The economic ties that bind China

Author: Editorial Board, ANU

Taiwan’s status as a potential trigger point for conflict amid escalating strategic competition between the United States and China has only been confirmed in the wake of Nancy Pelosi’s visit to Taipei. There is risk of miscalculation, mistake and escalation that could have devastating consequences.

China’s flexing its military might over Pelosi’s visit is currently feeding global uncertainty. Even if conflict is avoided, the new status quo will sit uncomfortably with the United States and the West and tensions are likely to worsen.

The United States and China are now engaged in policies of mutual technology ‘decoupling’ as the next phase of their trade war. Japan is enacting economic security laws aimed at China — in part to avoid becoming collateral damage in US decoupling policies. Australia, having been a target of Beijing’s trade coercion, seems to have also chosen to side with America in its futile attempt to diversify trade away from China.

These ‘decoupling’ policies have, predictably, failed to defy economic gravity. Interdependence with China is actually increasing for the United States, its allies and the global community.

China is the world’s largest trading nation and becoming more important. Whereas total US goods trade fell to US$3.8 trillion in 2020 from US$4.2 trillion in 2019 before recovering to US$4.7 trillion in 2021, total Chinese trade in goods increased from US$4.6 trillion in 2019 to US$4.7 trillion in 2020 and grew to a staggering US$6 trillion in 2021. China’s trade is predominantly market-driven, not state-driven. The private sector accounts for roughly 92 per cent of China’s exports, of which 42 per cent are from foreign invested firms. That is a huge constraint on policymakers.

Trade in goods between China and the United States grew 19 per cent in 2021 to US$693 billion according to US data, even though China fell short of the agreed purchases of US goods under their Phase One trade deal.

American companies expanded their operations in China with US$38 billion of new investment in 2021 to bring the US stock of direct investment in China to US$118 billion. Japanese investment into China also continued to increase, further integrating their economies. Total direct investment flows into China rose by a third in 2021 to a record high of US$334 billion for the year. That’s a lot of businesses committing to the Chinese market with new factories and operations even with Chinese borders closed and harsh domestic policies in pursuit of zero-Covid.

The mutually beneficial economic relationship runs counter to Washington’s instinct to counter every Chinese interest globally. The zero-sum approach to China dusts off the Cold War template.

But the first Cold War is a decidedly imperfect template to guide policy amid the confounding picture of rivalry and interdependence that the facts above illustrate.

As Sourabh Gupta explains in this week’s feature article, the Soviet Union and the United States had no common interests or common aims during the Cold War. ‘Moscow’s objective’, he reminds us, ‘was to overthrow capitalism as a rival centre of ideological authority and global power’. China, on the other hand, has fundamentally bought into the US-led order, not sought to overthrow it tout court.

This July marked 75 years since George Kennan introduced the idea of ‘containment’ that became the organising zero-sum framework to box in the Soviet Union. ‘Containment was premised on Washington’s remaining the dominant global economic power’, Gupta explains, ‘but China is a protagonist whose economic size and material capabilities at the government’s disposal will outstrip that of the United States’. ‘A strategy to cope with the challenge posed by China must be built on realism and objectivity, not ideology and values’, Gupta argues.

Realism and objectivity starts with the fact that Chinese and American economic power, from which their political and military power derive, is built on economic interdependence. That interdependence is the source of prosperity and security. Unlike the Cold War where the Soviet Union and the United States had no shared interests or aims except ultimately to avoid mutual self-destruction, China and the United States have a large and growing economic relationship that continues to bind them and the rest of the world together. Management of that interdependence remains a powerful and shared interest.

Economic interdependence itself won’t stop a war but it vastly raises the costs of conflict. The ‘commercial peace’ has put a floor on political relations in East Asia between China and Japan, for example, and across the Pacific.

China, the United States and the global community also share a core interest in decarbonising their economies to avoid catastrophic climate change. The climate-related elements of the landmark Inflation Reduction Act signed by President Joe Biden this week is welcome news. But the law attempts to sideline China from US clean energy supply chains—which will make America’s energy transition much more costly and difficult.

A politically shaky United States—distracted by big domestic challenges like entrenched inequality and democratic institutions under stress—is failing to prosecute its other core interest of wrapping the rising power in new rules, as the United Kingdom did to the United States at Bretton Woods. The non-binding Indo-Pacific Economic Framework that excludes China, and relies on an executive order from the White House, is a very poor substitute for leadership in multilateral rule making backed by broad political buy-in at home.

The rest of the world has an even stronger interest in securing multilateral rules to protect itself from the whims of Washington and Beijing, who have both shown willingness to leverage their economic might for political purposes.

If governments in Australia or Japan pursue market-distorting actions to diversify trade and supply chains away from China it will make them poorer and less secure. Almost all of Australia and Japan’s neighbours have China as their largest economic partner. China continues to demonstrate it has a stake in the existing system, for example, by signing onto the interim WTO dispute settlement substitute, the MPIA, to enforce trade rules.

Both Australia and China have ambitions to diversify their economic relationships away from each other as Beijing looks to secure long term iron ore supplies in West Africa. Deepening economic engagement brings prosperity and a peace dividend, though a fracture in trust and a loss of confidence in the multilateral rules means the risks will come to dominate.

China too is searching for economic and political security. Its insecurities are being fanned by its domestic challenges and the West’s misdirected containment efforts. China’s economic security in a multilateral economic system is still a major guarantor of economic and political security to the rest of the world.

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

The post The economic ties that bind China first appeared on East Asia Forum.

from East Asia Forum