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Foreign Policy

Reconcilable Sino-U.S. Differences

Sep 07, 2021
  • John Gong

    Professor, University of International Business and Economics

Over the past few years, tensions between China and the United States have flared over many issues. While due attention has been paid to the trade war, which the Trump administration launched in early 2018, and to technological might and military superiority, an underexplored area is a possible clash on ideology.

For many in Washington, the contest with China should be framed in terms of ideological differences. It is a zero-sum rivalry in which China and the U.S. both seek to export their political systems and topple the values of the other. In this sense, Washington portrays its unilaterally declared competition with China as a competition of values — an ideology underpinning a political system that will ultimately prevail throughout the world. It appears to suggest that not only America’s technological, economic and political dominance on the world stage are facing an existential challenge, but its reputation and stature as “a city upon a hill” is at stake as well. In short, America feels driven to defend its purported exceptionalism.

Obviously, Beijing doesn’t buy into this argument, not even the concept of the grand competition itself, even though it says that it is not afraid of competition but prepared for it. Beijing’s preferred relationship is what is called “a new type of major power relationship” to manage differences and conflicts between the two countries. The core premises of such a relationship are that major conflict between the U.S. and China is not inevitable but manageable; that it would be catastrophic for both, and for the world, should it occur; and that the consequences of noncooperation on key issues are simply too enormous to shrug off.

But it looks as though the Sino-U.S. relationship is indeed heading the way Washington envisions, with the Biden administration inheriting and so far continuing all of the various decoupling strategies left behind by Donald Trump, from technology to finance, education and other areas. Beijing is therefore forced to rise to the challenge of this grand competition. It is clear that policy adjustments are happening in China along many fronts, especially domestically. 

But one thing Beijing has said it is not interested in is an ideological competition with the U.S. As the largest trading nation in the world, and despite the many goods it exports all over the world, China is simply not interested in exporting its ideology and values. Its official position is that there is no universally triumphant political system that is applicable to all — and certainly not American-style liberal democracy. Each country is different with its distinct culture and historical heritage, and it is up to its own people to decide which development path to take. Nevertheless, China is willing to share its own development model and past experiences with the rest of the world.

Even in the absence of ideological competition, it’s a valid question whether the differences between the political and economic systems of the two countries are fundamentally irreconcilable in their relations, or at least with respect to their economic relations. I will attempt to address this important question from an economic perspective — that is, to ask whether such structural differences undermine, to the extent of being irreconcilable, China and America’s interactions at the trade and investment levels between themselves and with the rest of the world. 

This is an important question because both countries carry enormous weight in today’s global economy. China is the world’s largest trader, followed by the U.S. It is No. 1 in exports, again followed by the U.S. But it is behind the U.S. in imports. China has made great strides over the years from a negligible, minuscule player in global trade, even less than Hong Kong — something less than 1 percent of global trade before 1990 — to an astounding 15 percent of total global trade last year. In contemporary history, the highest percentage of global trade for a single country was achieved by the British Empire, at 23 percent in 1880. It then dropped to 17 percent by 1910.

Today, Washington claims that China’s economic system is “state-steered capitalism,” and some politicians in the U.S. accuse China of being engaged in distorting, mercantilist trade practices that are fundamentally driven by its political and economic system. The “state-steered capitalism” accusation basically falls into three categories. One is related to industrial policy, such as state subsidies and the preferential treatment of state-owned enterprises, or SOEs. The second is related to China’s macroeconomic policies, such as currency manipulation and market access. The third is related to the protection of intellectual property rights, including alleged IPR theft, forced technology transfers and lax IPR protection.

First, let's look at the IPR-related issues, which are indeed improving and nearing resolution. The new foreign direct investment law prohibits forced technology transfer outright. China has also recently passed a new piece of intellectual property legislation that strengthens IP protections. The government is also conducting an antitrust campaign against big tech and e-commerce companies, and going after IPR violations is part of that. With regard to online hacking, there is some agreement between China and the U.S. governments to crack down on those types of activities on both sides.

With respect to macro policies, the currency manipulation issue is a total hoax, which Washington is not even talking about these days. China is also making progress on market access, as its opening-up drive is deepening. More pilot free trade zones have been unveiled in recent years, and the Ministry of Commerce’s negative list for FDI continues to shrink.

The more thorny structural difference between the two countries concerns industrial policy, state aid and the SOE issue. The question is whether these areas constitute an irreconcilable hurdle, both in substance and in spirit. If one delves into these issues, it is clear they have nothing to do with ideology and values. It is also evident that all of these things can be addressed through bilateral and multilateral negotiations.

China’s industrial policy — a subject of intense scrutiny by Washington — is actually being imitated by Joe Biden’s $2-trillion infrastructure plan, which smacks of a whole-of-nation industrial policy. Other examples include the U.S. federal government’s initiative on artificial intelligence, the Quantum Economic Development Consortium led by the Department of Energy and upcoming legislation calling for greater participation by federal agencies in standard-setting bodies for technology. All these belong to the industrial policy category.

State aid is provided by most of the major powers’ central and regional governments. Decades of litigation between the U.S. and European Union over Boeing and Airbus airplanes immediately comes to mind. Perhaps it is true that China is more prominent in terms of the scale and scope of state aid. Many of these forms of government assistance are actually investment incentive measures provided by the provincial or municipal governments. 

Nor is thisd a unique phenomenon in China. Many advanced economies, including the U.S., have seen local governments provide such incentives. One good example concerns Intel’s $20-billion investment in the state of Arizona, which reportedly provided 10-digit subsidies, potentially worth billions of dollars.

But regardless of the way it is implemented, state aid has nothing to do with ideology or political system. The World Trade Organization does have a treaty, albeit a weak one, in my view, to regulate subsidies. Therefore, this issue can be resolved in future WTO reforms or through bilateral negotiations between China and the U.S.

The SOE phenomenon is probably more directly relevant to China’s unique political and economic system. But this is not unique to China either. Europe has more SOEs than the U.S., but the latter has at least one large SOE — the U.S. Postal Service. Again, the world has a framework to regulate the SOE issue via free trade agreements. The Organization for Economic Cooperation and Development has spent many years developing a regulatory framework called competitive neutrality to deal with SOEs. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership has largely incorporated this framework to deal with SOEs in the signed version. This author has participated in studies of gap analysis for the Chinese government to understand how the country can meet the competitive neutrality principles embedded in the CPTPP. More important, the Chinese government has openly committed to joining the CPTPP and, as a corollary, to competitive neutrality principles.

In summary, this brief note intends to convey the message that there is nothing inherently contradictory, nor irreconcilable, between China’s political and economic system and that of the U.S. All the issues raised by Washington so far pertaining to so-called distorting trade practices, true or otherwise, can be potentially addressed through bilateral and multilateral negotiations. From that perspective, the world’s largest trading nation is no different from other WTO members, and therefore should not be treated differently from other members.

What this means is that the grand competition initiated by Washington is supposedly grounded on a premise that bodes well for healthy, constructive and mutually beneficial competition. Beijing, from its perspective, certainly hopes for a relationship that is better than such grandiose competition. But even when push comes to shove, the competition remains manageable and could even become a positive influence in the national interest of both countries. 

(The foregoing is a revised version of the writer’s article published by the TI Observer of the Taihe Institute.)

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