US-China relations have entered a terrifying new era

The relationship between the United States and China is likely to determine the fate of humanity in the 21st century. It will determine if there will be peace, prosperity and protection of the planetary environment, or the opposite. If it were the latter, future historians (if they really exist) will surely marvel at the inability of the human species to protect itself against its own stupidity. Yet today, happily, we can still act to prevent disasters. That is true in many domains. Among these is the economy. So how best to manage economic relations in the increasingly difficult future we face?

Janet Yellen, US Treasury Secretary, and Ursula von der Leyen, President of the European Commission, have recently made thoughtful statements on this topic. But do they establish a viable future? In that I am, unfortunately, doubtful.

Yellen make a plan for what she calls “constructive engagement.” This has three elements: first, “securing our national security interests and those of our allies and partners, and . . . protect human rights”; second, “seek a healthy economic relationship” based on “fair” competition; and, third, “to seek cooperation on the urgent global challenges of our day.” In her discussion of the first element, she notes that “US national security actions are not designed for us to gain a competitive economic advantage or stifle China’s economic and technological modernization.” The difficulty, however, is that this is not at all what is seen in China, as I learned during a recent brief stay in Beijing.

Yellen’s discussion of the crucial element of security highlights how troublesome it has to be. She stresses, for example, US concern over China’s “unlimited” partnership and support for Russia, and warns against providing material support or help to evade sanctions. She also stresses US concerns about human rights, including those that the Chinese view as purely internal affairs.

Despite such concerns, he asserts that “we are not seeking to ‘decouple’ our economy from China’s.” Conversely, a “growing China that plays by the rules can be beneficial to the United States.” After all, he reminds us, the United States trades more with China than with any other country except Canada and Mexico. However, he adds, the US opposes China’s many “unfair” trade practices and will continue to “take coordinated action with our allies and partners in response.” Action on supply chains, including friendshoring, is one result.

The von der Leyen approach it is complementary. She also claims that “decoupling is clearly not feasible, desirable or even practical for Europe”. However, China, she argues, “has now turned the page on the era of ‘reform and opening up’ and is moving into a new era of ‘security and control’.” Her focus, much like the US’s, is on “de-risking” the relationship. One way is by eliminating vulnerabilities and preserving strategic autonomy. As in the US, this involves strategic investments in certain key sectors. Another way is through the active use of trade defense instruments. Yet another is to invent new instruments to ensure that the capital and know-how of European companies “are not used to enhance the military and intelligence capabilities of those who are also our systemic rivals.” This could include controls on outbound investment. One last way is deeper cooperation with partners.

In a remarkably pessimistic recent book, the avoidable warFormer Australian Prime Minister Kevin Rudd advocates what he calls “managed strategic competition” between the US and Xi Jinping’s China. It could be argued that Yellen and von der Leyen are developing the economic elements of this approach.

Bar chart of global GDP share in purchasing power parity (%) showing China's economy has grown, but the US and its allies are even bigger

If so, it’s unlikely to work. Unilateral efforts by one side to feel more secure are bound to make the other side more insecure. This is obviously true in the narrowly defined area of ​​security. If one side has the lead on a critical technology, the other will be vulnerable. But it is also true in economics. The refusal to sell strategically vital technologies or resources, or even the possibility of that happening at some point in the future, will make the other party financially insecure. Indeed, it was made clear in Beijing that informed Chinese believe the US is out to thwart their economic rise. US controls on chip exports they may be designed to strengthen US security. But they are also a drag on China’s economy. The two cannot be separated.

Bar chart of selected G20 countries' export shares to the US and China, 2022 (%) showing For many countries, China is a very important trading partner

Nor is this conflict likely to ease. Measured like-for-like (in “purchasing power parity”), the economies of the US and its allies are still 80 percent larger than those of China and Russia combined. Yet China is still a poor country: At PPP, China’s GDP per capita in 2022 was still less than 30 percent of that of the US. Let’s assume it managed to catch up with South Korea’s current relative position. Its economy would then be almost half the size of those of the US and the EU combined. Will this happen? Probably not. But, given past performance, it cannot be ruled out. In any case, China already has a powerful economy, a major role in world trade, and a huge military. (See graphics.)

Bar chart of military spending, 2021 ($bn) showing China has become a big spender on defense, though the US spends more

The era of strategic confrontation we have entered is terrifying. This is especially true for those of us who want the ideals of individual freedom and democracy to flourish, while cooperating with China to both maintain peace and prosperity and protect our precious planet. Somehow, we have to cooperate and compete, while avoiding military conflict. Our starting point should be to achieve as much transparency as possible about our goals and plans. We learned the need for it after the Cuban Missile Crisis in 1962. But we will need much more than that, and probably for longer. Few leaders in history have borne a heavier moral burden than those of today.

Follow Martin Wolf with miFT and in Twitter

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