Cooperate and Compete: Getting the Most out of U.S.-China Economic Relations

February 5, 2013

Recent reports of Chinese-sourced hacking of U.S. media outlets threaten to rekindle U.S.-China economic tensions following a lull over the past several months as both Washington and Beijing have been preoccupied with their political transitions. The cyber allegations are serious and need to be addressed forcefully and frankly by both sides. But before this and a plethora of other frictions overwhelm the relationship, the new teams in Washington and Beijing would do well to remember the broader stakes in bilateral economic ties and agree on a modus operandi for managing them in the years ahead.

To be sure, the U.S.-China economic relationship is beset with challenges, both real and perceived. In addition to the cyber issue, U.S. concerns include market-access and regulatory barriers in China, an uneven playing field between favored Chinese state-owned enterprises and U.S. firms, inadequate enforcement of intellectual property laws in China, and consumer anxiety about Chinese product safety. There is a widespread perception in the United States that China is “not playing by the rules” and is thereby undermining U.S. economic strength, or even, in some areas, national security.

For their part, a growing number of Chinese feel that the United States is trying to “contain” China’s rise, using not only diplomatic and military tools but also economic ones. Beijing chafes at what it sees as Washington’s excessive use of World Trade Organization (WTO) dispute-settlement mechanisms and domestic trade remedies such as antidumping and countervailing-duty actions. The Trans-Pacific Partnership (TPP) championed by Washington is seen as excluding China. And many in China perceive the U.S. investment climate as hostile to Chinese firms.

It is foolish to pretend that these problems and perceptions do not exist. Both governments need to address them forthrightly, through dialogue, negotiation, and litigation where necessary. But the challenges also need to be set against the substantial net benefits of bilateral economic ties to both sides. As the world’s two largest economies, the United States and China need each other to grow. Bilateral trade has increased roughly four-fold since China joined the WTO in 2001, with benefits to exporters and consumers in both countries. China has become an important link in the global supply chain for U.S. companies, boosting their efficiency and profitability while bringing technology, management know-how, and jobs to China. Similar benefits are likely to flow from Chinese direct investment in the United States as it begins to take off.

Moreover, healthy competition should not be mistaken for friction. It is natural, even beneficial, for two such large economies to compete provided there is a level playing field and businesses on both sides have an equal chance to succeed.

So what can the two governments do to ensure that the benefits of U.S.-China economic relations are not overwhelmed by the challenges; indeed, that the net benefits grow in the future? I suggest a three-part effort.

First, Washington and Beijing should each continue working to address its own domestic economic challenges. For the United States, this means getting its fiscal position on a more sustainable path and judiciously investing in the fundamentals of long-term growth such as infrastructure, education, and innovation. China’s task is to pull the state back from the marketplace and shift its growth model to one driven by consumption rather than exports. Greater balance within each economy should produce greater balance, and benefit, between the two.

Second, the two sides should acknowledge that there are elements of competition in their economic relationship and continue working to resolve areas of disagreement while reinforcing the rules of fair competition. Where possible, they should seek to settle trade and investment disputes through established mechanisms of bilateral dialogue, notably the Joint Commission on Commerce and Trade (JCCT). Where agreement cannot be reached, they should be prepared to use WTO dispute-settlement mechanisms while avoiding frivolous or purely retaliatory cases.

Third, Washington and Beijing should work to expand the “white space” of cooperation in their relationship. There are many areas of complementarity between the two economies that could be built upon. With only 7 percent of the world’s arable land but 20 percent of its population, China is already the largest market for U.S. agricultural exports; the potential for further growth to feed an increasingly affluent Chinese population is substantial. As both the United States and China step up their production of shale gas, there is significant scope for increased trade and technical cooperation. Improved access for U.S. financial institutions in China could support the critical financial reform process there.

Even on thorny issues such as cybersecurity, there is scope for greater cooperation. While both countries will reserve the right to use cyber tools in times of conflict, neither has an interest in seeing normal economic activities disrupted. Since 2009, CSIS has held seven formal meetings with a prominent Chinese think tank to reduce misperceptions and increase transparency of both countries’ authorities and understanding of how each country approaches cybersecurity and to identify areas of potential cooperation.

All of these topics are ripe for discussion in the principal existing forum for high-level discussion between the two governments, the Strategic & Economic Dialogue (S&ED). In a recent CSIS report, we offer some recommendations for streamlining the S&ED to reduce the ceremonial features that have come to overwhelm the substantive agenda, to reduce pressure for short-term “deliverables” at each annual meeting, and to reinforce the dialogue’s original objective of fostering long-term strategic cooperation.

Meanwhile, mutually beneficial cooperation could be expanded through regional and global forums in which the United States and China participate. Collaboration between the two countries in the early G-20 summits in response to the global financial crisis was exemplary. While there has been greater divergence at more recent meetings, the underlying interests of the two sides in strong, balanced growth, robust trade, and sound financial markets are not so far apart in substance. Washington and Beijing could usefully spend more time consulting on G-20 positions before meetings of sherpas, finance officials, and leaders.

The Asia-Pacific Economic Cooperation forum (APEC) provides another platform for expanded cooperation, particularly on regional trade and investment liberalization. With China due to host APEC in 2014, there is an opportunity for Washington and Beijing to work together to develop a roadmap for merging TPP with the Regional Comprehensive Economic Partnership (RCEP), Beijing’s preferred vehicle for Asian trade liberalization. A recent study by the Peterson Institute found that such a merger – in effect, APEC’s vision of a Free Trade Area of the Asia-Pacific (FTAAP) – would generate as much as $1.9 trillion in annual global income gains by 2025.

Doing all of these things will not guarantee a frictionless relationship between the United States and China. Indeed, given the adjustments, real and psychological, that both countries must make to the changes in their relative economic positions, some tension is almost inevitable. But by working at all the levels described above—unilateral, bilateral, regional, and global—the two sides should be able both to manage the main points of disagreement and expand areas of cooperation. This will help increase the net economic benefits of what is surely the world’s most consequential relationship.

Matthew P. Goodman holds the William E. Simon Chair in Political Economy at the Center for Strategic and International Studies in Washington, D.C.

Commentary isproduced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2013 by the Center for Strategic and International Studies. All rights reserved.