In the past, the ties between the United States and China were governed by the constraints of the Cold War. But the Cold War ended two decades ago. Now, it is time to adjust Sino-US relations to the multipolar era. During his four-day state visit to the US, President Hu Jintao has called for enhanced cooperation with the US in energy, infrastructure development, aviation and space. At the start of President Hu’s visit, the US and China agreed on US export deals worth $45 billion. Even before the visit, Chinese and US businesses had signed agreements worth $600 million in Texas. These are good developments, but the basic framework of US policy toward China was created during the peak of the Cold War. Today, these basics should be reassessed in the light of China’s next stage of growth and structural shifts in the global economy. Among other things, that should mean broadening and deepening of Sino-US ties in trade and investment. China is the US’ second-largest trading partner, third-largest export market and biggest source of imports. In recent years, US-China economic relations have been strained over a number of issues, including the US’ annual trade deficits with China. But the US enjoys a trade surplus in service exports, and 50 to 60 percent of “Chinese exports” are actually trade by foreign multinationals, including US companies, operating in China. Efforts to deepen bilateral clean energy cooperation, however, are promising. In 2008, China and the US signed a framework on a 10-year cooperation on energy and the environment. President Hu and US President Barack Obama have now highlighted the importance of China-US cooperation in these areas. Less than 10 percent of China’s high-tech imports in terms of value are from the US. If Washington were to relax its export controls on high-tech products, Beijing would gain know-how for productivity, while Washington would gain capital for employment. In early 2009, the Obama administration announced that it aimed to double US exports in five years to facilitate economic recovery. The success of this export strategy is predicated on sustained globalization, open borders and avoiding protectionism. In 2005, China National Offshore Oil Corporation (CNOOC) made a bid to acquire US energy company Unocal for $18.5 billion, but its efforts met with resistance. But times may be changing. Late last year, CNOOC succeeded in getting a stake in a US shale oil and gas field for $1.1 billion. The bulk of Chinese investment in the US has flown into advanced manufacturing, while some companies have started making forays into the service sector – as exemplified by the acquisitions of Chinese e-commerce giant Alibaba Group last year.
In relative terms, the US is one of the three most rapidly growing markets for Chinese investment – the others being the European Union and Japan. In absolute terms, however, the volume remains small. The US is at risk of missing the advantage of being an early mover in the world’s fastest-growing large emerging economy.
In November 2010, China’s holdings of US Treasuries reached $896 billion, and Beijing remained the largest foreign holder of the Treasuries. Two months before, the debate over China’s alleged “currency manipulation” moved to a new level when the US House of Representatives approved legislation that would allow the US to seek trade sanctions against China and other nations for engaging in “currency manipulation” to gain trade advantages.
Yet imports of inexpensive goods from China are not the primary cause of declining manufacturing output or job losses in the US. Even a significant exchange adjustment will not bring the lost low-cost jobs back, nor will a political currency blame game, which is just a distraction.
The yuan rose by almost 20 percent by the end of 2009 after Beijing reformed its currency policy in 2005. China will also make the yuan convertible on the capital account in the next five years and maintain its efforts to internationalize its currency’ further.
Effective global rebalancing cannot be resolved through bilateral pressure; it requires multilateral cooperation.
For the success of bilateral relations, it is important to:
broaden trade relations, because imbalances will decline gradually in the coming years;
relax US export controls, which will bring know-how to China and jobs and investment into the US;
increase cooperation to strengthen Sino-US investment cooperation; and
deepen bilateral ties, which will precipitate the convertibility of the yuan and support the dollar.
Given a stable international environment and internal cohesion, China may be able to sustain relatively high growth for another 10 to 20 years. The interdependent relationship between the US and China has the potential to ease China’s transition to a new stage of growth and facilitate the US’ recovery from the worst recession since the Great Depression.
With cooperative policies rather than friction, US can facilitate China’s growth and benefit from it.
The author is research director of International Business at the India, China and America Institute, an independent think tank in the US, and visiting fellow at Shanghai Institutes for International Studies.