By Julia Horowitz, CNN Business

Happy Wednesday. A version of this story first appeared in CNN Business' Before the Bell newsletter. Not a subscriber? You can sign up right here.

When China joined the World Trade Organization in 2001, the United States and its allies hoped that Beijing would adopt an increasingly liberal approach to its economy and financial markets, more closely mirroring its trading partners in the West. Political liberalization, it was assumed, would inevitably follow.

This week has exposed the faulty logic that underpinned those assumptions. A clash over free expression has ensnared the NBA, and the Trump administration has taken action against Beijing over alleged human rights violations. At stake is the relationship between the world's two largest economies — as well as a crucial round of trade negotiations.

What's happening: The fight between China and the NBA has only become more fraught. All of the NBA's official Chinese partners have suspended ties with the league after the Houston Rockets general manager tweeted support for the Hong Kong protests last weekend.

Meanwhile, NBA Commissioner Adam Silver said Tuesday that he won't censor players or team owners over China or other issues. He argued that the league is motivated by much more than money, and freedom of expression must be protected.

The league doesn't have great options, my CNN Business colleague Chris Isidore writes: "They can fire [Rockets general manager Daryl] Morey and apologize, which would be seen in America as putting profits ahead of free expression and caving to anti-democratic forces in China. Or they [can] stand behind him and risk losing the sport's largest growth market."

That tension has resurfaced questions about whether Western companies can operate in China while sticking to their values and keeping customers happy at home. It's an issue that's dogged US airlines, which have tweaked references to Taiwan to appease Beijing, and Google, which came under fire for developing a censored Chinese-language version of its search engine.

My thought bubble: Improved market access for US companies has been a goal of trade talks. But what happens when doing business in China exposes companies to the kind of trouble rocking the NBA? Facebook, which has been shut out of the country, might be breathing a sigh of relief.

It's a tense environment for trade talks

The NBA battle is ostensibly separate from trade talks. But it doesn't help the already tense environment ahead of high-level discussions in Washington on Thursday.

The scene: Earlier this week, the United States put 28 Chinese entities on a blacklist that effectively bars them from importing American technology over the groups' alleged role in facilitating human rights abuses in China's Xinjiang region. Then, on Tuesday, the Trump administration announced visa restrictions on Chinese officials suspected of being involved such abuses.

The spike in tensions sparked a late session selloff for US stocks on Tuesday. The S&P 500 finished down nearly 1.6%, while the Dow dropped 1.2%. The scare did not carry over to most Asian markets on Wednesday, however.

The fear: "Recent events surrounding US-China ties threaten to raise new points of conflict beyond just trade differences," said FXTM market analyst Han Tan. "A wider scope in this protracted conflict would only heighten the barriers to a meaningful reconciliation between the world's two economic powerhouses."

Risk aversion should continue to be the name of the game. Watch safe haven assets, like gold and the Japanese yen.

The Fed resumes Treasury purchases

The Federal Reserve will start expanding its balance sheet again — but don't call it quantitative easing.

From my CNN Business colleague Donna Borak in Washington: "Federal Reserve Chairman Jerome Powell on Tuesday said that policymakers will 'soon' announce measures that would add to the supply of reserves 'over time.' The policy move comes weeks after the central bank stepped into financial markets to keep very-short-term interest rates from rising."

What it means: It gets wonky, but the Fed is looking to increase levels of reserves to relieve stress in the overnight lending market. To do this, UBS expects the Fed to purchase at least $200 billion in T-bills, and that the Fed will finish these purchases by the end of the year. This should reduce some of the daily pressure on the New York Fed, which has been staging interventions.

Powell has made clear that he does not view this as part of a program of monetary easing. But it's a further sign that something unusual is happening in a key part of the markets, and that the Fed felt it needed to come up with a more dramatic response.

Singapore is the world's most competitive economy

Singapore has knocked the United States out of the top spot in the World Economic Forum's annual competitiveness report, my CNN Business colleague Sherisse Pham reports from Hong Kong.

The index, published on Wednesday, takes stock of an economy's competitive landscape, measuring factors such as macroeconomic stability, infrastructure, the labor market and innovation capability. Singapore pushed the world's largest economy down to second place this year, with the Asian city state scoring top marks for its infrastructure, health, labor market and financial system.

For Americans, it's not all bad. While the United States lost out to Singapore overall, "it remains an innovation powerhouse," the report said.

Up next

LVMH reports earnings after the market close in Paris, shining a light on the health of the luxury goods sector.

Also today:

  • US job openings for August post at 10 a.m. ET.
  • Fed minutes from the meeting in September arrive at 2 p.m. ET.

Coming tomorrow: More US inflation data, and Delta earnings.