Managing Sino-U.S.Competitive Interdependence

Zhang Xiaotong & James Keith

Forty years ago, U.S.President Richard Nixon visited China and the two countries issued the Shanghai Communiqué.Nixon later recalled that “When our hands met, one era ended and another began.” Four decades later, with significant progress, Sino-U.S.relationship has become “one of the most important, dynamic and promising bilateral relationships in the world”.1“Take a Long-term Perspective and Work Together for New Progress in Sino-U.S.Cooperation”,speech by Chinese leader Xi Jinping at the Opening Session of the Sino-U.S.Economic and Trade Cooperation Forum in Los Angeles on February 17, 2012.Proceeding from a long-term perspective, leaders of the two countries proposed to forge a “new type of relationship between major countries” for China and the United States.2“Promote the mutually beneficial and win-win cooperation in the development of new relations among major powers”, speech by Chinese leader Hu Jintao on the opening ceremony of the fourth round of Sino-U.S.Strategic and Economic Dialogue in Beijing on May 3, 2012.

However, in sharp contrast with this expectation, there has been frequent friction in recent years in Sino-U.S.economic and trade relations which serve as the core and foundation of the bilateral relations, and normal economic and trade disputes are often politicized, affecting the overall situation of a stable development of Sino-U.S.relations.This also led to questioning the role of economic and trade ties in the overall Sino-U.S.relationship: Do they serve as “ballast” for the relationship or as “stumbling blocks” in the way of the bilateral relations? The convergence of a U.S.presidential election cycle and China’s 18th Party Congress in November 2012 saw the completion of a leadership transition in both countries at the same time, and it is a common task for the new leaders of the two countries to gain strategic insight into the future development and positioning of Sino-U.S.economic and trade relations.

This paper is an attempt to make some preliminary comments on the essential characteristics of the Sino-U.S.economic and trade relations under the new circumstances, what kind of strategic thinking is needed to manage the relationship, and whether the future development of Sino-U.S.relations can break the traditional logic of confrontation and conflict between big powers in history.

I.The Concept of “Competitive Interdependence”

The current challenges facing Sino-U.S.economic and trade relations actually stemmed from the success achieved in the past.In the past four decades, China and the United States have established an intertwined economic relationship much beyond the expectations of the leaders of the two countries when the “Shanghai Communiqué”was released.The hope expressed in the Joint Communiqué that the exchange of people and trade would be expanded has become a reality,with the bilateral trade growing by more than 180-fold compared with 1979 when the two countries established diplomatic relations.Now the daily flow of goods and services between the two countries amounts to over one billion U.S.dollars, and every day 9,000 people travel across the Pacific Ocean between the two countries, bringing the total number of travelers to more than 3 million each year.Over the past decade, China has been the fastest growing export market for the United States, and the growing interdependence between the two economies means millions of jobs for the two countries.

But with opportunities come more challenges.Sino-U.S.competition has now become more subtle and more difficult to manage compared with 1972 when the two countries signed the“Shanghai Communiqué”.For Americans, although they benefit from inexpensive Chinese goods with good quality and more options,they are worried about the fierce competition from China and the loss of jobs as a result, and some of the U.S.political elites feel uneasy about the dominant role of the state-owned enterprises in China’s economy because they believe that China adopts a so-called “state capitalism”.

For Chinese, although they benefit from exports to the United States and plenty of employment opportunities created by U.S.investment in China, they feel that the U.S.handling of the bilateral economic and trade issues is highly politicized, the United States is unwilling to sell some high-technologies and high-tech products to China, many corporate mergers and acquisitions by Chinese enterprises in the United States are subject to stringent security review and end up in investment failure, and the United States has not yet granted China a market economy status and the Chinese enterprises suffer unfair anti-dumping measures as a result.

Although there is ample evidence that in the process of globalization, China and the United States are highly interdependent,many people still believe that they are subject to unfair, unjust and unreasonable treatment in the bilateral economic and trade relations and ask their national government to take retaliatory measures against the other country.This trend has become increasingly prominent and it seems that many people have forgotten the original intention of Dr.Kissinger and Prime Minister Zhou Enlai to discuss expansion of bilateral trade opportunities 40 years ago.

This article borrowed the concept of “competitive interdependence” to describe the dynamic tensions in Sino-U.S.trade relations.1Alberta Sbragia, “The EU, the US, and Trade Policy: Competitive Interdependence in the Management of Globalization,” Journal of European Public Policy, Vol.17, Issue 3, pp.368-382.Interdependence and competition both increase rapidly in their respective dimensions.They both reinforce and constrain each other.Increased interdependence will certainly lead to a certain degree of competition, which is a normal as well as an inevitable phenomenon as a result of the development of market economy at the international level.But the competition that goes beyond a certain limit will affect the quality of the interdependence between the two countries and the feelings of each other, causing tensions between them.

In fact, the tensions reflect the historical, political, economic and cultural differences between the two countries.From the outset, the Chinese and American governments have been aware of each other’s needs and the imperative to cooperate in building a relationship in the bilateral, regional and global sense in the long-term interests of the two peoples.But at the same time, they also compete at various fields and levels to seek relative advantages and obtain a more advantageous position for them.It is an important mission of the domestic and foreign policy as well as foreign economic and trade policy of the two countries to manage their competitive interdependence, eliminating the tension between short-term and long-term goals, and this endeavor requires the foresight, art of diplomacy and will of action of the leaders of the two countries.

II.From “mutual reassurance of market access” to “competitive interdependence”

When the U.S.merchant vessel “Empress of China”, loaded with ginseng in exchange for Chinese tea, silk and porcelain, sailed slowly into Port Canton (Guangzhou) on February 22, 1784, no one would have anticipated at that time that 200 years later, the Sino-U.S.economic and trade relations can turn into one of the world’s most important bilateral economic and trade ties.

From 1979 to 1992, the Sino-U.S.bilateral trade volume increased by 8 times; from 1992 to 2001, the trade volume jumped from $17 billion to $80 billion.China’s accession to the World Trade Organization (WTO) in 2001 was a major milestone in the process of building a market economy and accelerating reform and opening up in China.In five years after China’s accession to the WTO, Sino-U.S.bilateral trade volume rapidly grew from $80 billion in 2001 to$212 billion in 2005.The phenomenal growth of the bilateral trade for more than twenty years from the beginning of GATT (WTO)accession negotiations in 1986 to the end of the transitional period of accession in 2006 was mainly due to a strategic consensus reached between the two sides: mutually assured market access, uninterrupted increase of the absolute income of the enterprises of the two countries,and continued reform and opening up in China.This strategic consensus served as a foundation for rapid development of Sino-U.S.economic and trade relations for two decades.The two countries basically enjoyed a mutually beneficial and win-win economic and trade relationship during this period.

When a five-year transition following China’s accession to the WTO expired in 2005, the environment for China’s foreign trade came to a turning point with fundamental changes.Once China joined the global multilateral trading system, what China encountered was not only huge opportunities offered by the global market but also a substantial increase of trade frictions worldwide.The “textile crisis”of 2005 was exactly an embodiment of this contradiction.After the removal of global textile quotas in early 2005, China did not enjoy to the full extent the achievements of textile trade liberalization after joining the WTO, but instead found itself on the verge of a trade war with the United States and Europe and even developing countries.

To protect their own industries, these countries took measures to restrict imports of Chinese textiles.Only after arduous negotiations was China able to export textile to these countries but the growth in exports was kept at a certain agreed rate.At the same time, the trade imbalance between China and the United States deteriorated sharply, the jostling over the American-style free market economy and the Chinese-style socialist market economy intensified, and new trade frictions between China and the United States erupted one after another.According to the Chinese Academy of Social Sciences, of the 37 cases of anti-dumping and countervailing duty investigations against China from 2006 to 2010, 60% came from the United States; at the same time, the United States repeatedly initiated special safeguard measures against China, involving such Chinese export items of huge volume as steel products and textiles.

U.S.President Barack Obama speaks during the opening session of the U.S.-China Strategic and Economic Dialogue at the Ronald Reagan Building and International Trade Center in Washington, DC, on July 27, 2009.

In 2009, the United States started a transitional product-specific safeguard measure in response to imports of certain passenger vehicle and light truck tires from China in the amount of $1.7 billion.In 2011, the United States launched anti-dumping and countervailing investigations against Chinese photovoltaic products and made a final ruling in November 2012 authorizing high anti-dumping and countervailing duties on Chinese PV exports totaling $3.1 billion.In addition, in a sluggish world economy with declining global demand, competition between China and the United States in export markets in a third country has intensified.While the Doha Round of WTO trade negotiations has stalled, the United States is using the “Trans-Pacific Partnership”, the Trans-Atlantic Free Trade Agreement negotiations and other bilateral and regional trade deals to compete for greater market share worldwide.The first decade of the new century was an intensive test of the ability and wisdom of the Chinese and U.S.leaders to manage the bilateral economic and trade relations.

As far as China was concerned, the first decade of the 21st century was an important period of strategic opportunities.Despite the epidemic SARS in 2003 and the global financial crisis in 2008,China’s economy still grew in a healthy way to become the world’s second largest economy and largest exporter.For the United States,the first decade of this century was a severe test.While the effects of the 9/11 terror attacks on the American mind and psychology were lingering, the United States suffered a “subprime” crisis and the ensuing global financial crisis and economic recession.The costly Iraq and Afghanistan wars have been a drag on the American economic and social development yet to fully recover.Many commentators in and outside the United States interpreted the first decade of the 21st century as a harbinger of America’s decline and believe that the America model that once brought success to the American and world economy is now declining from its booming days and now is the time to turn to other countries for inspiration for governance.

The belief that “the United States is in decline” has caused a profound sense of insecurity among Americans, and the sense of uncertainty about the future of the United States and China has sent American foreign policy makers on pins and needles.While a“rising China” makes more and more Chinese people feel proud, the Chinese policy makers feel greater pressure.Whither China? How to deal with China’s relationship with the United States and the world?How to achieve a “peaceful rise”?

Over the years, the two countries have kept speculating on the trends of each other.With increased concerns over each other’s political and economic forces, the two countries have a stronger sense of distrust towards each other, unwilling to let the other side enjoy exclusive benefits.Despite deepened engagement between the two sides, mutual suspect and disappointment have become increasingly evident.China regards the United States national security review of Chinese investment projects in the United States as a way to deter Chinese investment, while the Americans may not want to bring technology to China for fear of intellectual property breach.

After 2005, the frictions and anxieties between the two sides in the economic and trade field have been eroding the important strategic consensus which, formed over the years, features twoway access, mutual benefit and mutual assurance and has served as a foundation for the rapid development of bilateral economic and trade relations since 1992.Will a model of competition between China and the United States at the bilateral, regional and global level to seek comparative advantages replace one of win-win cooperation between the two countries established over the years?

Given the disturbing reality of the development of Sino-U.S.economic and trade relations in recent years, “competitive interdependence” may be the most appropriate phrase to define Sino-U.S.economic and trade relations.The fundamental feature of being“mutually beneficial” and “win-win”as seen in Sino-U.S.economic and trade relations over the past decades is now being tested, with the notion of a “win-win” approach that pursues “absolute returns” being undermined by the notion of “win or nothing” approach that pursues“relative returns,” e.g.“one party shall win more than the other,” or“one party cannot lose to the other.”

A classic line in Shakespeare’s famous playMacbethsays that “present fears are less than horrible imaginings”,referring to some one whose imagined fear due to excessive anxiety is far from reality.

III.An appropriate understanding the future of China and the United States

As a normal state of Sino-U.S.economic and trade relations,competitive interdependence may remain for a long period of time.A certain degree of competition is healthy, but the competition that goes beyond a certain limit will become vicious and produce a negative impact, turning the economic and trade relationship into a“stumbling block” instead of a “ballast” for the overall relationship.Mutual suspicion is the psychological root of the zero-sum game between China and the United States while the cognitive root of their mutual suspicion is the sense of uncertainty and lack of selfconfidence about the future of its own and the other side.A classic line in Shakespeare’s famous playMacbethsays that “present fears are less than horrible imaginings”, referring to some one whose imagined fear due to excessive anxiety is far from reality.The key to elimination of mutual suspicion is a correct understanding of one’s own and each other’s future.

No simplistic judgment should be made of the future trend of China and the United States.Despite lots of problems in the United States, the country remains powerful with a great deal of capital and a lot of creative talents in various fields.Although China has covered a road of development in a short period of time, much less than about a hundred years spent by many other countries on achieving the same level of development, China needs to properly deal with varieties of domestic development issues, provide its more than one billion people with sufficient food, clothing and housing,and maintain constructive engagement and cooperation with its neighboring countries and the rest of the world in order for China to sustain its miracle of growth and eventually become the world’s number one economic power.

Each generation of Chinese leaders has their own clear ideas of governance and policy goals regarding domestic development.Then what’s the focus of China’s new generation of collective leadership in the next 5-10 years?

For Chinese leaders, development remains the overriding top priority for a long period of time to come, and their main concerns are still domestic.As U.S.economist Barry Naughton noted, the easy growth of Chinese economy has ended.China is facing a severe nearterm and mid-term test.In comparison with an annual double-digit growth rate in the two decades from 1992 to 2011, China lowered its GDP growth target to 7.5% for 2012.National leaders of China stressed the urgency of accelerated economic and political reforms.China is readjusting itself to adapt to a new, slower economic growth rate under the circumstances of a larger economy and a more mature economic structure than in the past.

This highlighted the urgency for the United States to enhance its domestic competitiveness.Future U.S.priorities will include increasing employment, striking a balance between economic development and a reduced budget deficit, promoting energy selfsufficiency, enhancing environmental protection, implementing educational reforms and improving the social welfare system.

The pursuit of a peaceful, stable and predictable external environment in the future by both China and the United States is conducive to expanding bilateral trade in goods and services and improving the quality of people’s lives.In this context, both sides should refrain from making simplistic predictions of the future of each other.The double-digit economic growth in China from 1992 to 2011 should not be used as an indication for the trajectory of China’s future development of power; nor should the financial crisis in the United States be used, as done by some senior American analysts, as an indication that the United States is in clear decline and the decline is inevitable.

Such simplistic, black-or-white-forecasts will lead to blind selfconfidence of one party and excessive nervousness of the other party,thus adversely affecting relations between the two countries.In fact,both countries are facing a severe test.China needs to accelerate the transformation of the mode of economic development, strengthen the building of the financial sector and revive the reform process in order to sustain itself after the rapid economic growth.The United States is facing serious financial difficulties which have constrained its ability to invest in infrastructure, education, energy and social welfare programs.A serious “fiscal cliff” may emerge after the Bush tax cuts and the Obama 2% Social Security payroll tax cut and federal unemployment benefits expired by the end of 2012 at the same time,with the U.S.federal expenditure in 2013 plummeting by nearly$600 billion.If not handled properly, the U.S.economy is likely to fall into the quagmire of recession again.

A Chicago trader shouts in the Soybean pit.Chinese trade representative is scheduled to sign an agreement to buy U.S.soybeans.

China and the United States need to seek a new strategic consensus,help each other cope with their respective challenges, and build a new foundation for bilateral cooperation.The strategic consensus should be aimed, through many channels of communication, at more close collaboration and the reshaping of a model of cooperation that will feature mutual benefit and win-win cooperation in Sino-U.S.economic and trade relations.

IV.Managing “competitive interdependence”

Although the main concerns of the two countries are domestic, many of the domestic problems are closely related to the international environment and the country’s foreign economic policy.When domestic problems pile up, it becomes increasingly appealing to shift the burden of domestic problems abroad.But the consequence is that the goal that was set is not achieved, and the reform that should be carried on remains on the paper or being put off time and again.The current competitive mode of Sino-U.S.economic and trade relations is producing more and more frictions and suspicion.In order to reach a new strategic consensus and promote steady development of the bilateral economic and trade relations, both sides need to manage, at the strategic level, the “competitive interdependence”, especially the vicious competition, and provide a strong incentive for starting a new round of two-way market opening up, pushing forward reforms and enhancing mutual trust.At present and for a relatively long time to come, there are at least three modes of strategic management of Sino-U.S.economic and trade relations, namely the mode of “Strategic and Economic Dialogue”, the mode of summitry and the mode of building a community of interests.

The mode of S&ED.The “Strategic and Economic Dialogue”(S&ED) is an important step towards the establishment of an overall Sino-U.S.strategic consensus and provides a platform for strategic management of Sino-U.S.bilateral and even global economic and trade relations.A big advantage of the S&ED is that it gathers senior officials of the two countries to discuss major economic issues of mutual concern.These pundits and policy-makers are responsible for both domestic policy and external relations and thus able to view issues from both domestic and international perspectives and evaluate the policy implications of both the domestic and international arenas.As the Economic Track of the S&ED brings together almost all government departments of economic affairs of the two countries,the strategic targets set by the leaders of the two sides proceeding from the overall interests could be fulfilled by these departments so as to prevent narrow local industrial interests or individual departmental interests from dominating the policy making and implementation process of various government departments of economic affairs.

The mode of summitry.In order to promote the rapid development of Sino-U.S.economic and trade relations in the next decade, the top leaders of China and the United States can consider engaging with each other at a level higher than the S&ED.If the new leaders of the two countries are able to hold a summit focused on economic and trade topics shortly after taking office, it will no doubt be a key step in promoting a strategic consensus in the economic and trade fields.

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The key to achieving this consensus is finding a way that will go beyond single, narrow issues and cover a wide range of inter-related issues involving broader interests and leading to a packaged solution.This packaged solution proceeding from an overall perspective will greatly promote the development of bilateral economic and trade relations, help boost confidence and reduce mutual suspicion, and reshape the cognitive basis of bilateral economic and trade relations,i.e., bilateral economic and trade relations should serve the overall interests of the people of the two countries rather than the local vested interests.In the next period of time, the details of the strategic consensus on Sino-U.S.economic and trade relations should include at least the following specific issues and elements:

- Open policy coordination on their macroeconomic rebalancing.

- Commitment by the leaders of the two sides to further promote two-way reciprocal opening up on the current basis and implement specific initiatives to enhance Sino-U.S.economic interdependence and integration in more fields and at a deeper degree.The early harvest may include China’s early accession to the WTO Government Procurement Agreement and the United States’ recognition of China’s market economy status.

- Commitment to equal treatment of each other’s investors and active pursuit of the signing of a Sino-U.S.bilateral investment treaty.If a national security review is required for an investment project, the criteria of the review should be strictly defined, instead of being too broad, and the reviewing process should be as transparent as possible.

- Continued commitment at the senior level to intensifying protection of intellectual property and innovation, and explicit recognition of the correlation between the protection of intellectual property rights and the encouragement of innovation.

- Commitment by the leaders of the two countries to maximizing facilitation of bilateral high-tech trade, and elimination of mutual suspicion and distrust that erodes the foundation of a mutually beneficial bilateral trade.

The mode of building a “community of interests”.In the process of forming a new strategic consensus, the leaders of the two countries can consider the feasibility of establishing a community of interests.This requires not only policy coordination and interests swap between the two large economies in the economic and trade fields, but also communication and mutual learning and acceptance in the fields of politics, security and even values.International and historical experiences tell us that the development and deepening of bilateral economic and trade relations can not be separated from a good foundation of political relations.

Take the trans-Atlantic relationship for an example, the development of U.S.-European trade relations can not be separated from a high-level political support from both sides.This support is based on a network of relationships developed by both sides for a long time.A comparison of U.S.-European relationship with Sino-U.S.relationship shows a lack of commonality between Chinese and American cultural, social and political systems, and this kind of commonality helped the United States and Europe establish a composite, interdependent system involving all aspects of U.S.-European economic and trade relations.The political, cultural and social factors that serve as the foundation of U.S.-European relations become challenges for Sino-U.S.economic and trade relations.Riding on the tide of globalization, the development of Sino-U.S.economic and trade relations is accelerating, but the progress of the cultural, social and political ties as an important foundation of Sino-U.S.economic and trade relations is unable to keep up with the development of commercial relations in the context of globalization.

For political leaders of the two countries, promotion of the development of bilateral economic and trade relations should not be isolated from promotion of the development of bilateral relations in all aspects.China and the United States should establish a partnership in the true sense.Enough space should be created to accommodate the rise of China on the one hand, and the United States should be allowed to continue to exert its influence and role in the Asia-Pacific region on the other hand.The key here is to insist on a mode of mutual benefit and win-win cooperation, suppress the mode of zero-sum game and vicious competition, and mitigate the negative impact of friction by gradually expanding cooperation.

At the same time, a sense of the community of human destiny is needed: the legitimate concerns of other countries should be taken into account in the pursuit of one’s own national interests, and common development should be promoted in the quest for one’s own development.Through development and promotion of common interests between China and the United States,the two countries should use the opportunity of building a community of interests to enhance the building of the community of destiny between China and the United States and for all of the humanity.

For now, strategic mechanisms of dialogue such as the S&ED play an important role, but that is not enough.

V.Conclusion

Great potential for the development of Sino-U.S.relations remains and the management of bilateral economic and trade relations is still promising, with no need to fall into a cycle suspicion and mistrust.The main reason why the potential of bilateral relations has not been fully realized is that a consensus on long-term gains is hard to come when two sides are faced with vested interests or short-term political risks.But taking into account the sluggish world economy,the serious setbacks in multilateral trade talks and the rising pressures of global competition, China and the United States must ensure that the fundamental features of the bilateral economic and trade relations should be “mutual benefit” and “win-win” amid interdependence rather than a zero-sum game and competition against each other.

For now, strategic mechanisms of dialogue such as the S&ED play an important role, but that is not enough.The two countries also need strong political will, closer coordination and more sincere dialogue to take into account the combined internal and external concerns and manage the bilateral economic and trade relations at the strategic level with the blessings of the top leadership of the two countries.

The success of each country domestically in the next one to two years will be the biggest contribution to the bilateral relations.As two economies both competitive and interdependent, China and the United States need to join hands and help each other to achieve better results in the domestic affairs.It is in American national interests for China to rebalance its growth through accelerated transformation of economic development and the reform of domestic fiscal and financial systems, to contribute to global growth, and to lift millions of Chinese people out of poverty.

Similarly, it is in line with China’s national interests for the U.S.to achieve economic recovery, keep its market open, and ensure that the United States remains a strong competitor in the global economy and plays the role of a stabilizing power in global affairs.For now, both countries focus their attention domestically and have no intention to engage in vicious competition on the international stage.As long as both sides are able to eliminate mutual suspicion, have a sense of community of human destiny, engage in strategic planning and effective interests swap through innovative thinking, and help each other achieve their domestic success, the Sino-U.S.relations might be able to remain stable and evolving for a long period of time to come and break out of the traditional logic of big-power confrontation and conflict in history.