Arthur Kroeber: Economic Sources of US-China Rivalry

What were the triggers for the paradigm shift in US-China relations over the past two decades? In the most recent installment of the CSCC Future of US-China Relations Project, China scholar Arthur Kroeber laid out his expert analysis. Kroeber is the co-founder of the China-focused research center Dragonomics and is the editor-in-chief of China Economic Quarterly. He provides a three-step explanation for the rise in economic and political tensions between the US and China. The initial trigger was China’s entry into the WHO, lowering world trade barriers between China’s growing economy and global markets. As it began implementing unfair economic policies, the nation’s economy with respect to the West turned from complementary to competitive. In the present day, China has leveraged its economic power for global influence, agitating the US and sparking the current worldwide competition of influence and ideas.

China’s accession into the WTO in 2006 and 2007 was met with optimism from the international community, but that quickly faded as the massive inflow of firms wishing to expand into the nation was not met with much reciprocity. The CCP began implementing unfair policies and forcing regulations onto foreign firms operating within their borders, while Chinese companies expanding internationally had relatively few restrictions placed on them. Rated for investment openness by the OECD, China scored a 0.07 in comparison to a 0.35 OECD average. These unfair means of competition have translated into the economic tensions we see today. As the 2008-2009 recession hit, the US lost countless manufacturing jobs to China, most of which it has never recovered. Furthermore, concerns about intellectual property theft and shady investments have raised security (economic and otherwise) concerns for US officials. Besides the CCP’s encouragement of foreign firms to transfer patents and technology, Chinese FDI into the US has surged since 2012, largely into technology and AI companies. The implications of Chinese dominance in such a valuable field led the CFIUS (Committee on Foreign Investment into the United States) to impose controls on such FDI. The number of investigations handled by this committee has surged, from a maximum of 7 per year between 1988-2008 to 66 in 2015 alone.

But the rise of China is not just an economic one. Xi Jinping’s Belt and Road Initiative has crystalized previously amorphous methods of leveraging economic power for geopolitical influence. Via trade leverage and massive infrastructure projects, the CCP has gained massive sway over much of the developing world and beyond. This is especially concerning, given that the US view (until recently) was that the state-led authoritarian capitalism model of China’s economy was unsustainable and doomed to fail.

The economic challenge that China presents is inseparable from the challenge it presents to a unipolar world. But it is impossible to go back to the old model of US-China relations; China is simply too economically formidable. Yet, full-scale decoupling is impossible. The two nation’s economies are too deeply interconnected. We must somehow find a path between “the unsustainable and unachievable,” as Kroeber put it. While he has no definitive answer, he did point out the danger in comparing the US and China to the US and the USSR, citing the economic integration currently present between the two powers. Instead, he likened the US-China relationship to the US and Japan in 1985. Japan’s threat to US manufacturing was stopped with specific several trade restrictions on key competing industries such as semiconductors.

It seems that there is no easy way to stop China’s rise. No matter the choice Washington makes, there is bound to be economic and political fallout, and it remains to be seen what, if anything, can be effective.

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