Executive Summary: “China-US Relations and Global Response” was an item high on the agenda of the Second Bund Summit held recently in Shanghai. Experts at the conference believed that China-US decoupling is bound to cause the two countries and the world at large a high economic price because of the extremely deep economic integration between the two countries and between China and the world. In reality, it is difficult for China’s supply chains to decouple from those of the US due to great stickiness between these supply chains. Meanwhile, China has been continuously deepening its integration into the global financial system.
To effectively manage China-US relations, experts from China and abroad put forward the following suggestions. First, the two countries should maintain adequate communication and dialogue to prevent the conflict spreading to other fields. Second, from a strategic perspective, the two sides should establish a risk control and management mechanism. Under this framework, China and the US should precisely define the fields concerning national security and separate them from most economic and trade issues, and strengthen cooperation in the fields of global public interests such as climate change.
China-US trade disputes have triggered a crisis in the multilateral trading mechanism and global governance. The two countries should step up cooperation to improve the WTO rules and the governance mechanism. In the trade field, China and the US should also restart talks on some important international rules under a multilateral framework, including those on industrial policy, intellectual property protection, trade and investment liberalization.
Joe Biden is expected to take office on January 20, 2021 at a time when bilateral relations feature enormous complexity and uncertainty. In terms of technology, the Biden administration will likely form a united front with Europe (including the UK) and Japan, putting China under greater pressure. However, the new administration’s China policy may be more rule-based and more predictable.
I. China-US decoupling is bound to cause both countries and the world at large to pay a high economic price
According to Nick Lardy, Senior Fellow of the Peterson Institute for International Economics, many advocates of China-US decoupling have seriously underestimated the degree of economic integration between China and the US and even China and the world, and failed to realize the economic price of the decoupling. In particular, there is no US agency charged with assessing the economic cost of policy tools such as tariffs and technology restrictions. Those who advocate decoupling are often prone to talk about the benefits rather than the price.
On supply chains, though the US government calls American manufacturers to return from China, a survey by the US-China Business Council shows that the trade war and even the coronavirus pandemic have not substantially changed the plans of US multinationals, and not many companies are really willing to echo the US government’s call. Even though some companies are considering moving out of China, most of them want to move to other countries rather than back to the US. Moreover, China has made some important steps in opening up the financial sector over the past few years, e.g. Stock/Bond Market Connect, and securities investment into China has posted a dramatic upward in the past three years. The opening up of China’s capital market and other institutional reforms have made RMB assets increasingly attractive to international investors. In addition, China has pushed forward reform of the financial system, lifting the restrictions on business scope and shareholding ratios of foreign financial institutions in China. Lots of US companies have received approval to enter new business areas in China.
Therefore, from the financial sector’s perspective, despite the increasing popularity of decoupling topics, China’s integration into the global financial system has been deepening. It is difficult to decouple China’s supply chains from those of the US and vice versa, and the decoupling will inevitably incur a high cost. Supply chains feature great stickiness. The supply chains within a country can give rise to an entire ecosystem. The pandemic has made countries aware of the shortcomings of global supply chain integration. The existing supply chains are too streamlined and have no extra capacity. After the virus outbreak, the world could not produce enough medical supplies, and thus naturally made extreme responses to supply chain integration.
Over time, supply chains will face more serious regionalization. This will not only change the globally integrated trade model, but also cause countries to accelerate the promotion of regional trade agreements, global trade will become more fragmented, global trade and economic growth will be hampered. In this regard, countries should try their best to seek a balance between protecting their own interests and global trade integration. This is not an easy task.
II. China and the US should maintain communication and dialogue, facilitating the establishment of a risk control mechanism
Tony Blair, former Prime Minister of the UK, pointed out that China-US decoupling is very dangerous. Interaction between China and the world is enormous, despite so many discussions on decoupling. Most Westerners are not hostile toward China, and they recognize China’s rise is a legitimate reality. China must actively seek opportunities to communicate with the West and understand their concerns some of which are out of anxiety over the Chinese power. Blair believes both Chinese and Western politicians need ‘strategic thinking’, and the best way is to figure out a way of dialogue acceptable to both sides for enhanced communication and cooperation.
Both sides need to adopt a strategic approach, i.e. ‘a(chǎn) framework within which countries can govern the relationship in a stable manner, not a series of reactions to events’. Both sides need to reserve some space for cooperation, e.g. climate change, COVID-19 response, and stabilization of global economy. Both sides need to put in place channels for sufficient communication and conduct candid dialogue on issues of common concern. Some expert at the conference believed China and the US should seek a risk control and management mechanism to manage rivalry of the two countries. The two countries should precisely define and separate the fields concerning national security, in particular technology, from economic and trade issues. The legitimate concerns of both countries should be resolved through talks or a prudent strategic decoupling process.
In fact, trade in technology has no impact on national security. Technology is ubiquitous and it makes no sense to block it just because some technology comes from China. Others thought it is becoming increasingly difficult to distinguish between security issues and economic issues in the high-tech sector. Countries are trying to introduce various industrial policies to support high-tech industries, which is also causing trade frictions. The US is trying to squeeze China out of its supply chains, and the ongoing friction between the US and China may lead to further expansion of decoupling in the high-tech sector, with significant impact on many other countries such as Japan.
Participants at the conference deemed it important for China and the US to maintain talks. “These talks don’t always have outcomes, but we call it the ‘bicycling theory’, where the bicycle has to be ridden constantly or it falls over.” China and the US need to constantly communicate and exchange ideas to prevent trade conflicts from spreading to other fields. It is not easy to resolve friction in the high-tech sector, but the two sides can make efforts in other fields for cooperation. Japan-US trade frictions lasted for decades, during which process the target of conflict shifted from one industry to another. So it is important for both sides of the conflict to reach consensus in various target industries, and talks during this period are important.
III. China and the US should restart talks and expand cooperation under a multilateral framework
Martin Wolf, Associate Editor and Chief Economics Commentator of the Financial Times, noted that the international situation we are facing now is unprecedented. For the first time since World War II, the world has seen two rival superpowers, whose economies are closely intertwined with the world economy and deeply integrated with each other.
Against this backdrop, it is now difficult for the post-war global mechanisms established under the leadership of the US to properly maintain and manage superpower relations, especially in the economic and trade fields. There is an urgent need to define “essential common interests” for major power competition and global governance, and it is clear that the “peace and prosperity” is common interest.
In this regard, first, countries need to work together to address global challenges, especially climate change. Second, countries need to reach minimum agreements on how to address these challenges. To this end, China and the US need to engage in disciplined, rules-based cooperation. Both countries need to restart trade talks on some important international rules. Given the current size of China’s economy, the talks will inevitably address what responsibilities China should assume. Trade talks mainly deal with four areas, namely industrial policy, intellectual property rights, trade liberalization, and investment liberalization. Ideally, the talks should be conducted under a multilateral framework rather than a bilateral framework, as the Trump administration has done. The history of GATT and WTO shows that it is much easier for major countries to reach agreements under a multilateral framework than under a bilateral one. In short, the main challenge is how to manage China-US relations as effectively as possible under a multilateral framework without causing a complete breakdown of international relations.
Jeff Schott, senior fellow at PIIE, pointed out that China and the US should step up cooperation to jointly improve the WTO rules and governance mechanism on the premise of fixing the dispute settlement mechanism and ensuring that the rules can be effectively implemented. Both small and large countries should unconditionally abide by and implement the corresponding rules. Under strong international rules, all countries should formulate rules on global access to vaccines/treatments; update rules on subsidies, with a focus on industry-specific applications, such as agriculture, civil aviation, fisheries, and steel; work out new rules on digital trade, including rules on mandatory localization of and restrictions on data flows; and develop climate change-friendly trade rules.
Experts also indicated that especially with regard to climate change, it is important to develop climate-friendly trade rules to address global warming through WTO negotiations. Specific measures may include: lowering trade barriers to encourage the spread of green technologies; revising subsidy rules to promote investment in clean energy vehicles; strengthening regulatory policy cooperation to set higher standards for energy efficiency and support the application of carbon-reducing technologies; working with the World Bank to phase out fossil fuel subsidies and ensure poor countries’ access to the technical and financial assistance necessary to ease the burden on low-income consumers; and halting carbon-related border tax adjustments, etc.
