China-US Relations, Tending Towards Maturity Huang Ping, Tao Wenzhao, Wang Rongjun, Yuan Zheng, Zhao Xingshu* The China-US relationship is one of the most important bilateral relationships in the world and its basis is progressively expanding. The present China-US relationship has much richer contents and a much broader scope than in the past. It seems that a consensus has now been reached among US officials and think tanks that it will be difficult to deal properly with any important international problem without China’s participation and cooperation. Some American policymakers and think tanks have called China “a US global partner” and asked China to become “a responsible stakeholder”. After the end of the Cold War, non-traditional security threats have loomed large, including natural disasters, environmental deterioration, energy constraints, epidemic diseases, transnational terrorism, WMD proliferation, drug and human trafficking, and last but not least the financial crises the world is now facing. These are all global challenges. No country, not even the United States, can deal with them alone, and no country can be exempt from their impact. China and the United States have a common interest in handling these challenges. It is obvious that the shared interests between the two countries are expanding. This is conducive to the long-term stability of China-US relations. China and the United States have developed more than sixty different platforms of dialogue and cooperation, including the Strategic Economic Dialogue (SED). Both sides have gone well beyond a simple concern for short-term hotspots in economic and trade issues, and are comprehensively considering the long-term development of the economic and trade relationship. China and the US have reached extensive consensus on many economic issues, and produced a number of visible and tangible achievements, such as the Ten-year Plan of Energy and Environmental Cooperation. In the past, China-US relations often served as a ‘political football’ in partisan struggles during the US presidential campaign, and bilateral relations sometimes suffered from changes in the US administration. Only after a period of adaptation to each other can China-US relations come back onto the normal track. This was the case during the Bill Clinton and George W. Bush administrations. Because more than 60 mechanisms (including the Senior Dialogue and the SED) have been established to manage the bilateral relations thus far, the relationship is now less subject to the influence of this ‘cyclicity’. Seeing each other objectively The military relationship between the two countries is sensitive and fragile, and has often lagged behind in bilateral relations. When bilateral relations suffer from twists and turns, military relations suffer the most; when bilateral relations begin to recover and advance, military relations are the last to do so. Notably, since Robert Gates replaced Donald Rumsfeld in 2006, bilateral military relations have improved. A periodical vice-minister level consultation mechanism between the two militaries has been established, and mechanisms for military educational exchanges and official visits at various levels have also been set up. The two militaries have gone through several rounds of maritime security consultations and joint maritime search-and-rescue drills, making military relations more practical. At the beginning of 2008, a hot line was set up. These measures will have profound significance in pushing bilateral military relations forward and strengthening China-US cooperation in international affairs. With regard to sensitive security issues, the two sides have made an effort to pay attention to each other’s concerns and treat them within the larger framework of overall strategic interests. In recent years, the United States has shown keen preoccupation over the proliferation of weapons of mass destruction (WMD). China has taken a cooperative attitude towards this, including in solving the nuclear issue of the Democratic People’s Republic of Korea (DPRK). In the Six-Party Talks on denuclearisation of the Korean Peninsula, China has been playing a triple role: convener of the talks, active participant and mediator between the US and the DPRK. Never before has it played such roles in an important regional security issue. With regard to the Taiwan issue, the US side has been more responsive to China’s concern during recent years. The two countries have reached a kind of consensus on keeping stability in the Taiwan Straits. Nevertheless, relations between the two countries suffered again in October 2008 with the US decision to sell weapons to Taiwan, and have not yet recovered. All in all, though, the China-US relationship is becoming more mature. For a long time, both countries had unrealistic views of each other. In the 1980s, many Americans looked at China through rose-coloured glasses and thought it was transforming into a Western-style society. After the political turbulence in Tiananmen in 1989, many Americans went from one extreme to another, thinking that there was no hope for China and that it would collapse following the Soviet Union’s suit. They thought that since China needed the American market, capital and technology, the US might use this as leverage to exert pressure on China. That is why there was an unreasonable and ineffective decision to link China’s most favoured nation status with its human rights conditions in the early 1990s. Some Americans even thought that the US could exert pressure on the world stage to compel China to make concessions. To that end, the US put forward the motion to condemn China’s human rights situation in the UN Human Rights Commission eleven times. It failed each time, not receiving enough international support. Now the two countries have a more realistic view of each other and of the other’s political realities, and as a result have more pragmatic expectations in bilateral relations. China and the US do have many differences, but they can seek common ground while shelving those differences so that they do not become a fundamental hindrance to cooperation. This is a sign that the bilateral relationship is tending towards maturity. Yet, this is not to say that there are no problems. Indeed, divergences on some fundamental issues will have prohound influence on bilateral relations. The biggest problem affecting current and future China-US relations is lack of mutual strategic trust. And this problem is unlikely to be resolved completely in the near future. The United States is the only superpower in the world today. The basic goal of US foreign policy is not to allow any country to potentially challenge its regional and global supremacy. Therefore, the United States is always beset by doubts about the rise of China. It is worried that China’s growth will weaken American influence in East Asia and even challenge its global leadership. Such misgivings are clearly expressed again and again in official US documents. Nevertheless, after President Barack Obama took office, he and President Hu Jintao have reached concensus on further development of bilateral relations. Before visiting four Asian countries, Secretary of State Hillary Clinton delivered a speech in New York at the Asia Society on February 13 stating that “Some believe that China on the rise is, by definition, an adversary. To the contrary, we believe that the United States and China can benefit from and contribute to each other’s successes.” This is a very important elaboration of the new administration’s view of China’s rise, contrary to the “China threat theory”. She also used the Chinese proverb of “crossing the river peacefully while in the same boat” to describe the urgent need for cooperation. During their first meeting in London on April 1, President Hu and Obama agreed to “work together to build a positive, cooperative, and comprehensive U.S.-China relationship for the 21st century.” Both leaders agreed to establish a “U.S.-China Strategic and Economic Dialogue” with Secretary of State Clinton and Chinese State Councilor Dai Bingguo chairing the “Strategic Track” and Treasury Secretary Timothy Geithner and Chinese Vice Premier Wang Qishan chairing the “Economic Track.” They also agree to respect the other side’s vital interests and deal with the divergences properly. This may be seen as the most postive development of the China-US relations since –if not earlier—Bill Clinton. Economically interdependent whether they like it or not Most obviously, with China’s trade with the US now accounting for more than 14 percent of China’s total foreign trade volume and more than 12 percent of the US’ and with the US’ huge investments in China, and China holding 70 percent of its $2 trillion foreign reserves in US dollars, including about $740 billion Treasury Bonds, the reality is that economic interdependence is so deep that neither can afford to lose the other. New challenges are looming, however, in China-US economic and trade relations. With the sub-prime mortgage crisis deteriorating into a systemic financial crisis, real economic growth in the United States has taken a downward turn. According to the cycle-dating committee of the National Bureau of Economic Research, a full-scale recession started in December 2007. When major developed economies, such as the European Union and Japan, and emerging economies start experiencing slower growth or even deep recession one after another, it is hard to predict any quick recovery for the world economy. And it is natural for the US’ main trade partners to look suspiciously at the Obama administration and the 111th US congress, fearing possible tides of US trade protectionism. Firm believers in the idea that economic globalisation can bring more benefits than losses to the US economy and less protectionist than the Democratic Party in formulating and implementing US trade policies, it seems that former US President George W. Bush’s administration and the Republican Party did not even see the huge and ever-expanding US current account deficit as a fundamental threat. For example, the 2006 Economic Report of the President, stated that In principle, the United States can continue to receive net capital inflows (and run current account deficits) indefinitely provided it uses these inflows in ways that promote its future growth and help the United States to remain an attractive destination for foreign investment. The key issue concerning US foreign capital inflows is not their absolute level but the efficiency with which they are used. The trade policy focus of the Bush Jr. administration was on how to maintain the international competitiveness of US enterprises and products, and how to open up foreign markets. President Obama and the majority of the Democrats apparently take a slightly different approach to trade, international investment and economic globalisation. First, they agree that international trade and investment can benefit the US economy, but they put more emphasis on the inevitable adjustment costs of the structural changes that come with the globalisation process. That is, they emphasize ‘fair trade’ more than ‘free trade’, arguing for more actions within the World Trade Organisation’s mechanisms to deter the so-called unfair trade practices of major trade partners. Secondly, they believe in the role that active and strategic government investment and trade policies can play in fostering the international competitiveness of US industries and enterprises. Thirdly, they are in favour of strengthening and expanding the current trade remedies and assistance to workers under pressure from international competition. Fourthly, they advocate that current and future US international trade treaties should be complemented by stricter labour and environmental standards. And finally, they propose using tax and other policy incentives to discourage US enterprises from ‘exporting jobs’ overseas. It is not fair to rush to the conclusion that the Obama administration will follow the path of trade protectionism or economic nationalism, but considering the current US domestic economic and social situation, there is reason to be concerned about the future direction of US trade policy. US official data show that real GDP growth declined by 6.3 percent at an annual rate in the fourth quarter of 2008, and that the real 2008 GDP growth rate is only 1.1 percent compared with the 2007 annual level, while the unemployment rate increased from 4.9 percent in January 2008 to 8.5 percent in March 2009. Personal consumption expenditure, which accounted for roughly 70 percent of US GDP in recent years, declined in the last two quarters of 2008 and will possibly decline further with income expectations falling and ‘household deleverage’ continuing. At the same time, it is difficult for enterprises to expand their investments with the troubles in the financial sector and the persisting credit crunch. Even if a huge stimulus package is put in place in time, the US economy is still likely to experience more difficulties in 2009, and the unemployment rate could rise even more. Under these circumstances, the pressure to introduce protectionist policies will strengthen, and de facto protectionist notions such as ‘buy American’ and ‘hire American’ could become more popular than ever. The pressure and temptation of trade protectionism becomes even greater when it comes to trade policy toward China. China-US trade has expanded substantially and steadily in the last 30 years, despite recent disputes over a number of issues such as market access, renminbi (RMB) exchange rate, intellectual property rights, industrial policies, antidumping and countervailing duties. Bilateral trade has continued to grow modestly even at the height of the severe financial and economic crisis of 2008. According to China Customs, in 2008, total bilateral trade of goods was $333.74 billion, 10.5 percent higher than in 2007. From 2007 to 2008, China's exports to the US rose 8.4 percent to $252.3 billion, and China's imports from the US rose 17.4 percent to $81.44 billion. 64.4 percent of total China-US trade was conducted by foreign invested enterprises. Even though a Strategic Economic Dialogue was created in 2006 to discuss issues that have strategic significance and to coordinate the macro-economic policies of the two sides, with important consensus reached in areas such as finance, trade and investment, energy and the environment, product safety and international economic cooperation, China is more likely than ever to become a major target of possible waves of US trade protectionism. There are a number of reasons for this: • US official data indicates that China became the largest source of the US’ trade deficit as early as 2000. In 2007, the total US trade deficit in goods and services was $700.3 billion, more than one third of which was with China, amounting to $256.3 billion. Even in 2008, when the US trade deficit decreased to $677.1 billion, the deficit with China continued to increase slightly to $266.3 billion. Although the rate of growth of the US deficit with China declined considerably in 2008, its proportion of the total deficit actually increased, making China a highly visible and attractive target in a Democrat-dominated US Congress. • China's exports have suffered sharp and deep declines because of the negative impact of the current world financial crisis, raising serious concerns about China's economic growth and employment. The Chinese government issued a package of policies involving the adjustment of export tax rebates, an interest rate reduction and credit guarantees to try to stabilise and promote exports. As China's economic and industrial policy has been an area of contrast in China-US bilateral trade negotiations, China's stimulus policy measures could easily become one of the hotspots in bilateral trade. • The RMB exchange rate issue could possibly re-emerge. From July 2005 to the end of 2008, the RMB appreciated against the US dollar by about 19 percent. As of 2007, it was no longer considered a top issue in bilateral trade discussions. However, when the dollar appreciated against other major currencies with the international demand for dollars during the credit crunch, and the RMB exchange rate tended to stabilise or at times even depreciate against the US dollar, pressure from Congress mounted again. President Obama once co-sponsored legislation aimed at China that would allow US companies to petition for import duties to compensate for the effect of a weak currency. Some critical members of his economic policy team believe that the so-called saving glut was one of the main reasons for the financial crisis, and that RMB appreciation could help bring about the necessary adjustments on both sides. As a result, the RMB exchange rate issue could re-emerge as a friction point in China- US economic and trade talks. • Different approaches to issues such as labour standards and climate change also have the potential to turn into trade disputes. Ron Kirk, President Obama's US trade representative (USTR), is considered a free trader. In his confirmation hearing testimony, he stated bluntly, “I believe in trade … but I also know that not all Americans are winning from it and that our trading partners are not always playing by the rules.” In the 2009 Trade Policy Agenda prepared by the Office of the USTR in March 2009, advancing “the social accountability and political transparency of trade policy” and making “trade an important policy tool for achieving progress on national energy and environmental goals” were two of the most important US trade policy priorities. “Social accountability” means not only providing adjustment help to US workers displaced by international competition, but also pressing the US “trading partners to improve the status, conditions, and protections of workers” so that the competitiveness of its partners “is not based on the exploitation of workers”. Trade policies are also required to “advance a cleaner environment, a stronger response to the challenge of climate change and more sustainable natural resources and energy supplies”. While China and the US can find opportunities to cooperate closely in these two areas, significant differences can also arise from different understandings of the standards and policy practices. Although the leaders of both China and the US have emphasized the need to cooperate in dealing with the current world financial crisis, it will take a lot of political wisdom and will for the Obama administration to fend off the temptation of and pressure for economic nationalism and to ensure the stability of the bilateral economic relationship. Climate policy, yes, but ... President Obama has explicitly stated that he intends to pursue a new role for the United States in global climate efforts. The recent global financial crisis and economic downturn would seem to have made it more difficult for the US to take any action on the climate issue. Instead, it has triggered further contributions from the US, linking efforts to address climate change to the national recovery strategy. This was clearly seen in the recent American Recovery and Reinvestment Act (ARRA), which comprehensively integrates goals of developing clean energy technologies, with enhancing energy efficiency, infrastructure construction, and employment promotion. The Obama administration’s adjustment of US climate policy has a fundamental strategic goal, namely to reverse its deteriorating international image and restore American leadership globally by playing a leading role in global climate efforts. But with the excuse of slowing down climate change, it will be more likely to make full use of its power as a trade giant and various trade measures to set up either traditional tariff barriers or more obstacles to export-oriented developing countries. Out of 12 market-based climate change bills introduced in the 110th Congress, almost half called for some border adjustment, either a tax to be applied to fossil fuel imports or a requirement for energy-intensive imports to gain permits corresponding to the carbon emissions embodied in them. In addition, environmental protection laws and regulations or other technological standards might also be applied as a sort of trade barrier targeting carbon-intensive goods from developing countries. Such explicit or implicit trade barriers will definitely weaken the competitiveness in the international market of commodities from developing countries. Thus, either they take part in green house gas (GHG) emission reduction or they will have to suffer losses from tariff and non-tariff barriers applied by developed counterparts. The stance of the United States with regard to China’s role in climate mitigation has not changed. In fact, both Democrats and Republicans have always agreed on getting China to make commitments to controlling its GHG emissions. Secretary of State Hilary Clinton has clearly stated that China is expected to collaborate with the United States and play a bigger role to mitigate global warming, overlooking its status as a developing country. Only the way in which the United States tries to achieve its goals may change, if there is any change at all. The Obama administration has begun to make tactical adjustments, trying to weaken and blur the difference between ‘responsibility’ and ‘capability’ between developed and developing countries. Dealing with this issue will also take political wisdom and cooperation. Brief conclusion In short, China-US relations in the coming years will be one of the most important bilateral relations, which will focus more on how to cope with global challenges, such as the current world financial crisis, and, later or sooner, on climate change. The traditional security and peace issues will remain important and some even sensitive and difficult. But since both countries are global players increasingly responsive to the global challenges, a better relationship will contribute substantially not only to bilateral relations but also to the global peace and order. This was published in The International Spectator, Volume 44 No.2, June 2009, pp.9-16.