The United States vs. China. C. Fred Bergsten
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to the rules-based TPP devised by the United States (pre-Trump) and its Asian friends.
An even more complicated interaction is taking place with respect to Huawei and, more broadly, in the high-technology domain. The United States argues that Huawei, the world’s largest producer of network gear for phone companies and the no. 2 global smartphone brand, can be controlled by the Chinese government and thus poses unacceptable threats to its own national security and that of its allies. It has banned Huawei from government contracts, slapped export controls on sales of most US supplies (including key semiconductors) to the company, taken other legal actions against it, and urged its allies to adopt similar policies. Most Chinese view Huawei as a national treasure, and President Xi personally complained to President Trump on several occasions about its treatment by the United States.
The reactions have been mixed. A few allies have agreed. Some have rejected the US overtures on the view that Huawei’s economic efficiencies are highly attractive and that no security intrusions have been demonstrated. Others have adopted a middle course, creating new review mechanisms or otherwise responding to the company’s bids on a case-by-case basis. Suspicions are widespread that the United States is using a security rationale to advance its desire to restrain China’s development (as it misused that rationale to justify tariffs on steel and aluminum, and potentially on automobiles).
The security linkage, much more clearly than with the AIIB, further complicates the Huawei case. It gives the United States, with its much greater power and leadership in the security domain, more leverage than on the “purely economic” issues, especially with its close allies (as in NATO) and, since intelligence questions are a major part of the issue, even more so with its fellow “Five Eyes” members in that space (Australia, Canada, New Zealand, United Kingdom). Even here, however, it has been unable to win full support in the face of strong Chinese economic capability and political clout (and its own inability to present, at least publicly, a compelling case against the company).
The major conflict between the United States and China has of course been the trade war (Davis and Wei 2020). US tariffs on over $500 billion of imports from China rose to an average of about 20 percent, up from 3 percent prior to the crisis. China’s tariffs on most of America’s $150 billion of exports to it rose to 10 percent, while it dropped its tariffs toward everybody else. Trade flows between the two countries dropped by double-digit percentages in 2019, the first full year of the decoupling process. Chinese investment in the United States dropped even more precipitously, due mainly to the sharp tightening of China’s controls over capital outflows, but also due to the rejections of Chinese proposals by the Committee on Foreign Investment in the United States (CFIUS), and the deep chill in the investment climate for China in the United States that has resulted.
Though ostensibly addressing immediate concerns such as merchandise imbalances and level playing fields, the trade war is rooted in deeply systemic issues, none of which was addressed effectively in the Phase One agreement reached in January 2020. China’s widespread deployment of subsidies to SOEs and others, demands for technology transfers to obtain access to its markets, and theft of intellectual property all reflect its state-centric economic system and disdain for the rule of law – basic conflicts with the international regime and norms that have prevailed, albeit in highly imperfect form, for over half a century. They raise the quintessentially systemic issue of whether China’s “socialist market economy” and the traditional capitalist system of the West can coexist without constant conflict. This latest source of China – United States confrontation thus underlines the imperatives of both systemic reform and cooperation between the two superpowers to make such reforms happen. So does their multifaceted conflict over the coronavirus pandemic in 2020, which deepened the mistrust and confrontation engendered by the trade war.
As the Trump Administration left office in late 2020 and early 2021, China accelerated three of its initiatives, in an apparent effort to take advantage of the global economic leadership vacuum created by that Administration and to get ahead of the Biden Administration’s likely moves to limit such opportunities for it. It concluded its negotiation, after seven years, for a Comprehensive Agreement on Investment (CAI) with the European Union as a partial equivalent to its Phase One trade agreement with the United States in early 2020 (which, however, remained to be ratified by the European Parliament). It brought to conclusion, after an even longer gestation period, the RCEP with 15 Asian neighbors (including by dumping India, which had impeded the process interminably), which carried considerable political significance because it encompassed the first formal steps toward free trade between China and Japan (and between Japan and South Korea). It stepped up its avowed interest in joining the CPTPP, presumably in part to get ahead of (or at least to move in parallel with) a possible Biden interest in reengaging the United States (and subsequently applied for membership). These items did not quite amount to a “dash for dominance,” but they certainly underscored China’s active pursuit of global economic leadership in competition with the United States.
Recent Systemic Cooperation
Several examples of effective systemic cooperation between China and the United States can also be observed. They both contributed to an effective resolution of the Asian financial crisis in 1997–8, the United States mainly through the IMF, and China by avoiding any devaluation of its own currency, which would have greatly intensified the contagion of the period. (They both rejected Japan’s proposal for an Asian Monetary Fund, killing an idea that could indeed have challenged the existing architecture but that has come back in modified form via the Chiangmai Initiative Multilateral supported by both China and Japan.)
They adopted parallel fiscal and monetary stimulus measures in response to the global financial crisis a decade later, effectively rescuing the world economy. They largely resisted protectionist impulses, avoiding the extensive erosion of the global trading system that was widely feared. They consulted actively on containing the euro crisis. China and the United States collaborated to conclude the Paris Agreement on global warming in 2015 (subsequently repudiated by President Trump, but maintained by the rest of the world including China and rejoined by President Biden). Their Phase One agreement in early 2020 called at least a temporary truce in the trade war that was roiling the world economy.
These cooperative episodes fall far short of an ongoing G-2 co-leadership of the global order, which the two countries explored during 2005–9 and will be addressed in chapter 9. They do, however, indicate the potential for such cooperation. They also reveal the willingness of China to exercise effective leadership, at least when the system on which it relies so heavily seems to be at risk.
A more subtle example of Chinese systemic attitudes may be currency manipulation. China intervened massively in the foreign exchange markets during 2003–13, buying about $4 trillion to limit the appreciation of the RMB. It kept the RMB undervalued by as much as 30–40 percent, which was the major trade distortion of that period and (rather than China’s entry to the WTO) the major cause of the “China shock” to the US and some other economies, and pushed its global current account surplus to 10 percent of its GDP, an unprecedented level for a major trading country (Bergsten and Gagnon 2017). The United States urged China to desist, increasingly from about 2005 and with growing Congressional threats to take action, but never was willing to label China a “currency manipulator” as called for by US legislation, on the grounds that such a public confrontation would make it harder for China to accede, and to avoid risking Chinese cooperation on other issues.
China never admitted liability but, at least partially in response to US pressure, let the RMB begin to rise gradually, while still intervening heavily to limit the pace of appreciation, in 2005 and in 2010–11 again after the global financial crisis. The RMB eventually climbed by 40 percent against the dollar with a subsequent decline in the external global surplus to about 1 percent of GDP (though with continued growth of its bilateral surplus with the United States). Manipulation ceased by 2014, and in fact gave way to sizable intervention to limit depreciation of the currency in 2015, and there was no repetition of the practice after that time. The semi-annual reports of the Treasury Department concluded that China was no longer manipulating and Secretary Mnuchin’s