How China and the United States might find a way to collaborate around strategic competition

Author: Editorial Board, ANU

Heightened US–China tensions and strategic competition and China’s recent weaponisation of trade against countries like Canada and Australia have encouraged calls to drastically divert economic ties away from China. Some switching of trade is inevitable because lower trust and increased uncertainties increase the risk-adjusted costs of doing business.

Breaking economic ties may isolate China but it will also make the world significantly poorer. An economic retreat from China would mean a retreat from Asia because of the complex interdependence of Asian trade, investment and financial flows. This would be flawed both as an economic and a security strategy, undercutting the region’s economic strength, as well as the security networks beyond US alliance relationships that are the foundation of East and Southeast Asian security.

A retreat from the Chinese economy means a retreat from complex regional supply chains that would cause severe economic and political damage to Asia and the global economy. Over 20 per cent of value added in Chinese exports is produced in other mainly neighbouring countries, 39 per cent of the total from foreign-invested firms. More than 90 per cent of China’s trade derives from private or foreign-invested firms.

The first-round cost of a general regional decoupling from a China-interlinked Asian economy would be very large: an immediate drop of over 11 per cent in ASEAN incomes, for example. Japan (China’s largest foreign investment partner), South Korea and other countries’ investment and trade in Asia would be undermined. The interest in terms of regional prosperity and stability in avoiding this outcome cannot be overstated. Not only would such a retreat damage all Asian economies; a collapse in regional trade would increase political vulnerability across the region.

Even US Commerce Secretary Gina Raimondo and US Trade Representative Katherine Tai have both called for re-coupling with China: China they say is simply too big a part of the world economy from which to disengage. And American trade with China is growing, as is American investment into China. That said, it’s not at all yet clear how or where the Biden administration’s global China strategy will finally settle.

Strategic competition with China is a battle cry in Washington around which partisans of every hue have now begun to rally. And China is of a mood to join the fray, wherever it may lead and however uncertain its outcomes may be. Indeed, finding a way to collaborate on reinvigorating the order that constrains strategic competition to productive outcomes increasingly appears a task that might be beyond the grasp of two great nations, left to their own devices.

In our lead article this week, Dong Wang argues that ‘different visions of [the] regional order need to be harmonised and a more inclusive vision [of that order] needs to be developed and articulated’.

Drastically contrasting visions for the future of the regional order were on display last September. On the same day that month that the leaders of Australia, the United Kingdom and the United States announced the AUKUS defence deal, China formally lodged its application to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

Wang argues that the ‘future regional order has to be one of inclusion and integration, rather than one of exclusion and bloc-rivalry’. China’s CPTPP application should be considered in that light and is an opportunity to reinvigorate the regional and global trading system that should not be passed up, he suggests.

Compliance with the CPTPP deepens commitment to open markets and shared rules in the regional trading system and substantially raises trade standards among its participants. The trade pact spans 30 chapters with provisions across labour and environmental standards, government procurement, competition, state-owned enterprises (SOEs) and designated monopolies, intellectual property and investment. Principles and rules around digital trade in the region, including provisions related to personal data privacy and the cross-border transfer of data, are entrenched within the trade pact’s e-commerce chapter.

Chinese policymakers will have their work cut out enacting the reforms to meet the standards set out in the  CPTPP, but China’s taking up that challenge should be welcomed not only by CPTPP members but by the global trade community.

Chinese provincial governments might be reluctant to move on SOE and competition reform that might dramatically shake up employment in their jurisdictions and exact large short-term political costs. Carve outs given to Vietnam and Malaysia in the CPTPP around disciplines on SOEs and designated monopolies are unlikely to be granted to China: the scale of the problem with state support for Chinese SOEs is of an entirely different order. Chinese regulators in the digital arena will also need to be prepared to accommodate CPTPP rules on digital privacy and the cross-border transfer of data as they figure out the regime for data governance at home.

By engaging with China on these issues, governments in the region can help push forward Chinese economic reform. As Wang notes, China’s CPTPP application is intended in part to provide the impetus ‘to lock in momentum toward the implementation of domestic structural reforms’ by generating ‘external reform pressure’. Much of China’s to do list of economic reforms have been ticked off by developed country CPTPP members who have lessons to share with China.

Working with China on the tasks of economic reform will be critical to driving and realising the positive spillover effects of future Chinese growth on regional growth, on which the region’s prosperity significantly depends.

Wang acknowledges that the ‘politicisation, weaponisation and over-securitisation of trade issues is corrosive’ to regional prosperity. The negotiation of China’s accession to CPTPP is unlikely to progress without settlement in detail and in principle of the issues of Chinese trade coercion that have affected trade with Australia, Canada and Japan, all founding members of CPTPP. US disdain for multilateral institutions such as the World Trade Organization that began under former president Donald Trump’s administration has put the rules-based trading system under duress. The negotiation of entry to CPTPP is a golden opportunity for China to set a new course that builds trust in its commitment to the multilateral rules-based system and therefore has strategic significance well beyond the negotiation of a relatively modest regional trade agreement.

China’s interest in joining the CPTPP ought also to encourage the United States to resume the economic engagement in Asia that it continues to walk away from. As Wang suggests, this ‘would require both Washington and Beijing to abandon [their] zero-sum mentality and instead conceive of power as a positive-sum game’.

If China approaches the negotiation in the spirit it will need to succeed, it’s a strategy that could prove an effective first step in rapprochement with the United States, delivering the countries of East Asia and the Pacific and the global economy the bonus of a much more secure international trading system as well as a boost to regional trade.

The EAF Editorial Board is located in the Crawford School of Public Policy, College of Asia and the Pacific, The Australian National University.

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