A Win-Win: The Essence of China-US Economic Cooperation

The global financial crisis dragged the economy of the U.S. into trouble at the same time that China successfully fended for itself and kept a relatively brisk pace of growth. Such a reversal of fortunes stimulated a psychological imbalance for some Americans, who even attributed their country’s economic woes to China. But as of late, the U.S. has been frequently stirring up disputes in the realm of trade. It has restricted the entry of Chinese goods and enterprises into the U.S. market, citing economic rescue measures and safety inspection procedures. Not only does this damage the legitimate interests of Chinese firms, but it also harms the interests of the United States as well. In fact, China-U.S. economic cooperation is naturally set up for mutual wins. Strengthening economic cooperation between China and the U.S. is not only conducive to sustained economic development between both countries, but it is also favorable to global prosperity and stability.

China Not To Blame for U.S. Economic Difficulties

The 2007 to 2008 financial crisis was a watershed moment for U.S. economic growth. While it recorded robust growth during the 1990s, since the bursting of the dot-com bubble from 2001 to 2006, the country maintained a false prosperity stimulated only by the Federal Reserve’s loose monetary policy. After the global financial crisis, the U.S. economy got into serious trouble with many companies going bankrupt and unemployment stuck at a high level.

Recent statistics show that the U.S. economy is now gradually recovering, and growth for 2013 may actually be a slight improvement over 2012. The U.S. real estate market has rebounded and consumer sentiments have risen. America’s domestic shale gas revolution and technical improvements in other areas show that it is striving to seize the strategic high ground and cultivate a new technological revolution among its leading industries. The United States, which gave rise to and leads the current global economic regime, is able to constantly adjust and make circumstances ever more favorable for it to retain its lead in the collective interests of developed economies. In the realm of international finance, the U.S. dollar continues to be the dominant global currency because the U.S. is the only country that can borrow from and pay back the world at any time by printing its own currency.

While blessed with certain advantages, the U.S. continues to face tremendous economic difficulties, even with the first signs of economic recovery. First, the country is facing a long-term dilemma with debt. The government debt-to-gross domestic product ratio in 2012 had already reached 107.2 percent, and with baby boomers gradually reaching retirement age, it will be hard for the U.S. to increase revenue and decrease spending for a long time. This may lead to a vicious cycle of increased debt and stagnation. Secondly, continued quantitative easing (QE) could bring risks. From 2008 until the end of 2012, the Fed instituted four rounds of QE and unleashed a flood of liquidity. The Fed will soon face the hard reality of “easing out” from QE. Third, the severe imbalance of payments continues to be a problem, as the U.S. has maintained an account deficit for 21 consecutive years now, and the 2012 current account deficit still amounts to a high of 3.1 percent of GDP. In the long run, a persistently high current account deficit will make people lose confidence in the country’s economy, and investors will lose trust in dollar-denominated assets. Lastly, persistently high unemployment encourages social problems to fester. According to U.S. Department of Labor statistics, unemployment after seasonal adjustments for February 2013 stood at 7.7 percent, whereas the figure was 4.8 percent over the same period in 2008. With stubbornly high unemployment, economic languor and decreased social welfare, there is a clear and present threat to the American dream.

When facing a myriad of economic difficulties, the logical reaction is to forge a consensus and accelerate innovation. Yet some Americans do all they can to find a scapegoat by resorting to contradiction as an outlet for their discontent, putting urgent problems on the back burner and pointing their finger at China.

Some Americans fault the Chinese currency for being undervalued, unleashing a flood of low-cost Chinese goods into the country and leading to some companies’ bankruptcy and job losses. But this argument lacks credence both in theory and practice. First, since the Yuan’s appreciation in 2005, the exchange rate has broadly reached equilibrium. From July 2005 when the Yuan’s exchange rate first began to rise until late February 2013, the currency has strengthened by about 30 percent against the U.S. dollar. Since Chinese inflation over the same period exceeded that of the United States, the actual Yuan appreciation rate must have been higher. Moreover, the adjustment of trade imbalances should be more contingent on each country’s structural reform. China’s 2007 current account surplus was 10.1 percent of its GDP and had already declined to around 2 percent by 2012, a result of China’s efforts to promote structural reforms and transform its way of development. At the same time, the U.S. current account deficit as a share of GDP barely declined from 5.1 percent in 2007 to 3.1 percent in 2012, reflecting how much further the country has to go in terms of structural reform.

Some U.S. firms grumble about how their Chinese state-owned counterparts get all sorts of perks from their government, leaving U.S. firms with little protection and making it hard for them to compete on a level playing field in China. In fact, the current output of Chinese state firms and holding companies amounts to only around 30 percent of GDP, whereas the nonstate part of its economy generates 80 percent of urban employment, 65 percent of patents, 80 percent of all technological innovation and more than 85 percent of import-export. With administrative structural reforms in state-owned companies taking root, a vast majority of them have become listed. These firms must allow for supervision by domestic as well as international regulators and operate according to market rules. However, confidence has declined among some U.S. firms in the Chinese market, mostly due to changes such as the rising cost of labor, the presence of other foreign-owned firms and the rise in competitiveness among Chinese domestic enterprises. China has not closed the door to U.S. investors, and U.S. firms have not lost interest in China’s market. A survey by the U.S.-China Business Council in 2012 shows that 90 percent of American companies in China continued to be optimistic in their future outlook.

Even though the U.S. has long flaunted itself to be open to all, it is nonetheless keen on enacting discriminatory policies against China in the fields of trade and investment. The country restricts exports by Chinese firms through trade relief measures, such as anti-dumping and anti-subsidy. It invokes so-called national security reviews to obstruct Chinese businesses from investing within its borders. It also restricts some government departments from purchasing Chinese IT equipment in the name of national security, at the same time as it is tightly controlling exports of some high-tech products to China. Not only are such practices unfair to Chinese enterprises, they also damage the interests of American consumers and related industries. More seriously however, they send a message of trade protectionism to the world. Such measures openly go against an agreement made at the G-20 summit against new protectionist measures and may imperil the global economy through beggar-thy-neighbor policies and zero-sum stances.

China-U.S. Economic Cooperation Helps Bring About a Win-Win

China and the U.S. have their own national interests and cultural norms, as well as disparities in their models and paths for development. But between them still lies great potential for economic cooperation.

China-U.S. trade has already turned into an intimately linked entity. First, China’s huge quantity of exports to the U.S. has improved the lot of U.S. consumers, lowering the price of goods and helping the Fed keep relatively low interest rates to stimulate economic expansion. Moreover, U.S. firms investing in China reap huge benefits from the country’s economic growth. A survey by the U.S.-China Business Council showed that 89 percent of American companies in China were profitable in 2012. Two-thirds of companies surveyed said that income from their Chinese operations had increased by 10 percent or more over the past year, with 75 percent indicating that profits from their Chinese operations exceeded or equaled those of their global ones. Finally, China invested large sums of its foreign exchange reserves in U.S. Treasury bonds, thereby keeping the United States government’s finances stable.

Moving on, both China and the U.S. need to structurally adjust their economy and possibly form a new paradigm to coordinate their interests. The most important task currently facing the United States is to resume and promote steady growth of its economy and boost levels of employment, while China is hard at work transforming its style of growth and can lend new momentum to U.S. economic recovery. To begin with, furthering urbanization in China and implementing the national income doubling plan will prompt huge investments and consumer demand, thus creating greater leeway for future U.S. exports and investment to China. Second, Chinese firms will maintain a “going out” strategy, with progressively more of them willing to invest and set up shop in the U.S., helping to create jobs there. Up until the end of 2012, Chinese investments in the U.S. had created approximately 30,000 jobs, and in 2020 that figure is expected to rise to between 200,000 and 400,000. Third, the U.S. has already recognized that East Asia is among the most dynamic areas for future economic growth. For the U.S., increased cooperation with economically vibrant East Asia is its rationale for pivoting toward the region. If the country truly aspires to become part of the vast Asia-Pacific economy, it will have to strengthen communications and cooperation with China, which is now becoming the region’s axis for economic growth and stability.

At present, the most important task for China is to transform its way of development to achieve balanced and sustainable growth. The rebounding U.S. economy can help provide better external conditions for China’s economic development. First, China is devoting itself to upgrading its industrial infrastructure and enhancing its innovation capability. Importing high-end U.S. products and advanced technology will help China attain technological progress quicker. The U.S. economy’s recovery also gives Chinese exports more opportunities. Second, Chinese manufacturing is very competitive among global markets, yet its services sector trails behind others’, which is precisely where the U.S. holds a competitive advantage. However, China and the U.S. complement each other rather well when it comes to their industrial infrastructure. Third, both countries are actively preparing for the next revolution in technology. The U.S. owns a great part of the core know-how, while China has a large cohort of practical research talent and a huge domestic market. American expertise, complemented with Chinese talents and markets, can help speed up the innovation and industrialization of new technologies.

China-U.S. cooperation is not only limited to economics, yet economics is where both countries can best realize their complementary strengths. It serves as an important channel for both sides to improve strategic trust and broaden pragmatic cooperation.

China-U.S. Economic Cooperation Helps Improve Global Governance

As U.S. economic clout goes into relative decline, with Europe and Japan’s economies in a prolonged slump, emerging powers grow stronger day by day and the traditional framework of global economic governance comes under pressure for change. Thus China and the U.S. should step up their game to better achieve the world’s common interests.

In the realm of commerce, all sorts of protectionist policies have been on the rise since the global financial crisis. With the World Trade Organization’s Doha round of negotiations now practically at a standstill, other countries have started taking a different approach by setting up a plethora of free trade zones. These agreements [outside of Doha] could benefit member nations but may also result in trade distortions, and subtract from the “bigger pie” of global economic welfare. Any regional free-trade agreement should have as its basis the World Trade Organization regulations; therefore, China and the U.S. should work together along these lines to protect global free trade and the multilateral trade regime.

Led by the U.S., developed nations should come together regarding investments with newly emerging ones, including China, to construct a framework for global investment regulation. Existing global investment norms allow for great flexibility among developed nations and even tend to protect their interests. Recently however, much change has happened to global investing as newly emerging economies are now the source of robust growth in foreign direct investment. The interests of emerging economies must be given due attention: Not only have they long been the target of foreign investments, but they now also represent the interests of emerging economies investing abroad. The global investment regulation framework of tomorrow will establish a highly open international investing environment and further improve on safeguards concerning overseas investments by firms. China and the U.S. ought to shoulder more responsibility for the challenge of establishing an international investment regime.

As for finance, these two countries should again cooperate to promote reform in the international monetary and financial regime. The global financial regime has suffered several acute crises in the past 15 years, with each successive crisis more destructive than the one before. This shows a lack of international regulation within the global monetary and financial system and brings with it huge systemic risks. Global financial governance has to concurrently deal with two problems. Primarily, it has to guarantee the free movement of capital so it can better service the real economy. Second, it needs to maintain the stability of financial markets and avert financial crises, or at least reduce their destructiveness. China and the U.S. can push for reforming the International Monetary Fund, redress inequalities in the balance of payments worldwide, establish a more stringent mechanism to regulate global capital flows and increase collaboration in other critical areas. This not only serves the interests of both countries, but also helps to protect the openness and stability of the global financial system.

China and the U.S. share a common interest in the midst of the global economy’s many issues, even though both sides also harbor mutual strategic distrust. In particular, some Americans continue to maintain a Cold War mentality, which invites opposition and obstacles in China-U.S. economic cooperation. In a meeting with U.S. Secretary of State John Kerry, President Xi Jinping pointed out that “[the] vast Pacific Ocean has ample space for China and the United States.” China and the U.S. should intensify economic communication and teamwork and achieve a mutual win for the benefit of both of their peoples, as well as contribute accordingly to the protection of global economic prosperity and stability.