For all the talk about the World entering a new global era, the past year bears a striking resemblance to 2008. That year, Russia invaded its neighbor, Georgia, and tensions with Iran and North Korea were consistently high. In addition, the world faced severe global economic challenges. But one notable difference is the status of relations between China and the US. At the time, cooperation based on self-interest was possible even amid political and ideological differences, conflicting security interests, and divergent views on the global economy, including the valuation of the Chinese currency and industrial subsidies. The US worked with Chinese leaders during the 2008 financial crisis to prevent its spread, mitigate its worst effects, and restore macroeconomic stability.
But at present, such cooperation is unimaginable. Unlike the period of the financial crisis, the Corona pandemic failed to revitalize cooperation between China and the United States. On the contrary, it exacerbated the hostility between them. They attack each other, blame each other for bad policies, and trade accusations about the global economic slowdown from which countries and the world have yet to recover.
Obviously, the world has changed. China is now under very different and more assertive leadership. Its economy has more than tripled in size since 2008 and it now has stronger capabilities to pursue more aggressive policies. At the same time, it has made far fewer efforts to open its economy to foreign competition than many in the West had advocated and expected. Meanwhile, the US attitudes toward China have turned sharply negative, as has politics in Washington. What has not changed, however, is the fact that without a stable relationship between the US and China in which cooperation on common interests is possible, the world will become a very dangerous and less prosperous place.
And unlike in 2008, the two sides view almost every aspect of their relationship in 2023 through a national security lens, even matters that were once seen as positive, such as job-creating investments or joint innovation in advanced technologies. In fact, Beijing views US export controls designed to protect US technologies as a threat to China’s future growth, and Washington, in turn, views anything that develops Chinese technological capability as enabling the rise of a strategic competitor and helping to boost Beijing’s aggressive military power.
And by extension, relations between China and the US are undergoing a sharp decline, from a competitive but sometimes cooperative relationship to a confrontational relationship in almost all respects. As a result, the US faces the prospect of placing its companies at a disadvantage and in a weaker position relative to its allies, which limits its ability to commercialize innovations. Also, it is possible to lose market share in other countries. For those who fear that the US will lose the competitive race with China, American actions threaten to embody that fear surely on the ground.
An alliance of the willing
The US is trying to create a coalition of like-minded countries, mainly democracies in Asia and Europe, in order to create a counterweight to China and put pressure on it. But this strategy does not seem to be working, and it is harming both the US and China, and in the long run, it is likely to hurt the Americans more than the Chinese. It is also clearly in Washington’s interest to cooperate or work in complementary ways with China in certain areas and to maintain a beneficial economic relationship with the world’s second largest economy.
Although many countries share Washington’s hatred and aversion to China’s policies, practices, and behavior, none of them follow Washington’s ways in addressing these concerns. It is true that almost all major partners of the US tighten export controls on sensitive technologies, scrutinize and often stop Chinese investments, and expose Beijing’s coercive economic policies and military pressure, but compared to Washington, even its closest strategic partners are not to the same degree. Its willingness to confront China or attempt to contain it or disengage from it economically.
In fact, there are several countries that do the opposite of what hard-line voices in Washington demand. Rather than decoupling or economically disengaging from China, many countries are increasing trade with it even as they hedge against potential Chinese pressure by diversifying business operations, building new supply chains in other countries, and reducing exposure in the most sensitive areas. Perhaps that is why, despite years of American warnings, in 2020 China overtook the US as the European Union’s largest trading partner. In 2022, both EU exports to and imports from China grow. It now appears that Asian and European leaders, emboldened by German Chancellor Olaf Schultz’s November 2022 visit to Beijing, will flock to meet Chinese President Xi Jinping, and the trips of Philippine President Ferdinand Marcos Jr., French President Emmanuel Macron and Italian Prime Minister Giorgia Meloni are likely will motivate others to do the same.
Washington risks resisting economic gravity
Complementary, Washington’s approach to “reducing China’s role” is achieving worse results in the countries of the South. Trade between China and Africa has reached an unprecedented level in 2021, up 35 percent compared to 2020. In contrast, an aggressive US campaign to squeeze Chinese technology companies like Huawei out of the telecommunications infrastructure has fared relatively well. in Europe and India, and weakly almost everywhere else. Let’s take Saudi Arabia, for example, its largest trading partner is China, and in a parallel way, its Vision 2030 reform plan relies heavily on the desired cooperation with Chinese technology companies, including “Alibaba” and “Huawei”, even in sensitive areas that Washington targets directly, such as artificial intelligence and cloud services. As for Indonesia, a huge Asian democracy that Washington has courted with the aim of creating a counterweight to Chinese influence, it has made Huawei its partner of choice in cybersecurity solutions, and even in government systems.
These US efforts are likely to be less successful now that China has reopened its borders. In exchange for the strategy of “reducing China’s role” pursued by Washington, China adopted its own strategy based on “increasing dealings with everyone except America.”
Beijing, too, is rolling back its restrictive coronavirus policies, reopening its borders, courting foreign leaders, and seeking foreign capital and investment to revitalize its economy. Last year, Xi made his first overseas trip since the outbreak of the epidemic, to Central Asia and the Middle East, underlining his strategy to strengthen China’s ties globally. And now, as he resumes his travels around the world again after a three-year hiatus, renewing his pledges on Chinese investment, infrastructure and trade at every stop, it is Washington that may soon find itself disappointed, not Beijing.
Trade rules are a good example of this. In 2017, US President Donald Trump withdrew from the Trans-Pacific Partnership (TPP), and after six years, Washington clearly has no intention of returning to it. Despite this, Beijing applied to join that partnership, which is now called the Comprehensive Trans-Pacific Partnership Progress Agreement (CPTPP). Also, China has ratified the Regional Comprehensive Economic Partnership in Asia, and applied to join the Digital Economy Partnership Agreement. In addition, it has updated or launched new free trade agreements with countries from Ecuador to New Zealand. China is now the largest country in the world in terms of trade volume, as nearly two-thirds of the world’s countries trade more with China than with the United States.
Competition with China begins at home
Meanwhile, the US pursues a “worker-centred” trade policy much like protectionism, and in comparison to it, Washington’s Indo-Pacific Economic Framework initiative looks timid. Indeed, this initiative faces difficulties, not least because it prevents countries joining the agreements the Washington has avoided from accessing new markets.
Washington risks resisting economic appeal. It is true that it has succeeded in controlling the most sensitive technologies, including advanced semiconductors, but it will achieve less success if it pursues a strategy based on encouraging a broader technological decoupling with China, because most countries do not follow the example of the United States and may eventually find ways to adapt .
These efforts to exclude China will certainly hurt them, but at the same time they will cause harm to the US. American companies are at a huge competitive disadvantage, and American consumers are paying the price. One reasonable step to correct this problem is to reduce import tariffs on Chinese consumer goods that make them more expensive for American consumers. These definitions are politically popular but economically inconsequential. They hurt China but also hurt job creators in the US, including ordinary firms dependent on Chinese suppliers and those with few alternative solutions, or crushed by inflation and high energy bills. But these tariffs should not be eliminated without getting something in return. For example, Washington should push China to comply with the terms of the Phase 1 trade deal signed in 2020, including by buying more US agricultural products. Also, he should ask China to open its markets to more American goods.
Solve the issue by discussion
Ultimately, competition with China begins at home. In fact, the US and China have very different political systems. The US excels, but that must be proven by results. This means adhering to the principles that have made the US economy the focus of the world’s attention, and supporting US national security. It also means playing a leading economic role abroad.
It is very important for Washington to win the race to develop technologies and attract talent, as economic success will be largely driven by technological superiority. This requires the US not only to develop these future technologies, but to commercialize them instead of keeping them for themselves. It also calls for setting global standards rather than ceding the playing field to China. By extension, the US should be a leader in trade, rather than withdrawing from the very agreements that China applied to join and denying American workers export opportunities.
Certainly, security tensions are part of this relationship. Indeed, under Xi, China is a formidable competitor with which the United States must take a very tough approach. Beijing pursues policies hostile to US interests in many areas, and it is unlikely that this approach will be modified anytime soon. So, Washington needs to be firm and at the same time fair, open to dialogue but not in its own interest, and to be ready for a difficult, difficult and long path in its endeavor to coordinate with China in a way that serves its goals.
This cooperation has been beneficial in the past. At the height of the 2008 financial crisis, China was a huge owner of bonds belonging to some companies and banks and to the mortgage companies Fannie Mae and Freddie Mac. Also, the close coordination that Washington established with Chinese leaders through the Strategic Economic Dialogue helped it persuade Beijing not to sell US securities, which was crucial in order to avoid another Great Depression. And by extension, the Chinese stimulus package that followed the first G20 summit in 2008 contributed to facing the effects of the crisis and helping the global economic recovery.
Indeed, financial crises cannot be avoided. But if the two largest economies and the two greatest engines of economic growth are able to communicate and coordinate in order to anticipate, thwart and mitigate economic turmoil, managing these crises will be much easier by adopting methods that reduce economic difficulties in both countries and the world. It is in the common interest of China and the United States to do just that, but this will require US Treasury Secretary Janet Yellen and her colleagues to engage in regular dialogue with their Chinese counterparts, discussing and monitoring global and domestic macroeconomic and financial risks.
A shock in the real economy can quickly spill over into the financial system, and financial excesses can wreak havoc on people’s lives if left unchecked. Notably, modern finance, in which money can move around the world at breakneck speed, makes the world seem like a shrinking place. And the Chinese economy is so large and so globally integrated that the turmoil that occurred in China in 2015 and 2021 instantly rippled through global financial markets. Of course, the primary and secondary economic and financial ties between China and the United States are too broad and deep to be easily shaken off, which makes it especially important for the two countries to exchange views on macroeconomic risks. To complete, China is the second largest contributor to long-term US Treasury bonds and is a major investor in other US securities. Therefore, it is in the interest of both countries that China has an understanding of US economic policy and confidence in US policy makers, especially when Congress is in a debate over the debt ceiling. . It should be noted that the lack of transparency about China’s lending to some very troubled economies and the large US commercial investment in the Chinese economy, which can appear opaque to outside analysts and where abrupt changes in policies can catch the market by surprise, means that it is important for both countries to have US policymakers better understand Chinese economic policies and challenges.
Moreover, the United States needs to bolster the defenses that the Biden administration has attempted to put in place in order to hedge against a sharp deterioration. Indeed, this is necessary because the allies and partners that Washington hopes to enlist to pressure China can expect sincere efforts to seek cooperation with it, wherever possible. This is one of the reasons why US President Joe Biden, in his meeting with Xi in Indonesia last November, took steps aimed at preventing a deterioration in relations.
In order to improve coordination between the two sides, decision makers in China and the United States should meet more frequently and talk more frankly. It is worth noting that friendship is not a prerequisite for such coordination. Clear political, security, and ideological tensions do not preclude cooperation based on self-interest on issues such as macroeconomic stability, pandemic preparedness, climate change, combating terrorism, preventing the spread of nuclear weapons, and protecting the global financial system from future crises and the possibility of their spread. In that context, the upcoming meeting of US Secretary of State Anthony Blinken with Chinese State Councilor Wang Yi is a good starting point. In a parallel fashion, Yellin should speak regularly with China’s new economic czar, Heu Lifang. Also, Fed Chairman Jerome Powell should speak to the Chinese central bank governor.
In contrast, Beijing should not restrict cooperation on global issues such as climate change because it is troubled by unrelated issues. In fact, linking different issues in foreign policy undermines China’s efforts to present itself as a constructive solver of global problems.
In addition, the United States must carefully distinguish between what it should get from its allies and what it would get on their benevolent initiative. It is necessary, for example, to control technologies related to weapons and dual and multiple use technologies, and to increase scrutiny of Chinese investments and mergers and acquisitions with international technology companies. On the other hand, Washington need not encourage disengagement in areas unimportant to national security or competition among the world’s democracies in high technology.
But there is a certain level of separation that is unavoidable. In the field of high technologies, some targeted separation will be very necessary, in contrast, wholesale separation is useless. The Americans benefit from access to the world’s markets, and China will remain a huge market that they can either participate in or give up to competitors. Moreover, China is the second largest economy in the world, and ranks first globally in manufacturing and trade. Over the coming decades, the Chinese market will form a large part of the global financial picture. Instead of inevitably accepting an economic iron curtain, Washington should negotiate aggressively with China in order to unlock opportunities that benefit Americans in its market. Administration officials should have serious discussions with the Chinese leadership about how to manage economic decoupling in a way that allows for mutually beneficial trade. Right now, the two countries often trade accusations and counter-accusations while doing nothing to expand mutually beneficial economic opportunities.
Indeed, Sino-American security tensions cannot be dismissed, and Americans, especially after Russia’s brutal invasion of Ukraine, are right to worry that Beijing will use its influence, particularly by subjugating Taiwan. Enhancing deterrence is a big part of the solution, as is improving relations with allies. However, US allies and partners have made no secret of their unwillingness to isolate or contain Beijing. This is a message that Washington must draw from the rest of the world’s refusal to stop dealing with China, and from China’s attempts to create a rift between Washington and the rest of the world.
The political winds are fierce, and many in Congress are dominated by the desire to punish China, even at the expense of the United States. Biden will need great courage to face these challenges with brilliance and audacity.
