encompass a growing array of non-tariff barriers and wider decoupling moves,” the analysts warned.
Looking ahead, investment flows may become the next battleground, according to Capital Economics.
They state the “America First Investment Policy,” released in February, outlines potential steps such as delisting Chinese firms from U.S. exchanges and restricting capital flows in both directions.
“If decoupling continues at pace, the next major target is likely to be investment flows,” the report said.
Though some hope remains for talks, the broader momentum appears to favor separation.
“Many in Washington don’t want this and would rather see further decoupling,” Capital Economics wrote. “Some Chinese officials probably hold similar views, even if they are less likely to admit so in public.”