The US-China Strategic Economic Relationship: Overcoming Distrust?

Pacing back and forth across the room, his gestures matching the speed and force of his words, Professor Arvind Subramanian began his lecture with an admission of disappointment. “It’s a tragedy that my book [Eclipse: Living in the Shadow of China’s Economic Dominance] only has two parts,” he said – hardly enough space to deal with the breadth and ambition of the book’s topic. The first half documents China’s rise to economic dominance in the twenty-first century, the second, “how the rest of the world should deal with it. How the rest of the world should deal with it” has nowadays become a key question for China watchers to answer. With both rich and developing countries uneasy about China’s growing economic power, intellectuals have rallied to either the confrontational or cooperative camp. Pessimists argue that China will try to change the rules of the international system as it gets stronger, imposing its own designs on the liberal world order previously run by the United States. China should be contained, not encouraged. Optimists claim that China will integrate seamlessly into the global economic system created by other superpowers before it, and that efforts to contain its rise are either impractical or unfair.

Professor Subramanian is an assertive member of the second camp, arguing that China’s rise will be a win-win scenario for everyone, provided that it accepts its new leadership role and doesn’t face strong opposition from the US and others. Subramanian began by citing a litany of facts to justify that China is becoming too big to ignore. China is the world’s second largest economy by nominal GDP, and it will soon be the world’s largest on a purchasing power-parity basis. It could become the world’s biggest economy in nominal terms – the “G1” – by 2030. It is the world’s largest net exporter and its second-largest creditor. And yet despite these achievements China is still a relatively poor nation, underdeveloped in many parts and able to keep growing through capital accumulation for a few more years.  “There’s still considerable scope for catch-up,” said Subramanian.

He dismissed the bubbling concerns about China’s slowing growth, noting that countries inevitably slow down a little when they reach China’s stage of development and that 5.5% growth is still feasible, even a “relatively conservative estimate,” in the medium term. While social and political challenges or a financial crisis could wreck that prospect, current trends are still indicating China will defy its critics and continue to prosper. The US, even if it need not fear being overtaken any time soon, should at least accommodate Chinese juggernaut.

That, of course, has implications for a global economic order currently managed by America and Europe. Regarding the fear about China being a game-changer, however, Subramanian was similarly unfazed. He admitted there is a fundamental difference between China and former superpowers, in that, while other nations became great powers at the same time they became rich, China will still be relatively poor as it ascends. Does that mean its interests will run contrary to the liberal order created by the rich nations? History doesn’t indicate it will, argued Subramanian. After 1978, he pointed out, China relied on openness and benefited from it; since then its domestic reforms and development strategy have stuck to that approach. “China’s interests align with an open, rules-based international system,” Subramanian said.

Yet if China wishes to assuage fears and guard against external threats to its development – namely opposition from the international order – it needs to embrace global leadership to a greater extent than it has thus far. What are some things China can do, and what can it expect in return? First, contends Subramanian, China should contribute more to the International Monetary Fund (IMF) and work to strengthen that institution in the name of global financial stability. In return it should get expanded voting rights on par with the US and the larger European economies. After all, most of those countries are now China’s debtors; it makes little sense and seems patently unfair that those in hoc should dictate the rules to their creditors. At the same time, the US and Europe should not worry about China’s voting in opposition their own preferences since China has its own interest in maintaining global financial stability. “What is good for the European goose is good for the Peking duck,” Subramanian joked.

Second, China should try to revive multilateralism, mostly to hedge against the growing concerns in the US and other countries about China’s domination of world trade and the hunger among voters for protectionism. Even some prominent Western economists have started criticizing globalization and China’s overwhelming share of the benefits. To prevent backlash, China should start new trade talks after the dismal failure of the Doha Round, which drags on despite a lack of progress for over a decade. China, which is frequently embroiled in trade disputes could benefit enormously by taking the lead on resuscitating free trade.

Third, China should promote more action on climate change. The costs of global warming are not evenly distributed: China, India, and other poorer countries would all suffer far more than Europe and the US. Doing nothing could lead to a nightmare scenario in which America and the West decide to adapt to climate change and leave poorer nations to deal with it on their own.

Thus, China must articulate its leadership vision. But how should the rest of the world respond? Subramanian here criticized World Bank President Robert Zoellick’s famous admonition that China become a “responsible stakeholder” in the international system. That point of view “lets other countries off the hook,” says Subramanian, implying that China shouldn’t get anything in return for good behavior. Moreover, it seems to reflect an unrealistic view of history – that economic might has always been wielded for good. Citing the old aphorism of John Adams, “Power always thinks it has a great soul,” Subramanian argued that the US itself did not always use its economic influence for unselfish ends. It is hardly fair to expect China to do the same.

Any attempt to stifle China would be pointless, a willful neglect of the “limited options” countries have with regard to China’s economic growth. Besides, China could easily retaliate to any antagonistic scheme. What should other nations do instead? “They should empower, not contain China,” said Subramanian. They should, for instance, let China take on a greater role in the IMF and World Bank. An emphasis on making China work through multilateral institutions will ensure it adheres to norms of transparency and openness and will curb the power of hegemons on all sides. “Multilateralism defines what’s legitimate,” noted Subramanian, and he cited the successful example of China’s accession to the World Trade Organization, in which it has generally honored the rules for reciprocity and settling trade disputes. The rest of the world could also promote the internationalization of the RMB. Besides a goodwill gesture, this is in part an acceptance of inevitability: the Yuan, Subramanian believes, will become an international currency on par with the dollar by 2035 whether the world likes it or not. Finally, countries should avoid the temptation to “encircle” China by using regional economic agreements such as the Trans-Pacific Partnership, which Subramanian sees as little more than an effort to balance against China’s dominance.

Ultimately the nature of China’s rise “will be conditioned by how the West reacts,” says Subramanian. “Basic congruence [of interests] isn’t enough,” he warned. Should the United States decide to respond with suspicion and rancor, economic relations will undoubtedly turn into a zero-sum game, to the detriment of all. Therein lies the value of the strategic partnership – an idea in which the latter term matters much more than the former. “Partnership,” it seems, is the core of Subramanian’s vision of the two countries’ economic future – a chancy undertaking, but one teeming with possibility nonetheless.


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