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Global Responsibility for China, U.S.

Dec 14, 2022
  • He Weiwen

    Senior Fellow, Center for China and Globalization, CCG

The frank, fruitful meeting between Chinese President Xi Jinping and U.S. President Joe Biden on the sidelines of the G20 Summit in Bali, Indonesia, last month sent a positive signal to a turbulent world hit by multiple shocks.

As the world’s largest two economies, managing their differences to avoid conflicts is not only right for bilateral relations but also helps fulfill their responsibility for geopolitical stability and world economic recovery.

There is no question that the follow-up dialogues and meetings between China and U.S. teams should focus on key bilateral issues. They should, at the same time, be handled in the broader context of global responsibility. 

Coordination for recovery 

With multiple shocks, including the Russia-Ukraine conflict, the worst inflation in over four decades, energy prices soaring, food shortages and debt distress in a large number of low-income developing economies, the world economy is rapidly sliding downward toward a possible major recession in 2023. Kristalina Georgieva, managing director of the International Monetary Fund, said at the IMF’s global annual meeting on Dec. 1 that the global GDP growth rate might slip below 2 percent in 2023. The IMF world economic outlook in October estimated a quarterly possibility of growth lower than 2 percent and a 10 to 15 percent possibility of going below 1 percent. The developed economies will grow by only 1.1 percent, with the U.S. at 1.0 percent and Germany at -0.3 percent. Georgieva has estimated that the world economy will lose $4 trillion between 2022 and 2026.

The hawkish rate hikes of the U.S. Federal Reserve have forced widespread rate hikes by central banks worldwide and resulted in a surging U.S. dollar, which hit its highest point in 20 years, thus changing international capital flows and aggravating the sovereign debt burdens of 60 percent of world’s developing countries.

Under these circumstances, China and the U.S., which account for 40 percent of the world’s GDP, should intensify their macro-economic policy dialogue and coordination to support global financial stability and economic growth. The U.S. needs to slow down the rhythm of its rate hikes to alleviate the pressure on world financial markets. China, for its part, should support its own currency. Both governments should apply appropriate fiscal policies to support economic growth, prevent the U.S. economy from slipping into a recession and bring the Chinese economy back to a medium growth track.

Both governments should intensify coordination in combating climate change and providing more debt relief tools for countries in debt distress. The central theme and consensus of the recent G20 summit in Bali was “Recover Stronger, Recover Together.” As both attended the summit and signed the leaders’ declaration, China and the U.S. should do their best to contribute to that vision. 

Globalization, not fragmentation 

The key pathway to bolstering the world economy is joint support of China and the U.S. for globalization, WTO rules-based multilateralism and an unswerving fight against fragmentation and unilateralism. The G20 Bali summit’s leaders’ declaration emphasized support for the WTO based on its rules — a non-discriminatory, free, fair, open, inclusive, equal, sustainable and transparent trade system. All G20 members, including China and the U.S., signed the declaration.

However, the recently passed U.S. Inflation Reduction Act and the CHIPS and Science Act of 2022 are running in the opposite direction and are raising serious concerns. The IRA provides as much as $369 billion in subsidies for the production of clean products and investment in qualified facilities. Nine types of tax credits contain domestic content requirements. These tax credits appear to violate multiple WTO rules. They contain clearly discriminatory domestic content requirements and may constitute trade-distorting subsidies.

Its provisions could be in breach of the following WTO rules: First, domestic content requirements violate national treatment obligations contained in Article 3 of GATT 1994. Second, import substitution subsidies, to the extent that tax credits are made contingent on the use of domestic goods over imported ones, are prohibited by the ASCM. Third, trade-related investment measures (TRIMs), to the extent that the investment tax credits contain domestic content requirements, are inconsistent with national treatment obligations in the TRIMs agreement. Fourth, final assembly requirements discriminate against like imports and violate the national treatment obligations contained in Article 3 of GATT 1994.

The Inflation Reduction Act contains provisions limiting subsidies to FTA partners, and the “China exclusion” provisions in the clean vehicle credit violate the MFN obligations contained in Article 1 of GATT 1994. The IRA thus has trade- and market-distorting effects. It distorts international investment flows, distorts global markets in downstream sectors and turns the efforts to protect global commons into a zero-sum game. It also initiates a race regarding subsidies competition and increases trade tensions.

Apparently, the IRA breaks the rules-based international economic order and disrupts global supply chains. The strong world repercussions, especially from the EU, augurs a grave risk of a trade war across the Atlantic. The IRA also hurts China, which will undoubtedly demand a change as well.

Similarly, the CHIPS and Science Act of 2022 provides heavy subsidies for semiconductor manufacturing investment in the U.S., discriminating against other WTO members — especially China. It includes a “China exclusion” that bars investment for 10 years in China for the foreign investors receiving U.S. subsidies. Again, the clauses constitute a blunt violation of a WTO core principle — non-discrimination.

However, the Biden administration has gone even further. On Oct. 7, it announced a set of stringent measures prohibiting or restricting chip technology exports to China, and forced its allies to follow suit, so as to align a fragmented chip supply chain and set up Chip 4 — all excluding China.

The chip act and technology restrictions on China are seriously damaging key high-tech global supply chains and pose a serious risk to the world economy. The semiconductor industry is highly globalized. It covers more than 50 sectors and more than 2,000 procedures. The supply chain spreads over North America, Europe, East Asia, Southeast Asia and South Asia. The latest Semiconductor Industry Association data show global market sales in this sector of $555.2 billion in 2021, with China accounting for 34 percent of that, or $195.2 billion — the largest market for the U.S. semiconductor industry.

Intel saw its sales revenue fall 20 percent, with net profits off 85 percent, for the first three quarters of 2022, as 50 percent of its chip profit comes from the China market. A Gartner study shows that global semiconductor sales revenue, after a sharp increase of 26.3 percent in 2021, will grow by only 4 percent in 2022 and fall by 3.6 percent in 2023. Undoubtedly, the chip act and the devastating prohibitions on China by the U.S. is a major reason.

It is thus crystal clear that both the IRA and CHIPS Act are unilateral moves by the U.S. based on its own interests and strategy and denying rules-based multilateral mechanisms. They fragment the whole global supply chain.

Georgieva, the IMF managing director, warned in her speech on Dec. 1 that if the world splinters into two major camps — one of the U.S. and West and the other led by China — the world economy will lose between $1.4 trillion and $3.5 trillion. That will be disastrous for a world economy already hit hard by multiple shocks.

China and the U.S., the world’s two largest economies, must address the issues seriously and work together to stop fragmentation. Both the IRA and CHI Act need changes.

Washington sees China as “the most consequential geopolitical challenge” to U.S. hegemony and sees the next 10 years as the “decisive decade” in its rivalry with China. This view explains the push for deglobalization and unilateralism. However, the so-called China threat does not exist. The central task for China is developing its economy and thereby bringing its people a better life, which is, of course, not an insurmountable challenge. The coming sector dialogues and talks between the two countries should also cover the above-mentioned crucial challenges. In working to stabilize and manage bilateral relations, all efforts should be focused on a global vision in which China and the U.S. share a common obligation to support globalization and multilateralism and to manage differences — not only to avoid conflicts but also to avoid fragmentation. 

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