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Economy

The Future of US-China Relations After Buenos Aires

Dec 07 , 2018

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The 90 day “truce of Bueno Aires” buys time for negotiations during the US-China trade wars, but President Trump’s subsequent proclamation that he was “Tariff Man” and the ambiguities about what was agreed at the Trump-Xi dinner left markets shaken. An increase in China’s purchase of soybeans or natural gas might alleviate some political aspects of America’s bilateral trade deficit, but it would do little to address the real problems of the China-US relationship. That will depend on the coming negotiations over the technological and intellectual property aspects of trade that will be led on the American side by Special Trade Representative Robert Lighthizer.

Some analysts blame the current impasse on the idiosyncratic personality of Donald Trump, but it has deeper roots. Washington’s attitudes toward China were already changing, and Trump merely threw gasoline on a fire that was already smoldering. The liberal international order helped China achieve dramatic economic growth and reduce poverty, but the degree of political and economic opening was disappointing. China also tilted the trade field to its advantage with subsidies to state-owned enterprises and used commercial espionage and coercive measure to force foreign firms to transfer their intellectual property. While most economists argue that Trump is mistaken to focus on the bilateral trade deficit, many support his complaints about the means China has used to challenge America’s technological advantage. Moreover, China’s growing military strength and its reclamation projects in the South China Sea adds a security concern, and things weren’t helped by China’s rejection of the 2016 Law of the Sea Tribunal decision.

Some observers believe that the harsh speech by Vice President Mike Pence in early October meant that what we are witnessing is not a trade dispute, but a new Cold War. Others go further and see a “Thucydides Trap” in which an established hegemon goes to war with a rising challenger. Thucydides attributed the Peloponnesian War to the rise in the power of Athens and the fear that created in Sparta. Analysts also cite World War I when the rise of Germany created fear in hegemonic Britain. But historical analogies can mislead. Germany had already surpassed Britain in industrial production by 1900 while China’s economy (measured in dollars) is today only 60% of that of the United States. And unlike the Cold War when the US and USSR had virtually no trade or social contact, the US and China have over a half trillion dollars in two-way trade and more than 350,000 Chinese students and three million tourists visit the US annually.

People sometimes forget that there are two parts to Thucydides’ famous explanation; “rise” and “fear” and they tend to focus only on the former. As former Treasury Secretary Larry Summers points out, we cannot stop the rise of Chinese economic power and the effort to do so would damage us all. But we can shape the political environment of China’s rise and we can do something about fear by not succumbing to unnecessary hysteria of the type that sometimes sweeps Washington.

The US has more time and assets to manage the rise of Chinese power than Britain had with Germany. Asia has its own natural balance of power in which Japan (the world’ third largest economy) and India (about to surpass China in population) have no desire to be dominated by China. For America to succumb to Thucydidean thinking would be a damaging self-fulfilling prophecy. Fortunately, polls show that the American public does not yet see China as another Soviet Union. A recent Pew poll showed 38% of the public with a favorable view of China, down slightly from 44% before the trade wars started in 2017 (and 40% during the 2012 election period.) The next 90 days will be accompanied by hard bargaining to press China to change some of its trade practices, but it will be important that the accompanying rhetoric does not pitch us into the fear side of a Thucydides’ trap.

China does not pose an existential threat to us the way that Hitler’s Germany or Stalin’s Soviet Union did. China is a global economic power, but it casts a modest ideological shadow in terms of its soft power, and it is far from being a global military power. China has increased its military capabilities in its region, but it is unable to expel us from the Western Pacific where most countries welcome an American presence. The largest part of the “first island chain” is Japan which pays to keep 50,000 American troops based there. The US still holds the better cards, and we need not succumb to Thucydidean fear.

There is another reason why succumbing to hysteria would be a mistake. China and the US both face transnational challenges that are impossible to resolve without the cooperation of the other. Even if economic globalization slows, environmental globalization will increase. The laws of physics are not bound by politics. The ancient Greeks did not have to worry about climate change and rising sea levels. As borders become more porous to everything from drugs to infectious diseases to terrorism, it will be important for the world’s two largest economies to cooperate to cope with these threats. That is why we should think of the US-China relationship as a “cooperative rivalry” rather than a revival of the Cold War. We should be prepared for tough bargaining, but some aspects of American national security will require power with China, not just over China. 

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