Writing off China is a hazardous option

THE recent Biden-Xi summit in San Francisco was what the Chinese call a ‘win-win’ event. Both sides have reasons to be satisfied, even though, given the nature of the US-China relations, this marks a truce of sorts rather than a final outcome.

The China-US rivalry is not going away in a hurry. Among the outstanding issues is the US grouse on non-market policies and practices adopted by China.

The US went into the talks with the belief that China’s growth had plateaued and that the latter’s economy was unlikely to overtake its own in the near term, if ever. What the US wanted was a stable relationship that would avoid the perils of an inadvertent conflict.

The Chinese perspective also included a desire for stable ties with the US, and so Xi wanted some reassurance on the US policy on Taiwan, while assuring the US that he had no intention of undertaking any precipitate action against the island or fight a war with anyone. Above all, he wanted to persuade American businessmen to continue to invest in and trade with China.

China agreed to restore communication between their militaries and the two sides decided to set up a presidential hotline. China also agreed to a crackdown on the export of fentanyl precursor chemicals. Both countries said they would address issues related to the use of AI (artificial intelligence), especially in military systems.

No doubt what was most heartening for Xi was the three rounds of a standing ovation that he got at his dinner with top US executives. Many US politicians have criticised the business leaders, but clearly the top executives have their own calculations and if Xi is willing to provide the right conditions, they are likely to once again flock to China.

The rivalry between China and the US is not going away in a hurry. Xi may have rejected Biden’s view that the two countries were in a ‘competitive relationship’, but he went along with the American President’s view that the relationship needed to be handled in a rational and reasonable way with effective guardrails to prevent a conflict.

There are many grievances that will fuel the rivalry in the coming period. Among the outstanding issues is the American grouse on economic competition and the non-market policies and practices adopted by China, which has had a negative impact on US workers and firms. As for Beijing, it remains seriously concerned over the US restrictions on high-tech exports to China.

While issues of military communication and fentanyl captured the headlines, there has also been important forward movement on their economic relationship. In September, the US and China launched two working groups to deal with finance and economic policy. Both working groups have been holding meetings and could play a role in re-establishing an element of trust in the US-China economic relationship.

The US says that its policy is to create “a small yard with a high fence”, a strategy to protect its strategic assets without losing the benefits of its wider trade relations with China. The problem is that over time, the yard is likely to get bigger and the fence higher.

Trade between the US and China was around $762 billion in 2022 and their investments in each other’s physical and financial assets are around $1.8 trillion.

The relationship features deep economic links, but geopolitics keeps pushing them apart. The US must also consider that China is currently the top trading partner of more than 120 countries with an import-export value of some $4.6 trillion. It exports a wide range of products — electronics, machinery, textiles, chemicals — and given its hold over the supply chains, decoupling isn’t even an option here. The US has, therefore, adopted the European model of ‘de-risking’ by seeking to shift strategic supply chains away from China. But this remains a work in progress.

The Chinese have in the past decade focused on the Belt and Road Initiative (BRI), which has deeply integrated China into the global economy. According to AidData, China has worked to increasingly ‘de-risk’ the BRI by working with Western international financial institutions like the International Finance Corporation and the European Bank for Reconstruction and Development (EBRD) or commercial banks such as Standard Chartered and BNP Paribas to manage its financial exposure in developing countries.

What both sides seem to have acknowledged is that ‘decoupling’ is simply not likely to take place. There is too much interdependence between them and also mutual interest in ensuring that the global system does not come apart and the need for cooperation in a range of areas from climate change to non-proliferation and pandemics.

In a recent essay in Foreign Affairs, US National Security Adviser Jake Sullivan noted that the main challenge was “competition in an age of interdependence”, adding that a separation of their economies would have “significant negative global repercussions”. This has been the view put forward by Treasury Secretary Janet Yellen, who has argued that constructive engagement could be worked out within the bounds of national security, ‘fair competition’ and cooperation on global challenges.

The current US policy towards China is being laid out in a paradigm where China’s economy is stagnating and is unlikely to recover its zest. Demography and debt have weighed it down and US-led technology restraints are doing their bit. But writing off China is a hazardous option; there is a chance that Beijing will be able to set things right and get its economic engine going again. Should that happen, we are likely to see an entirely new phase in the competition between the two world powers, one that could feature more cooperation than competition.