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U.S. Economic and Trade Policies with China Need A Forward Look

Aug 15 , 2016

With the presidential campaign entering its second phase, the clock is ticking as the second term of President Obama nears its end. Considering there is very limited time left, the status of China-U.S. economic and trade relations is almost set for now.

Undeniably, the past eight years have seen nonstop progress of China and U.S. trade and economic ties. The main characteristic of the China and U.S. economic relations is positive. But there are still unsettled and potentially conflicting points.

To begin with, the US is not ready to accept public goods provided by China.

China is claimed by the U.S. to be a free rider internationally. But when China shows its will to provide global public goods with growing national material power, the U.S. hesitates to respond, for example, to China’s Asian Infrastructure Investment Bank (AIIB). The Obama administration still has too much suspicion of China’s intentions.

The U.S. is now the only Western major power left out of the AIIB. There are reports saying the White House National Security Council miscalculated on this issue and believes it misguided the president.  But as of now, the Obama administration has not yet changed its position.

When China proposed the “One Belt One Road” initiative, U.S. politicians also buried their heads in the sand. Some U.S. officials and commentators expressed fear and concern that China will use it for narrow political or economic purposes. Some scholars treat the OBOR initiative as a response to the U.S.’s rebalancing strategy to contain China’s rise. It indicates again that blocking China’s effort to provide public goods tends to be a kind of common view in Obama’s administration.

Second, the U.S. excludes China from its free trade agenda.

Since 2009, Washington has actively promoted the negotiations for the Trans-Pacific Partnership (TPP), the Transatlantic Trade and Investment Partnership (TTIP), the Trade in Services Agreement (TiSA). Strategically, these U.S.-designed free-trade agendas will underpin a global economic system that is U.S. rule-based, consistent with U.S. values. As Ashton Cater, Secretary of Department of Defense, said, “America’s economy and national security depend on the U.S. leading global trade in the future”.

The TPP negotiation closed in October 2015. If it were ratified by the Congress, it would create a factual “Competing Yard (Arena)” for China and U.S. The Asia-Pacific countries are or will be divided into two categories: TPP members and non-TPP members. Because of the high TPP threshold, the non-TPP countries would face relatively high barriers for their products and services.

Unfortunately, China is one of the supposed containment targets, or even the only one. Although officials in the Obama administration denied the TPP’s intent is to contain China, some late statements from high-level U.S. officials indicate that it is. In Obama’s 2016 State of the Union address, he stated clearly “The TPP means that America will write the rules of the road in the 21st Century”. According to details of the negotiation process that have been exposed, there was a common thought in their minds, “dealing with China with clauses”.

By being excluded from the TPP, China’s economy will suffer potential losses.  According to an estimation by Peter Petri of Brandeis University, Michael Plummer of John Hopkins and Fan Zhai of China Investment Corporation, exclusion from the TPP could cost China over $46 billion by 2025.  The other article by Ma Jun, the chief economist of the People’s Bank of China’s research department, pointed out that China’s textiles, clothing and electronics industries will miss out by being excluded from a U.S.-led Pacific trade pact. China would see another 0.5 percent annual increase in economic output over four years if it were to join an expanded 16-member Trans-Pacific Partnership.

Thirdly, there is little contribution to the positive trend of goodwill between the people of each country.

According to a Pew poll, the percent of Chinese holding a favorable view of the U.S. increased between 2007 and 2015, from 34% to 44%, but on the U.S. side, the ratio decreases from 42% to 38% during the same period.

Those pessimistic views will have a negative influence on business activities. The negative feelings about China’s economy have indeed influenced investors’ operating plans. According to the American Chamber of Commerce’s survey on Jan. 20, 2016, more overseas businesses are cutting back investments, with some planning to move production out of China. Nearly one-third of Chamber member companies plan no investment expansion in China, while one-third intend to expand their investment by less than 10% — lower than in previous years.

Last but not the least, the bilateral trade and economic relationship has not been upgraded in a timely way.

The economic relationship should have evolved with China and U.S. economies’ “New Normal”. The Chinese economy’s “new normal” features more sustainable, mid- to high-speed growth with higher efficiency and lower costs. The U.S. is also adapting to a new set of expectations for slower economic growth. The difference lies in that they are coming at it from opposite directions. The U.S. 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 consumer spending, and less reliance on domestic investment and exports. Those goals are highly complementary and mutually reinforcing.

Moreover, the basis for traditional Sino-U.S. division of trade – cost difference — is collapsing, as China lets go of its edge in manufacturing costs.

The U.S. is revitalizing manufacturing sectors and promoting economic transformation from an overly fictitious economy to a real economy. Beyond advanced industries like 3-D printing and new-energy vehicles, low-end manufacturing such as shoemaking and packaging companies are also recovering. The traditional industrial layout between China and U.S. is based on comparative advantages, and that is facing challenges.

What’s more, China-U.S. trade growth is slowing. According to U.S. Bureau of Economic Analysis statistics, the growth rate of the total value of China and U.S. imports and exports slowed from 24.6 percent to 5 percent between 2010 and 2014. Imports and exports now include nearly all sectors except arms and prohibited high technology, so the remaining potential for traditional trade relations is limited.

So it is time for traditional trade and economic relations to be updated. But unfortunately, Obama administration fails to offer a strategic vision with its Chinese counterparts.

As the two biggest economies, neither could afford the cost of bad relations. No matter who wins the election, the next U.S. president will try to find more advantageous opportunities to cooperate. With better cooperation, the road for the “new type of major-power relations” between the U.S. and China would be less rocky and bring more benefit for the people of both countries.

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