Don’t Dumb U.S.-China Relations Down

Not only are U.S.-China relations at a crossroads, but the two countries’ claims to global leadership are also in the balance. Bilateral economic relations, as well as a commitment to global economic leadership, lie at the heart of both of these important changes. On the one side, the new U.S. presidential administration of Donald Trump has chosen to take a more confrontational approach with China on bilateral trade and monetary issues and to withdraw from America’s role in creating a new Asian trade architecture through the Trans-Pacific Partnership (TPP). On the other side, China’s president Xi Jinping and other top leaders have promoted Chinese-led alternatives to TPP and more generally advocated for China’s role as a champion of globalization just as America steps back from this role. Such a scenario where the U.S. seeks to punish China for its mercantilism, while China trumpets its globalization bona fides, risks the unnecessary expansion of strategic rivalry between the two countries and obscures possibilities for cooperation on a number of complex issues. In particular, U.S policy should be aimed at bolstering the reformist and multilateral elements of China’s economic policies and initiatives.   

 

Even before the election of Donald Trump or Xi Jinping’s debut at the World Economic Forum in Davos, two mutually contradictory frameworks for understanding China’s international economic and geopolitical influence, one emanating from increasingly hawkish U.S. pundits and the other from China’s top leaders, had taken shape. Prior to Trump’s election, an increasing number of U.S. observers had begun to criticize America’s economic and diplomatic engagement with China as naively optimistic and instead pointed to China’s mercantilist domestic and foreign economic policies as a threat to U.S. interests. Such criticisms increasingly took note of recent Chinese initiatives such as One Belt One Road (OBOR), which were seen as a clear indication of China’s willingness and ability to promote Chinese interests through “geo-economic” strategies and instruments. Such a zero-sum approach contrasts sharply with China’s official talk of “win-win” global economic engagement, an approach that has long been at the heart of China’s core “Peaceful Development” foreign policy. This approach has long stressed that through global economic engagement China relies on, and contributes to, regional and global economic prosperity, which in turn underpins domestic stability as well as global peace and security.

 

If these zero-sum versus win-win frameworks had been headed for a clash before Donald Trump’s election, we are now witnessing heightened contestation as the U.S. seeks to confront China over its mercantilist domestic and foreign policies, while China seeks to position itself as an alternative to U.S. leadership, as a champion of open trade and globalization more generally. Yet these mutually opposed frameworks do more harm than good by obscuring complex realities and therefore limiting the possibility for cooperation in a direction that would be in both countries’ national interests. Two examples, steel and international development finance, serve to illustrate this complexity and the need for new thinking and policies.

 

Chinese steel production and exports are certain to feature prominently in the Trump administration’s efforts to crack down on China’s mercantilist trade policies. Concerns over Chinese dumping of cheap steel into the U.S. market already featured in a number of WTO anti-dumping claims brought and won by the Obama administration. Media reports often refer to Chinese subsidization of its steel sector and the Chinese government has long acknowledged the country’s overcapacity in steel production. Yet to argue that China subsidizes its steel sector, leading to overcapacity, obscures the crucial fact that the Chinese government never set out to become the world’s largest steel producer and exporter as part of its broader efforts at industrial strategy. In fact, for well over a decade Chinese central government officials have lamented the country’s “disorderly”, heavily-polluting, under-concentrated steel sector. Upon closer inspection, the boom in Chinese steel production has been an unintended consequence of a range of distorted markets and incentives including mispriced capital and energy, as well as national and local fetishes for property and infrastructure development. Steel production (as opposed to steel exports) in China has been subsidized, but not as a matter of national industrial policy, and so, as central officials have sought to curtail overcapacity, support for steel exports has served as a politically more viable way of offloading excess capacity than shutting down local production, which involves rising unemployment and browbeating local officials.

 

What does all this mean for policy and in particular for US-China trade relations? Long-term solutions will require a more well-functioning domestic Chinese market for capital and energy and a move away from state-led property and infrastructure development, which is to say many of the key elements of Xi Jinping’s original economic reform agenda. In short, it is in the U.S. and China’s interests that China move forward with its stalled domestic economic reform agenda, which in turn would alleviate trade frictions with the U.S. Yet if the U.S. focuses only on punishing China for its mercantilism, regardless of the complexities and contradictions of China’s hybrid state-economy relations, economic and political tensions will unnecessarily rise. Instead, in areas where China’s reform agenda aligns with U.S. interests, including in industrial overcapacity and energy sector reform, the U.S. must find ways to support those reforms.

 

Turning to China’s recent international economic activism, including the creation of institutions like the Asian Infrastructure Investment Bank (AIIB) and the rollout of initiatives like OBOR, the dueling “geo-economics” and “peaceful development” frameworks again obscure more than they enlighten. For their part, Chinese leaders portray the role of AIIB and OBOR in financing and building infrastructure as beneficial for economic opportunity and growth for China’s neighbors, not to mention for China itself. However, an increasing number of observers in the U.S., not to mention in some of China’s own neighbors like India, see such efforts as part of a broader gambit to enhance China’s geopolitical clout via economic strategies and tools.  Yet, while both AIIB and OBOR are Chinese-backed efforts nominally aimed at promoting economic development through the financing and building of infrastructure and other “connectivity” projects in China’s own neighborhood, they also diverge in important ways. The AIIB is designed as a multilateral (in fact maybe more multilateral than China intended) institution open to a wide range of developing and developed countries while its leader, Jin Liqun, has been a vocal critic of the misallocation of Chinese capital and outbound investment who may see the AIIB’s multilateral framework as bringing a kind of market and diplomatic discipline to China’s foreign economic initiatives. OBOR, on the other hand, remains distinctly unilateral and statist and likely to encounter many of the same economic and political difficulties that Chinese state-owned firms and companies have encountered in recent years.

 

Again, for both American and Chinese policymakers these distinctions matter. For the United States, it’s not a question of whether to support the AIIB (which the Obama administration initially chose to shun) and oppose OBOR, it’s a question of determining those elements of each that are conducive to U.S. national interests and then working with China and other partners to support those. The AIIB and OBOR both represent different combinations of China’s ongoing experiments at engaging economically and politically with its neighbors as well as others as far away as Africa, the Middle East, and Europe. U.S. policy should be geared to supporting the multilateral and reformist elements of these Chinese institutions and initiatives, otherwise it is likely to strengthen their unilateral and statist elements. A first step in this direction would be for the U.S. to clearly signal its support for cooperating not only with China, but also with U.S. allies like Japan, to address the very real infrastructure needs of developing Asian countries.