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Injects New Vitality into China-US Economic Relations

Nov 03 , 2014


2014 is a landmark year for China. After becoming the world’s largest trading nation in 2013, some reports said that China would soon overtake the US to be the world’s largest economy. According to the International Monetary Fund, by the end of 2014, China will make up 16.48% of the world’s purchasing-power adjusted GDP (or $17.632 trillion), and the US will make up just 16.28% (or $17.416 trillion).

China’s growth is beneficial for the US. Today, China’s richest and most powerful companies like Alibaba, Baidu, Huawei, and Wanda, are increasing their direct investment in the US. Just this year, Chinese internet giant Alibaba launched the biggest initial public offering (IPO) in the history of the New York Stock Exchange. Others such as, China’s second-biggest e-commerce company after Alibaba, and China’s microblogging site Weibo have also filed plans for IPOs in the US. Recently, Chinese insurance company Anbang Insurance Group announced its intentions to buy New York’s landmark hotel, the Waldorf-Astoria.

The deepening economic and financial relations between China and the United States brings a win-win result. The Chinese e-commerce giant Alibaba raised huge sums of cash ($21.8 billion). Four of the top six investment banks tapped to underwrite the Alibaba IPO are US firms, Wall Street’s central role in the global finance world is reinforced against London and Hong Kong. Anbang Insurance Group’s purchase of the Waldorf-Astoria let nearly $2 billion flood back to the hotel’s US owner.

Now, more and more of the US public have begun to adjust their attitudes and emphasize the importance of cooperating with China. According to a recent poll by the Pew Research Center in June 2014, about half of the Americans (51%) say it is important to build a strong relationship with China on economic issues. Public support for a strong economic relationship with China has bounced back to where it was three years ago.

When Chinese and the American economies are entering new phases, it is even more important to enhance the relations. The Chinese economy’s “new normal” features more sustainable, mid- to high-speed growth with higher efficiency and lower costs. The US is also adapting to the “new normal” economy, a new set of expectations for slower economic growth, which is firstly coined by the Pacific Investment Management Co. co-founder Bill Gross. The main reason why the two economies are adapting to the “new normal” is that both countries are looking to create more long-term stability by rebalancing the role that domestic consumption plays in their economies. The difference lies in that they are coming at it from opposite directions. The US would like to decrease its reliance on consumption as the engine of growth, relying more on domestic investment and exports. China intends to see more consumers spending at home, and less reliance on domestic investment and exports. Those goals are highly complementary and mutually reinforcing. So US and Chinese economic relations retain the potential for future development, enhanced rather than hindered by the need for reassessment and rebalancing on both sides.

Moreover, the world economy is still unstable. In October, the International Monetary Fund (IMF) cut its global growth forecasts for 2014 and 2015, warning that the world economy may never return to the pace of expansion seen before the financial crisis. On this situation, it’s more important for China and the US to limit discrimination against each other and strengthen the overall relationship.

This year marks the 35th anniversary of the establishment of official diplomatic relations between China and the US. After 35 years of development, the economic relations are more intertwined and mature. To deepen the relations, the upcoming 2014 APEC leaders’ meeting in Beijing could play an active role. At the coming APEC and Xi-Obama meetings, Chinese and US leaders could put an ambitious road map for the bilateral economic relations, updating the current case-by-case method of addressing their disputes.

The first step of the road map is the Bilateral Investment Treaty (BIT). Considering that leaders have the ability to set policies and shape relationships, Chinese President Xi Jinping and US President Barack Obama could play a bigger role in setting a goal of achieving a freer and more intertwined economic relations. At the coming APEC meetings next month, President Xi and President Obama could and should give clear instruction on negotiating teams of both sides to advance the BIT negotiations.

The opening of financial services is a deep-water issue in the talks of the China-US BIT. In order to inject the “positive energy” to the BIT talks, China could consider to further liberate its growing financial services. Until the end of 2013, foreign financial services had only taken 2% of China’s whole bank assets, which is even lower than the level in 2001 when China became a member of the World Trade Organization (WTO). So there is much room for China to open up its financial sector to the US. As a reward, the US should let Chinese companies obtain preferred access to the US supplies of natural gas and lift export control on high-tech products.

The BIT will bring adjustment challenges to each other, but also create new cooperation opportunities for China and the US. A big impact of the trade and investment liberation is structural unemployment. Wages for US workers employed in industries may fall under pressure of competition from China. Many Chinese workers may also have to change their jobs. In order to reduce the impact, China and the US government could set up joint task forces to do research on the impacts and put up advices on how to provide supportive measures for the involuntarily laid-off workers, such as financial assistance or new skills training program.

The fusion between the TPP and the RCEP is the second step. China and the US should encourage more members of the TPP and the RCEP to join the other. The Free Trade Agreement of the Asia-Pacific (FTAAP), first proposed by APEC in 2004, provides a new way to make the TPP and the RCEP converge. The rules set by the FTAAP are intermediate standard levels in terms of tariff concessions, services and opening up, intellectual property rules. The theme of this year’s APEC leaders’ meeting is to “Jointly Build a Future-Oriented Asia-Pacific Partnership”. At the meetings, China and the US could officially launch a feasibility joint study of the FTAAP by which it can create substantial progress in regional economic integration, taking a key step toward building a trans-Pacific cooperation framework that benefits all.

The third and final step is to launch the bilateral comprehensive FTA talk between China and the US. President Xi proposed on April 1, 2014 that China and the European Union can “actively explore the possibility of a free trade area”, which has sent out a clear signal that China is willing to launch FTA talks even with mega-big economies. The FTA between China and the US is of great importance to the development of bilateral economic and trade ties and is for deepening the interdependence and strategic mutual trust.

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