In less than twenty days after celebrating, in different ways, the 70th anniversary of victories in WWII, President Xi met President Obama in Washington for his first state visit to the U.S. as Chinese president. Unlike 70 years ago, the common enemies the two countries face this time is no longer Japanese militarism, but instead, economic uncertainty and climate change.
This was the third formal meeting between Xi and Obama, and is likely to be the last. The first one was in June 2013, the “private” meeting held at the Sunnylands in California. The two reached agreement to build the “Sino-U.S. new type of major-power relationship,” and together with the development of their personal relationships, provided impetus to build mutual trust and set a clear strategic direction for the Sino-U.S. relations. The second was in November 2014 during the Beijing APEC summit, when President Obama made state visit to China. The outcome was very successful, including the “Sino-US Joint Declaration on Climate Change,” a landmark moment after years of international climate change negotiations, bringing a bright prospect to the UN Climate Change Conference in Paris at the end of 2015. For the third meeting between President Xi and Obama, both countries and the international community had good reason to have high expectations.
However, this meeting took place at a time with more difficulties and complications. Since 2015, Sino-U.S. differences on a range of issues have deteriorated. Although some progress was made in June during the seventh round of Strategic Economic Dialogue (S&ED), inevitably hot-button issues negatively affected the bilateral relations.
A series of recent fluctuations in the Chinese and the world economies, however, reminded everyone of the necessity for the two countries to cooperate. The Shanghai A-share index has fallen about 40% from its high point in June. Prices of mass commodities, including crude oil, experienced another sharp fall after an unexpected devaluation of the Chinese renminbi in August, followed by disruption in European and U.S. stock markets. Weak demand from China also dampened the expectations of oil prices, adding a threat to the U.S. shale boom, upon which it has based its economic recovery. The road to transitioning the Chinese economy to a “new normal” is anything but flat, and the expectation of the Fed raising rates has complicated overall implications on the world economy, especially for the emerging economies. Economic decision-making in the world’s two largest economies in the coming months may have decisive impacts on the world economy as it approaches 2020. Reaching a coordinated and common understanding of respective economic policies at the third meeting between presidents Xi and Obama will have immense importance for stabilizing the world economy.
Climate change negotiation has also reached the most critical time. After Xi’s visit to the U.S., less than 10 weeks remain before the UN climate conference in Paris. Whether Xi and Obama could bring further consensus and cooperation between the two largest emitters is also a question warmly expected by international community.
Ironically, the world now faces a similar economic difficulty as before Copenhagen in 2009, only the U.S. and China have switched positions. Back in 2009, the Chinese economy outperformed the rest of the world under the $4 trillion stimulus package, while the U.S. and Europe were struggling in financial turmoil. The 2008 economic crisis was regarded one of the reasons for the failure of Copenhagen 2009. Now the Chinese economy is a real concern to many, with worrying indicators in industry and energy demand, whereas the U.S. economy is on track for strong recovery partly driven by the shale oil and gas boom, with an employment rate higher than expected. Could there be a different outcome from 2009 due to this role reversal?
The Chinese government needs to make hard choices in 2016. Is it to go back to the old path of heavy industrialization and investment to stimulate the economy, or insist on restructuring, implementing the long-awaited reform in production factor pricing and state-owned monopoly enterprises? The former means greater environmental risk, possibly making the early conservation efforts in vain, while the latter means enduring greater pain in economy in the short term. Given the scale of the Chinese economy and environmental impacts, either choice would have global implications.
However, environment conversations and economic development are not necessarily an either-or choice. Good investment can also drive good economic transitions.
If the Chinese government could make better use of market mechanisms to control pollution, providing a supportive environment for clean energy and environment technologies, China’s environmental-protection efforts and carbon-reduction targets could turn into huge economic opportunities. The total environmental investment needed during the “Thirteenth Five Plan” in China is estimated to be more than $1 trillion, while the Chinese government can only provide 15% of the funds. The United States can use its own experience and technology to help China to achieve this goal, while bringing greater market opportunities for its own business.
Investment and technical cooperation in key areas have been identified and agreed by both governments in the latest SED, including heavy-load truck fuel standards, electric vehicles, shale gas, industrial boiler efficiency, and smart grids. The Chinese government hopes to promote public-private partnership (PPP) projects in these areas as primary means of stabilizing economic growth, but inadequacy in protecting private investment and poor coordination in project management between private and public partners are still prevailing barriers. The Chinese government could learn from U.S. experience in effectively utilizing market forces to guide and encourage private investment towards these areas.
China also needs to deepen the reform in the energy sector. Since the Third Plenum of the Eighteenth Party Congress, President Xi has repeatedly pledged to carry out reform in monopolizing state-owned enterprise, and to let the market be the decisive power in allocation of resources. Progress was made in the past two years, but only slowly. If China wishes to replicate the shale boom of the U.S., it needs to break down the restrictions of access to oil and gas resources, to establish a vibrant oil-and-gas trading system, and continue to push for reforms in oil, gas and power markets. As a cleaner fossil energy, natural gas can make contributions to both environmental protection and economic prosperity, but the main obstacle is neither price nor supply, but the market and trade restrictions, as well as distorted pricing of alternative energy. It is evident that with adequate supply and declining prices in the first half of 2015, growth of natural gas demand slid. From 8.9% in 2014 to 1.4%. The national carbon-trading market that China plans to establish in 2016 would help to partially alleviate this distortion, but the most important thing is promote the much needed reform of in the power sector.
Energy security, especially of the oil and gas supply, has always been one of the major concerns of the Chinese government. This also to some extent explains the Chinese firm stance on the issue of the South China Sea. With clearer prospects for U.S. exports to the Asia-Pacific market, China and the U.S. would have common interests in safeguarding oil and gas supplies in this region. Even though oil is not mentioned in the “Sino-U.S. Joint Declaration on Climate Change,” coordinating the two countries’ oil policies, including in the evaluation of greenhouse-gas emissions from unconventional oils. Managing the consumption of its by-product, petroleum coke, requires institutionalizing cooperation and communication between the United States and China. This would ease Chinese concerns about energy security, contributing to the two countries’ common target of climate change, and encourage China’s participation in international energy governance.
Collaboration on clean technology, energy-sector reform, and energy security could provide new impetus to China’s economic transition, but also provide more support for the U.S. economic recovery, and at the same time contribute to the stability of the world’s economy and efforts in tackling climate change.
Professor Yan Xuetong, president of the management board of the Carnegie–Tsinghua Center for Global Policy, commented in July 2013 that, “providing public good to the international community is the foothold for a healthy competition between China and the United States.” Seventy years ago, China and the U.S. fought side by side during the anti-fascist war, but confined by different battlegrounds, direct cooperation was limited. Seventy years later, facing economic uncertainty and climate change that put the world’s prosperity and sustainability at great peril, the two countries have to work much more closely to provide much-needed public good for the world. This should be the essence of “Sino-U.S. new type of major-power relationship.”