US-China relations have entered a frightening new era – 4/25/2023 – Martin Wolf

The relationship between the United States and China has the potential to determine the destiny of mankind in the 21st century. It will determine whether there will be peace, prosperity and protection of the planet’s environment, or the opposite. Should the opposite happen, future historians (if they still exist) will surely marvel at the inability of the human species to protect itself from its own stupidity. But today, fortunately, we can still act to avert catastrophe. This is true in many domains. Among them, the economy. How, then, could economic relations be best managed in the increasingly difficult future we face?

Janet Yellen, Secretary of the US Treasury, and Ursula von der Leyen, President of the European Commission, have recently made very thoughtful statements on this subject. But is what they describe viable? About that, unfortunately, I have doubts.

Yellen lays out a plan for what she calls “constructive engagement.” It has three elements: first, “securing our national security interests and those of our allies and partners, and protecting human rights”; second, “seek a healthy economic relationship” based on “fair” competition; and, third, “to seek cooperation in the urgent global challenges of our day”. In her analysis of the first element, the secretary stresses that “US national security actions are not intended to gain a competitive economic advantage or to stifle China’s economic and technological modernization.” However, the difficulty is that, in China, things are not seen that way at all, as I learned during a recent brief stay in Beijing.

Yellen’s discussion of security as a crucial element reveals the situation can be problematic. She stresses, for example, the United States’ concern about China’s “boundless” partnership and support for Russia, and warns against providing material support or help to circumvent sanctions. It also underscores US concerns about human rights, including those that the Chinese regard as purely domestic issues.

Despite these concerns, Yellen asserts that “we are not trying to ‘decouple’ our economy from the Chinese economy”. On the contrary, “a growing, rule-abiding China could be beneficial to the United States.” After all, she points out, the United States trades more with China than with any other country except Canada and Mexico. However, she adds, the United States is opposed to China’s many “unfair” trade practices and will continue to “take coordinated action with our allies and partners in response.” Actions related to supply chains, including “friendshoring” [transferência de produção a países amigos]are one of the results.

Von der Leyen’s approach is complementary. She also states that “decoupling is not feasible, desirable or even practical for Europe”. However, she argues, China “has now turned the page on the era of ‘reform and opening’ and is entering a new era of ‘security and control'”. Von der Leyen’s focus, like that of the United States, is “risk reduction” in the relationship. One way is to eliminate vulnerabilities and preserve strategic autonomy. As in the United States, this implies strategic investments in certain key sectors. Another way is the active use of trade defense instruments. Yet another is to invent new instruments to ensure that the capital and knowledge of European companies “are not used to bolster the military and information capabilities of those who are also our systemic rivals”. This could include foreign investment controls. A final route is to deepen cooperation with partners.

In a recent and remarkably pessimistic book, “The Avoidable War,” Kevin Rudd, the former Prime Minister of Australia, defends what he calls “managed strategic competition” between the United States and Xi Jinping’s China. It could be argued that Yellen and Von der Leyen are embodying the economic elements of this approach.

If that is the case, the proposals are unlikely to work. Unilateral efforts by one party to feel more secure are likely to make the other party more insecure. This is evidently true in the narrowly defined domain of security. If one side has an advantage in a key technology, the other is vulnerable. But it is also true in the economic domain. Refusal to sell strategically vital technologies or resources—or even the possibility that such a refusal might happen at some point in the future—will make the other side feel economically insecure. Indeed, it was clear in Beijing that well-informed Chinese believe that the United States intends, in practice, to impede their country’s economic rise. US controls on chip exports may have been designed to bolster US security. But they are also a drag on China’s economy. The two things cannot be separated.

Nor is this conflict likely to get any easier. Measured under comparable criteria (by “purchasing power parity”), the economies of the United States and its allies continue to be about 80% larger than those of China and Russia combined. However, China remains a poor country: in terms of purchasing power parity, Chinese per capita income in 2022 remains less than 30% of US per capita income. Let’s assume that the country manages to reach the current relative position of South Korea. Its economy would be almost half the size of the economies of the United States and the European Union combined. Will it happen? Probably not. But, taking into account the previous results, it is not a possibility that can be excluded. In any case, China already has a powerful economy, an important role in world trade, and a huge army.

The era of strategic confrontation we have entered is a frightening one. This is especially true for those of us who want the ideals of individual freedom and democracy to thrive, while cooperating with China in maintaining peace and prosperity and protecting our precious planet. Somehow we have to cooperate and compete while avoiding military conflict. Our starting point should be to achieve the greatest possible transparency regarding our goals and plans. We learned the need to do this after the Cuban Missile Crisis of 1962. But we will need much more than that, and probably for longer. Few leaders in history have borne a greater moral burden than today’s leaders.

Translated by Paulo Migliacci

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