politically significant clash arose over the scheduled annual meeting of the Inter American Development Bank in Beijing in 2019. The contentious issue was the representation of the government of Venezuela. Host China invited the sitting regime of Nicolas Maduro, but the United States and a number of other member countries rejected him in favor of the appointee of Juan Guaido, whom they recognized as the legitimate leader of the country. The result was a cancellation of the meeting, an unprecedented event in the history of the MDBs. It could be a harbinger of future disputes over national representations as China acquires increased clout in the operation of the different institutions (and the Taiwan issue remains a “core interest” of the mainland, which insisted on excluding the island nation from WHO deliberations on the coronavirus, despite its outstanding success in responding to it).
A much more important case is China’s BRI. This far-flung scheme, whose projects aim to reach $1 trillion or more, clearly promotes China’s commercial interests by providing new markets for the excess capacity of many of its capital goods industries; its financial interests by offering more productive use of its high savings and large foreign exchange reserves; and its foreign policy interests by strengthening its ties to (and potential influence over) a large number of participating countries and indebting them to Chinese lenders. Its financing is often devoid of the traditional economic and values conditions required by Western foreign aid programs. It has been criticized as creating “debt traps” and political liabilities for its recipients. It thus fits less comfortably within the current system, functioning without new multilateral or institutional machinery and with much greater political overtones. It can be viewed as a transactional (largely check-writing) alternative to the rules-based TPP devised by the United States (pre-Trump) and its Asian friends.
An even more complicated interaction is taking place with respect to Huawei and, more broadly, in the high-technology domain. The United States argues that Huawei, the world’s largest producer of network gear for phone companies and the no. 2 global smartphone brand, can be controlled by the Chinese government and thus poses unacceptable threats to its own national security and that of its allies. It has banned Huawei from government contracts, slapped export controls on sales of most US supplies (including key semiconductors) to the company, taken other legal actions against it, and urged its allies to adopt similar policies. Most Chinese view Huawei as a national treasure, and President Xi personally complained to President Trump on several occasions about its treatment by the United States.
The reactions have been mixed. A few allies have agreed. Some have rejected the US overtures on the view that Huawei’s economic efficiencies are highly attractive and that no security intrusions have been demonstrated. Others have adopted a middle course, creating new review mechanisms or otherwise responding to the company’s bids on a case-by-case basis. Suspicions are widespread that the United States is using a security rationale to advance its desire to restrain China’s development (as it misused that rationale to justify tariffs on steel and aluminum, and potentially on automobiles).
The security linkage, much more clearly than with the AIIB, further complicates the Huawei case. It gives the United States, with its much greater power and leadership in the security domain, more leverage than on the “purely economic” issues, especially with its close allies (as in NATO) and, since intelligence questions are a major part of the issue, even more so with its fellow “Five Eyes” members in that space (Australia, Canada, New Zealand, United Kingdom). Even here, however, it has been unable to win full support in the face of strong Chinese economic capability and political clout (and its own inability to present, at least publicly, a compelling case against the company).
The major conflict between the United States and China has of course been the trade war (Davis and Wei 2020). US tariffs on over $500 billion of imports from China rose to an average of about 20 percent, up from 3 percent prior to the crisis. China’s tariffs on most of America’s $150 billion of exports to it rose to 10 percent, while it dropped its tariffs toward everybody else. Trade flows between the two countries dropped by double-digit percentages in 2019, the first full year of the decoupling process. Chinese investment in the United States dropped even more precipitously, due mainly to the sharp tightening of China’s controls over capital outflows, but also due to the rejections of Chinese proposals by the Committee on Foreign Investment in the United States (CFIUS), and the deep chill in the investment climate for China in the United States that has resulted.
Though ostensibly addressing immediate concerns such as merchandise imbalances and level playing fields, the trade war is rooted in deeply systemic issues, none of which was addressed effectively in the Phase One agreement reached in January 2020. China’s widespread deployment of subsidies to SOEs and others, demands for technology transfers to obtain access to its markets, and theft of intellectual property all reflect its state-centric economic system and disdain for the rule of law – basic conflicts with the international regime and norms that have prevailed, albeit in highly imperfect form, for over half a century. They raise the quintessentially systemic issue of whether China’s “socialist market economy” and the traditional capitalist system of the West can coexist without constant conflict. This latest source of China – United States confrontation thus underlines the imperatives of both systemic reform and cooperation between the two superpowers to make such reforms happen. So does their multifaceted conflict over the coronavirus pandemic in 2020, which deepened the mistrust and confrontation engendered by the trade war.
As the Trump Administration left office in late 2020 and early 2021, China accelerated three of its initiatives, in an apparent effort to take advantage of the global economic leadership vacuum created by that Administration and to get ahead of the Biden Administration’s likely moves to limit such opportunities for it. It concluded its negotiation, after seven years, for a Comprehensive Agreement on Investment (CAI) with the European Union as a partial equivalent to its Phase One trade agreement with the United States in early 2020 (which, however, remained to be ratified by the European Parliament). It brought to conclusion, after an even longer gestation period, the RCEP with 15 Asian neighbors (including by dumping India, which had impeded the process interminably), which carried considerable political significance because it encompassed the first formal steps toward free trade between China and Japan (and between Japan and South Korea). It stepped up its avowed interest in joining the CPTPP, presumably in part to get ahead of (or at least to move in parallel with) a possible Biden interest in reengaging the United States (and subsequently applied for membership). These items did not quite amount to a “dash for dominance,” but they certainly underscored China’s active pursuit of global economic leadership in competition with the United States.
Recent Systemic Cooperation
Several examples of effective systemic cooperation between China and the United States can also be observed. They both contributed to an effective resolution of the Asian financial crisis in 1997–8, the United States mainly through the IMF, and China by avoiding any devaluation of its own currency, which would have greatly intensified the contagion of the period. (They both rejected Japan’s proposal for an Asian Monetary Fund, killing an idea that could indeed have challenged the existing architecture but that has come back in modified form via the Chiangmai Initiative Multilateral supported by both China and Japan.)
They adopted parallel fiscal and monetary stimulus measures in response to the global financial crisis a decade later, effectively rescuing the world economy. They largely resisted protectionist impulses, avoiding the extensive erosion of the global trading system that was widely feared. They consulted actively on containing the euro crisis. China and the United States collaborated to conclude the Paris Agreement on global warming in 2015 (subsequently repudiated by President Trump, but maintained by the rest of the world including China and rejoined by President Biden). Their Phase One agreement in early 2020 called at least a temporary truce in the trade war that was roiling the world economy.
These cooperative episodes fall far short of an ongoing G-2 co-leadership of the global order, which the two countries explored during 2005–9 and will be addressed in chapter
