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Foreign Policy

Managing a Multifaceted Relationship between the U.S. and China

Jun 03 , 2011

The U.S.-China relationship is complicated, but it is probably the most important bilateral relationship of the 21st century. There is also great debate on how the relationship will evolve in the future. The following is the interview I did recently with Dr. Ira Kasoff, former Deputy Assistant Secretary for Asia at the U.S. Department of Commerce, and currently a senior advisor at APCO.

Patrick Corcoran: Let us start right at the top: the Chinese hold X amount of U.S. debt.

Dr. Ira Kasoff: It’s a little hard to know exactly, broad estimates are roughly 1 trillion dollars in treasuries, and somewhere near 500 billion in other U.S. commercial paper, China’s foreign reserves are approaching 3 trillion USD.

CORCORAN: Just to confirm, China purchases the treasury bonds off the market, as would anyone else?

Kasoff: U.S. treasuries are for sale to anyone, basically. Lots of foreign governments hold U.S. treasuries, just like lots of private citizens hold U.S. treasuries – there is an open market.

CORCORAN: I read recently that China has enough foreign reserves to buy the debt of several European countries. Do you see the European countries, as African states already have, turning to China for debt relief?

Kasoff: I am not an expert on that sort of thing, but I am unsure why China would do that. They are continuing to accumulate foreign exchange reserves because of their surplus, and they need to invest it – and one might argue that they are overly invested in the United States – so I think it is prudent from their point of view to diversify a bit, but despite the short-term issues in the United States about whether we’ll increase the debt ceiling and what that will mean if we do not – U.S. treasuries are still considered the safest and most liquid investment in the world. I think they’ll continue to be large holders and large purchasers of U.S. government debt.

CORCORAN: What about the job market? The sort of typical understanding is that U.S. jobs are being shipped overseas to China. And someone like Donald Trump, for instance, who has a lot of appeal to people who are angry about that – what are your thoughts?

Kasoff: It is interesting; I saw something in the press saying that Donald Trump’s products, the Donald Trump brand, most of them are made in China! He does not talk about that when he complains about China. It is also worth pointing out, in that context, although the United States has a large trade deficit with China, a lot of it is because, similar to the Trump example, U.S. companies have products made in China to be imported into this country, ranging from Donald Trump, which is a relatively small example, to Wal-Mart, which imports tens of billions of dollars from China. Wal-Mart, K-Mart, J.C. Penny – all the retailers do this. They go to China, provide specifications for the products, and then bring them into the United States. That is a big part of the U.S.’s trade deficit with China, it’s basically products made to order by U.S. companies and retailers. One could argue, and many do, that U.S. consumers benefit from this because it provides access to quality products at low prices, and keeps inflation down.

Another point on the trade deficit, and I am not presenting this to be an apologist for China, but it is also a fact.  If one looks at U.S. trade patterns, at a macro level, basically, one-third of the trade deficit is with Asia. That percentage has not changed much over the last 20 years, but the breakdown of that percentage has. In the past it was distributed among many countries, Taiwan, Japan, South Korea, etc. But, over the years, the intra-Asian trade pattern has changed. A lot of those countries produce the components, ship them to China for final assembly, and then the products get exported from China to the United States, so on the books, that counts as an export from China, at the full value of those products. But in fact, most of the value added is not done in China, it is done elsewhere. As a result, the U.S. trade balance with some of those other countries has improved, but the trade balance with China has deteriorated because more imports are now being put on the balance sheet as coming in from China, where they do come from, but most of the value-added is not taking place in China. The U.S. trade deficit is still about 35 percent derived from Asia, just now a bigger proportion of that comes out of China. The overall U.S. trade deficit has grown, so of course, the 35 percent is a bigger number than it was, but that is a different question.

CORCORAN: Can you assess the pros and cons of a weak and strong dollar for the Chinese?

Kasoff: If you look at what Treasury Secretary Geithner and previous Treasury Secretaries say, they say, “A strong dollar is in the United States interest.” They have said that for a long time, Geithner just reaffirmed that recently. Paulson used to say that, all the way back to James Baker, all the Treasury Secretaries have said that for a long time; presidents will say that when they comment on the dollar as well. At the same time, for quite some time now, the United States has been pushing China to let the yuan appreciate – which means the U.S. dollar would depreciate against the yuan, by definition – if one goes up, the other one goes down. On the one hand they are saying “a strong dollar is in the U.S. interest”; on the other hand they are saying, “We want the dollar to be a little bit weaker vis a vis the yuan.” One could say there is a bit of a contradiction there.

Ok, so what are the pluses and minuses, it is a very complicated subject. A weaker dollar or a strong yuan means U.S. exports to China are more competitive and China’s exports to the United States become more expensive. Basic economics would tell us that if the exchange moves in that direction, that should adjust the trade balance a little bit. The United States should export more, and import less because China’s products become more expensive for the United States, and U.S. products are less expensive for China. In that sense, a weak dollar should help the U.S. trade balance, and should hurt the Chinese trade balance, a little bit. The other side of the coin is a strong dollar makes it easier for the United States to invest overseas, to acquire assets overseas; it becomes easier for U.S. citizens to travel overseas, because prices are cheaper if the dollar is strong. Conversely, a weak dollar means it is easier for foreigners to buy up U.S. assets, cheaper for foreigners to travel to the United States. It is complicated, there are pluses and minuses to a strong dollar and a weak dollar and a strong yuan and a weak yuan.

CORCORAN:  No question the growth of the middle class in China has been tremendous; do you see a big future of opportunities for U.S. markets?

Kasoff: Absolutely! U.S. exports to China have grown dramatically. I think last year (2010) U.S. exports exceeded $100 billion. China has been for the past decade, the fastest growing major export market for the United States. It has been growing at double-digit rates annually over the last decade. As China’s standard of living rises, and their middle class continues to develop, that is a huge market for U.S. goods and services. As I mentioned earlier, there has been some appreciation of the yuan or weakening of the dollar which will further help U.S. exports – it is a major opportunity for the United States, no question.

CORCORAN:  Do you see a link between the Chinese Communist Party’s legitimacy with their citizenry and economic growth? If so, what happens with the growth stops?

Kasoff:  Well, it is not as simple as that. But, there is an implicit bargain that the economic growth has been so strong, standard of living has risen very dramatically in the past thirty years, and so that definitely contributes to social stability. People are willing to perhaps accept less in terms of political freedoms and human rights, in exchange for a steadily improving standard of living. As for what happens if the growth stops, I do not see any sign that the growth is going to stop in the near-term; very long-term, it is possible. However, for the more foreseeable future, China is going to continue to grow at a pretty strong pace – I think their challenge is more controlling excessive growth and overheating, rather than worrying about not enough growth.

CORCORAN: Can you explain what is meant by “China’s GDP is going to pass the U.S.’s GDP?”

Kasoff: Yes, it’s based on the size of the population. The GDP is basically the whole economy, in gross terms; the U.S. economy is roughly $14 trillion, the Chinese economy is roughly $6 trillion – so the U.S. economy is bigger, but the Chinese economy is growing faster so if you project the two trends, at some point, the two lines cross and China passes the United States, unless things change, but if you do straight line projections, the Chinese economy surpasses the United States. However, if you divide by the number of people, GDP per person or per capita, the United States is much bigger because China’s population is four times as big as the United States. Even when the size of China’s overall economy passes the United States, they still will be poorer than the United States by a factor of four because there are four times as many people in China.

CORCORAN: Could you comment a bit on China’s noninterventionist foreign policy? What comes immediately to mind is Africa and Latin America, where they have heavily invested in states with horrendous human rights records, and largely turned a blind eye.

Kasoff: China’s foreign policy has traditionally been noninterventionist or non-expansionist. They do not have a history of imperialism or colonialism the way that Western countries have had. Also, since the founding of the PRC, but also historically, they have followed a policy of noninterference in other countries’ domestic affairs (in part because they do not want other countries intervening in their own domestic affairs). Their foreign policy now, one could say, has been more aggressive than it has been, because they are driven by economics. They are growing so fast, they have a huge demand for energy and commodities, and so a lot of their foreign policy is based on securing access to those things – oil, and other energy reserves, and other types of commodities from copper to cotton. Now, when one talks about countries like Sudan or Iran or any of these states, where there are huge human rights problems, people criticize China as forming relationships with theses renegade regimes; the criticism is legitimate. The reason they do it is to maintain access to the economic resources.

CORCORAN: In most instances, authoritarian leadership does not always coincide with tremendous, sustainable economic growth, i.e. corruption issues, successful development of a middle class, etc. How do you assess the government’s ability to manage economic growth from an authoritarian-type rule?

Kasoff: Well, that is an interesting question. First off, China has a lot of problems with corruption too, but it has been contained enough and the growth has been fast enough, it has not come close to a point that would effectively challenge the regime or their economic prospects.

CORCORAN: Where does the corruption come from? Is it public, private or both?

Kasoff:  Well, it is sort of built into the system. You have a one-party system, and no checks and balances; no independent judiciary, no independent press reporting on scandals, no consumer rights organizations, there is no counter-weight to the party. The party can decide all kinds of things arbitrarily, and the party has to basically police itself. It tries to do this, through corruption crackdowns, etc., but corruption is built into the system – it’s institutionalized.

CORCORAN: Where do you see the future of U.S.-Taiwan-China relations?

Kasoff: It is complicated; I think all three sides need to be mature and pragmatic – which generally speaking, they have been. There have been some blips; the previous regime in Taiwan was very aggressive, causing some heartburn in China and the United States. But I think in general, no one wants to see the situation get out of hand. And if there is mature leadership on all sides, there is no reason for it to get out of hand. Also, the economic ties between Taiwan and China are enormous and growing; the investment from Taiwan into China is hundreds of billions of dollars, there is a very large number of businessmen traveling back and forth, hundreds of thousands of Taiwanese living in China, so it is almost like a de facto unification – direct flights, easy movement back and forth, etc. As long as they do not go crazy, the relationship is moving in a direction that I think everyone can live with comfortably.

CORCORAN: How do you assess Chinese foreign policy towards North Korea?

Kasoff: China has had historically a close relationship with North Korea; they are basically the only friend to North Korea. They are also important economically to North Korea – so they have influence, but at the same time, that influence is limited. The last thing China wants is for North Korea to collapse and have a flood of refugees coming across the border. They want to see a stable situation in Korea. They host the Six Party Talks, and I think they exert some positive influence on North Korea, within limits. The Korea peninsula is a very difficult issue.

CORCORAN: Where do we see India in U.S. – China relations?

Kasoff: India and China have been rivals, and China has been very close to Pakistan. As India’s economic growth has increased, India economically becomes more of a competitor with China in some ways, but India and China have been improving their bilateral relationship. Again, this is another complicated relationship that needs enlightened management on all sides – it seems to be going alright, as far as I can see.

CORCORAN: Finally, Dr. Kasoff, where do you see the future of U.S.-China relations, in say, twenty years: A cooperative relationship because of economics or a great-power rivalry?

Kasoff: Well, it could go either way. U.S. and Chinese economies are more complementary than competitors in a sense. The United States is at the high-tech, high-innovation end of the spectrum and China is still more of a manufacturing country, although China wants to move up the value-added chain. As I said before, China makes a lot of products that the United States does not make, and the U.S. benefits from the fact that China makes those products well, and cheaply. There is a lot of complementarity between the two economies. At the same time, inevitably, and particularly as China moves up the ladder, there is more competition. On the geopolitical side, China is a big country, one that has strategic interests (natural resources, energy, etc.), various kinds of interests around the world, so inevitably, there is more friction as they expand and develop militarily – a potential for more friction between the United States and China. As far as the United States is concerned, there are major challenges ahead, we need to get our economy and debt under control, get on a more sustainable path. If the United States can do that, and China continues to develop in a peaceful and rational way, I do not see why the relationship cannot be positive and complementary. There are no guarantees though, and the relationship could go in the other direction – historically this has happened as well.

Patrick R. Corcoran is a doctoral student of world politics at The Catholic University of America. Currently, Patrick is a research associate at the Public Affairs Council, a researcher for Dr. Maryann Cusimano Love at the Institute of Policy Research and Catholic Studies, and a research assistant at National Defense University.

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