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Economy

Closing 'Trust Deficit' Rather Than 'Trade Deficits' As a Matter of Priority

Nov 01 , 2019
  • Zhang Monan

    Senior Fellow, China Center for International Economic Exchanges

Compared with the trade deficits between China and the United States, “trust deficits” are even bigger. The key to increasing mutual confidence is rational dialogue and active communication. Only by establishing institutionalized channels for dialogue can the two countries avoid strategic misjudgment.

The U.S.-China strategy has reached a new juncture. The evolving U.S. attitude towards China, held by the government and the general public, draws on 40 years of bilateral diplomatic ties while reflecting two emerging conclusions. Conclusion 1: the traditional objective of democratic transformation of China through engagement has failed; Conclusion 2: efforts to contain Chinese development have actually resulted in strengthening China. Against this backdrop, proponents of both “transformation” and “containment” believe current U.S.-China policies need adjustment. The “economic hawks” and “national security hawks” in U.S. Congress are forming a bipartisan alliance and will adopt more confrontational approaches to China. Upon closer look, however, this alliance does not represent everyone: gaps seem to be appearing in U.S. domestic consensus on its strategies with China, and people are re-evaluating the consequences of the trade war.

The first gap in U.S. consensus on China derives from an understanding of China. Though suspicions of China are conspicuous in U.S. policy-making circles, the American public does not seem ready to fully embrace them. For instance, a report by the Chicago Council on Global Affairs based on an October 2018 survey concluded that the majority of the public does not deem China’s rise as a world power as a major threat to U.S. interests (as opposed to 39 percent of respondents who did).

The second gap in U.S. consensus is around China policies. Many people of insight who have dealt with China for decades do not endorse the Trump administration’s extremist “zero sum” approach to China, and do not believe China seeks to overthrow the entire global order so as to replace it with the so-called revisionist world order. These people have expressed profound pity over the trade war and Trump’s obsession with trade deficits. They are opposed to the goal of delinking the Chinese economy from those of the United States and other western markets.

The “boomerang effects” of U.S. tariffs on Chinese exports have resulted in U.S. trade deficits growing larger. American political scientist Peter Harris stated recently that it is wrong to wage a cold war with China, and that it is still not too late to return from the brink and restore broken bilateral ties. According to Rick Larsen, co-chair of the bipartisan U.S.-China Working Group of the U.S. Congress, on trade issues, the Democratic and Republican Parties share broad consensus on China regarding market access, technology transfer and intellectual property rights. They disagree only on approach. Larsen insists that the Trump administration’s current tariffs strategy “won’t work,” as it subjects U.S. exports to China to three to four times the tariffs of other countries exporting to China. Therefore a new, different strategy is needed.

The third gap is around China-related interests. At present, U.S. stakeholders influencing China-U.S. economic and trade policies fall into four categories: 1, U.S. executive authorities, with President Trump as their representative as well as Congress; 2, various think tanks that wield considerable influence; 3, the U.S. business community with companies as their representatives, and; 4, the American public.

U.S.-funded firms play significant roles in preserving China-U.S. economic and trade ties. Waging a trade war and escalating trade disputes is against both Chinese interests and the fundamental interests of U.S. firms. More than one year into the trade war, though the hawks inside the U.S. government have vowed to "decouple" the U.S. and Chinese economies, the U.S. business community has expressed opposition with actions. According to Rhodium Group data, in the first half of 2019, U.S. investment in China amounted to $6.8 billion, 1.5 percent above the average of the same period of the past two years. An American Chamber of Commerce in China suvery in May showed 35 percent of American firms in China indicate they are taking an "in China, for China" approach to cope with impacts of the trariffs. A U.S.-China Business Council survey found nearly 90 percent of American companies surveyed stated they have not moved and will not move business out of China; over 80 percent said they have not reduced or stopped investment in China. The American business community has realized that breaking up China-U.S. relations will deal a heavy blow to the global industrial order, and are therefore against "decoupling."

At the end of the day, establishing effective mechanisms for coordination and building a relationship featuring coordination, cooperation and stability remains a common goal for both parties. Many dialogue and communication mechanisms have been set up since the two countries established diplomatic relations, including a leaders' hotline, Strategic and Economic Dialogue, military hotline, consultation on maritime military security, and the China-U.S. Joint Commission on Commerce and Trade. Such mechanisms. These mechanisms, particularly the strategic dialogues and those for military exchanges, can play key roles in ascertaining common interests, managing differences, avoiding misjudgment and even resolving crises.

Unfortunately, some of them are already out of service. How can we effectively eliminate the "trust deficits" between China and the U.S.? We hope the two sides can, building on cooperation over the past decades, relaunch channels for institutionalized dialogue, build a new cooperation framework, identify converging points of common interests, clean up fields of long-term cooperation, and, under such a framework, resolve disputes. This is the only way to create a new model of China-U.S. co-existence.

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