America and China: It’s Complicated

February 3, 2016

Editor’s Note: This article is adapted from the Heritage Foundation’s forthcoming Solutions 2016, a recently released policy handbook for federal candidates.

 

“It’s complicated.” That vague Facebook relationship status indicator very much applies to the United States and the People’s Republic of China.

American decision-makers must balance necessary cooperation with increasingly intense competition. They must reconcile the benefits of America’s enormous economic relationship with China with the demands of maintaining the alliances, partnerships, and forward-deployed military needed to offset China’s increasingly strident bid to displace the United States as the Asia–Pacific’s preeminent power. The effort to draw China into the global trading system, while upholding the principle of “Freedom of the Seas” in waters now claimed by China, is perhaps emblematic of the difficult nature of this relationship.

China (the rising power) and the United States (currently the dominant power) constantly compete with each other throughout East Asia, even as the two economies continue to intertwine. As China’s strategic center of gravity has shifted to the coast, Beijing’s views of its “core interests” and fundamental national concerns mandate dominance, if not outright control, of the region lying within its “first island chain.” That chain stretches from Japan through Taiwan and the Philippines to the Malacca Strait. East Asian states along that line are largely U.S. allies, as well as major Chinese trading partners. Yes, it’s complicated, indeed.

China’s economic growth has been due in part to the economic liberalization begun under Deng Xiaoping and sustained by Jiang Zemin. Liberalization allowed China to generate the surpluses and wealth that in turn helped it become the world’s largest trader (as of 2013) and invest tens of billions of dollars in Australia, South America, and sub-Saharan Africa. But credit is due, as well, to the international trading system, undergirded by the global financial system, where the U.S. dollar is the world’s reserve currency and the American bond market is a safe haven. Without these elements, China’s exchange rate and balance of payments regime could not function.

Over the last several years, though, China has increasingly chafed at its subordinate role in international trade and finance. Beijing worked hard to get the renminbi accepted in the International Monetary Fund’s basket of currencies with Special Drawing Rights. Meanwhile, it established a network of new international banks, including the Asian Infrastructure Investment Bank (AIIB) and the New Silk Road fund.

China’s huge reserves leave many American leaders wary of China’s influence on the United States as a creditor, especially when our nation’s debt increasingly threatens U.S. financial security and solvency. Such fears are overblown, as China would incur great capital losses if it rapidly sold U.S.-denominated assets. Moreover, other countries would quickly absorb the sell-off as bond prices fell and yields to maturity rose. China has business contracts and financial investments across the globe, but it keeps the bulk of its money in U.S. dollar assets because the American market is the only one large enough to absorb its giant foreign currency reserves. The lack of investment choices and China’s overriding interest in security and return on investment severely limit any influence China’s debt holdings have on the United States — a situation exacerbated by the structural problems of the Eurozone.

China remains a growing economic powerhouse, but serious structural, economic, and even political issues hamper its further development and potential for economic leadership. And renewed state intervention in the economy, beginning around 2004 under Hu Jintao and apparently continuing unabated under Xi Jinping, has made these problems worse. For example, reliance on state-directed investment has led to a profound economic imbalance and is likely to threaten future development. Frantic spending in response to the global recession led to massive waste and corruption and distorted resource allocation. This is manifested in inflation and debt pressures.

China’s own numbers indicate that economic growth has slowed substantially. That trend is likely to continue. It remains to be seen whether the Chinese leadership under Xi Jinping will revive economic reform to reignite real, long-term growth or simply continue to rely on economic stimulus packages and support for state “champions,” that is designated companies (often state-owned) that will enjoy easier access to capital and state intervention against competition.

Critics claim that increasingly close economic ties between the United States and China have cost American jobs, and that China’s exchange rate policies are particularly harmful. But China’s exchange rate has been appreciating, and its currency policy is not to blame for lost American jobs. The United States should not abandon its free-market approach to China and retreat into protectionism. Government interference with purchases, sales, and other economic decisions made voluntarily by American consumers and companies can only hurt our economy. It would also be a clear abandonment of America’s global leadership.

Although China has permitted more individual economic freedom over the last three decades, it is still a one-party authoritarian regime. The Chinese Communist Party continues ruthlessly to suppress any group — and even lone individuals — that might threaten its monopoly on power. Yet the one-party bureaucratic system, which answers to no outside authority, breeds corruption and leads to much administrative waste within the political system.

There are concerns that, in addition to its internal conflicts and human rights abuses, rising China aims to displace American preeminence in the Western Pacific. China’s military has modernized at a pace that often defies foreign expectations, aided by economic growth that has allowed Beijing to acquire both guns and butter. Official Chinese defense spending figures indicate annual double-digit growth for most of the past two decades. The People’s Liberation Army (PLA) has introduced new fighter jets, anti-ship ballistic missiles, space systems, and now an aircraft carrier faster than predicted. The Chinese military is also believed to be engaged in computer network attacks worldwide.

These efforts are supported by reforms in military doctrine and training. The last several weeks have seen announcements of a fundamental overhaul of the PLA’s organizational structure. The reforms aim to better prepare it to fight and win future “local wars under informationized conditions.”

Meanwhile, China has assumed an increasingly hardline stance in its territorial disputes with American friends and allies: in the East China Sea with Japan, in the South China Sea with the Philippines and Vietnam, and even on its southern border with India. The Taiwan issue also remains a potential flashpoint in Sino–U.S. relations. More than 1,200 Chinese ballistic missiles are arrayed against the island. Taiwanese President-elect Tsai Ing-wen heads the Democratic Progressive Party, which has long championed independence. Her election will likely spur Beijing to refocus attention on the Taiwan Straits.

Diplomatically, China has cultivated relationships with countries that openly oppose and threaten the United States, including North Korea and Iran. China has also become much more strident in opposing traditional freedom of navigation near its coast, directly challenging the long-standing American principle of freedom of the seas.

Only the United States has the ability to balance China and keep its increasing assertiveness in check. No Asian state can match China’s nuclear arsenal, growing conventional military capability, and burgeoning defense budget. Similarly, Taiwan can hope to defend itself only with U.S. support, including arms sales. For these reasons, Beijing has pushed the United States to assume a smaller role with respect to Taiwan and the region as a whole. China has acquired weapons that are much more suited to countering U.S. military capabilities than they are to simply defending China’s own borders and sea lines of communications.

Despite the mutually beneficial economic relationship, Beijing’s leaders seem more and more intent on challenging Washington’s presence in East Asia — especially where China has disputes with American allies, friends, and partners. Confrontation could be economically disastrous for the region — and the world. For example, were China to interfere with freedom of navigation in the South China Sea, the disruption of trade would cripple U.S. allies such as Taiwan (which imports 98 percent of its oil via the South China Sea). It would also imperil the 40 percent (by value) of global trade that transits those waters.

Were China to threaten to use force or try to inhibit U.S. ability to cooperate with our regional allies, it would risk a much broader military conflict. The lack of funding and resources to realize the so-called Asia pivot — coupled with American policy vacillation — has raised questions in various quarters about American reliability and the potential loss of U.S. military predominance.

So how should Washington proceed to chart a course through these troubled and “complicated” waters? Here are five foundational policy recommendations:

Remain economically engaged with China and encourage free-market cooperation. Keep economic discussions tightly focused and based on open-market, not protectionist, principles. China will not give up state intervention quickly or fully. But the U.S. should encourage greater competition and fewer subsidies, working hard to roll back China’s mercantilist policies at the World Trade Organization. Freer movement of money in and out of China is another key issue; the U.S. should press it in appropriate bilateral and multilateral forums. Most important, however, the United States should get its own house in order and not mimic unwise Chinese policies.

Honestly evaluate Chinese “cooperation” to date. The United States and China can work together on certain issues, but the United States should not credit China for helping where progress has not been made. China’s interests, whether regarding Syria, outer space, or maritime legal regimes, do not mirror those of the United States. And China regularly votes against U.S. interests at the United Nations. China doesn’t pretend that its interests mirror America’s, and the United States should recognize the same reality. Washington should adopt a more realistic view of cooperation, based on case-by-case coincidence of interests.

Remain committed to treaty alliances and forge deeper relations with other East Asia nations. The United States has five treaty allies in the Asia–Pacific region: Japan, South Korea, the Philippines, Australia, and Thailand. Washington must be unequivocal in its commitment to mutual defense under these treaties. The United States should engage these and other, non-ally nations in the region so that they do not perceive China as the sole game in town. India is the leading power in South Asia, but China has made inroads with neighboring countries that could undermine the trends toward stability and democracy in the region.

Develop and maintain a strong, comprehensive response to bad Chinese behavior. Progress in one area does not excuse China’s shortcomings elsewhere. China should not escape condemnation with the pretense of being a “responsible stakeholder” when it provides diplomatic assistance to authoritarian regimes — such as Syria, North Korea, Iran, and Sudan — that abuse their own people and/or threaten American security. Likewise, China’s unwillingness to recognize the negative aspects of its conduct as a powerful nation — such as the rampant cyber-intrusions originating from China — must be addressed.

Maintain a strong U.S. military presence in Asia. U.S. Navy and Coast Guard shipbuilding and modernization programs must be fully funded. The United States should also invest in long-range power projection systems — such as unmanned aerial vehicles, bombers, and nuclear attack submarines — that could counter Chinese efforts to deny U.S. forces access to the region or interfere with the freedom of the seas. In addition, the United States must maintain robust bases in the region to support U.S. forces.

 

Specializing in China’s military and foreign policy, Dean Cheng is a research fellow in The Heritage Foundation’s Asian Studies Center.