There is little cause for optimism in the future relations of the world’s two largest economies: the US and China.
About a year and a half ago, US President Donald Trump labelled China a “strategic competitor” while more recently, Kiron Skinner, the director of policy planning at the US State Department, talked of preparing for “a fight with a really different civilisation”.
The wide differences and deep distrust between the two powers has been highlighted again with the latest abrupt turn in the bilateral trade negotiations. With or without a trade deal, the turbulence in economic ties, widely viewed as the ballast of China-US relations, heralds more choppy waters ahead.
Beijing has shed little light on what exactly China will do to adapt to the changed conditions. A beaming Vice-Premier Liu He said he went to Washington with “sincerity” and despite “pressure” on Friday. But that followed a Thursday commentary in People’s Daily, the Communist Party’s mouthpiece: “We do not want to fight, but we are not afraid to fight and, given no choice, we will fight.”
Analysts’ opinions varied on what cards China will play over the longer term. However, even to the most optimistic, it will be a difficult balancing act for Beijing to maintain an otherwise positive and stable relationship with the United States.
In a sign of strong distrust, a Pentagon report last week said that many major initiatives by Beijing had posed security threats to the US, and not only its military modernisation. The report also found cause for concern in the “Made in China 2025” industrial upgrading programme, China’s growing interest in the Arctic region, even its cultural exchange programmes.
“Be it a deal or not, the US and China are negotiating a divorce,” Pang Zhongying, a Beijing-based international affairs expert, said.
“China has been a beneficiary of globalisation amid a constructively cooperative relation with the US in the eras of Clinton, Bush and Obama.
“Now, China has to adapt to deglobalisation, the theme set by Trump, amid antipathy stemming from the alleged subsidies to state-owned enterprises, technology theft, unfair trade practice, among other things.”
Pang said that the many possible battlefronts on which the US had pressed China included a technology war, featuring the US boycott of China-developed 5G communications networks, and a currency war, with China forced to appreciate the yuan against the US dollar.
In a worst-case scenario, he said, China faced a lost decade.
“China is not prepared to cope with that. The only strategic solution to my knowledge is the Belt and Road Initiative, but that does not sound feasible,” he said.
The initiative, also known as the New Silk Road strategy, is President Xi Jinping’s signature programme intended to connect Asia, Europe, Africa, Latin America and other regions through infrastructure and trade. Since the programme’s launch in 2013, it has attracted 126 partner countries and 29 global organisations.
It is not clear to what extent China’s goals for the initiative have been or will be achieved. But the US and some European countries have criticised Beijing of neocolonialism, developing projects at the expense of the environment and saddling poor countries.
“The future is impossible to predict, but if history is any guide, US-China competition is likely to intensify in coming years,” said Jonathan Hillman, a senior fellow of the Centre for Strategic and International Studies in Washington.
Three decades ago, US officials worried about the rise of Japan – a democracy and US ally – and that anxiety did not really decline until Japan’s economy declined, Hillman said.
Many analysts argue the Japan’s economic stagnation was in large part due to the Plaza Accord, a 1985 currency pact among developed nations to manipulate exchange rates by depreciating the US dollar against the yen (as well as the Deutschmark). Pang said the yuan could be the target of a similar agreement.
Hillman agreed that the differences between the United States and China were bigger than those between the US and Japan, “and unlikely to be solved by any ceasefire in the US-China trade war”.
But Tao Wenzhao, a researcher with the Institute of American Studies at the Chinese Academy of Social Sciences, said things would not be that bad.
“Although there are more conservative opinions emerging in the US, no one is in favour of outright confrontation. After all, I believe there is a consensus that the huge size of the bilateral trade means the China-US relations are too important to collapse,” he said.
That trade came at US$630 billion last year, up 5.7 per cent from a year earlier despite the friction. But China’s trade surplus, an issue Trump has vowed to tackle, rose last year more rapidly at 17 per cent year on year, to US$323 billion.
“It’s true the relations have entered a new phase, with differences, competition and possible frequent frictions, and it will be the theme for the next 20 or 30 years,” Tao said.
“The US is unable to contain China, because China is already powerful. China’s development will definitely continue, and it’s likely we can have a basically stable China-US relations as both countries cherish the economic ties, no matter how they differ in other areas,” he said.
Shi Yinhong, an adviser to China’s State Council and a US affairs professor at Renmin University in Beijing, expected China to face brushfire confrontations across a wide landscape of politics to strategy to ideology in the coming years, as competition overwhelmed cooperation.
Shi said Beijing would focus more on domestic affairs – maintaining domestic stability, deepening reforms, strengthening ideological controls, and continuing with innovations and technology upgrades, even though the Made in China 2025 strategy, designed to help it gain global leadership in core technologies, had been under attack.
At the same time, he said, Beijing was expected to be more restrained in the belt and road programme and issues including the South China Sea and its territorial claims to the self-ruled island of Taiwan – because “it won’t have plenty of money”.
According to official data, China’s economy grew 6.6 per cent last year, the slowest pace since 1990, official data showed. Economist say much of the slowdown in growth was due to the trade war and the trend was likely to continue.
According to Wang Tao, chief China economist at UBS Securities, a full-on trade war with the US would decelerate China’s GDP growth to below 6 per cent if Beijing did not ratchet up stimulus measures significantly. Beijing’s official growth target for this year is 6 to 6.5 per cent.
“I do believe the Chinese government will increase policy stimulus if the trade war escalates, shifting its macro policy stance again to more of an easing bias,” Wang said.
She said more stimulus could include more infrastructure investment, more cuts in the reserve requirement ratio, continued credit easing, and a less hawkish stance on the property sector
In the longer term, China will rigorously seek to become more competitive globally in innovation and technology, according to analysts, and will thus have to reform and open up to attract international cooperation.
Sourabh Gupta, a policy specialist at the Institute for China-America Studies in Washington, said China would not rely only on itself to innovate although Xi has called on scientists and researchers to depend mainly on themselves for breakthroughs.
“China seeks to perpetuate a symbiotic high-technology trade and investment relationship with the US,” he said.
“Crucially, the dynamism of China’s domestic innovation system is based in large part on US-owned core technologies.”
Gupta said Washington’s foreign acquisitions and export control rules did not exclude Chinese innovators from acquiring technology and those rules were expected to remain unchanged. As a result, China was likely to continue to level to trade and investment playing field to attract technology and investment from the US.
Beijing was betting that the more liberal and reciprocal its foreign investment and mergers and acquisitions regime became, the more likely that under pressure from business groups Washington would narrow the definition of “national security” to encourage two-way flows in technology, he said.
On the technology front, intellectual property protection will remain the crux of the conflicts, according to Chad Ohlandt, a senior engineer with the Rand Corporation, an American research group – even though China has banned forced technology transfer and vowed to protect intellectual property better.
“Legal protections are enforced by courts,” he said. “While the US system believes in the ‘rule of law’, the Chinese system espouses the ‘rule by law’, meaning that the Communist Party governs through the execution of the legal system.
“Even if Chinese ministries and industries accept that intellectual property rights and their enforcement are in their own best interests in the long term, accepting US review of their effectiveness essentially interferes with the Communist Party’s governance by law and their ability to select industrial winners and losers.”
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