potential for such cooperation. They also reveal the willingness of China to exercise effective leadership, at least when the system on which it relies so heavily seems to be at risk.
A more subtle example of Chinese systemic attitudes may be currency manipulation. China intervened massively in the foreign exchange markets during 2003–13, buying about $4 trillion to limit the appreciation of the RMB. It kept the RMB undervalued by as much as 30–40 percent, which was the major trade distortion of that period and (rather than China’s entry to the WTO) the major cause of the “China shock” to the US and some other economies, and pushed its global current account surplus to 10 percent of its GDP, an unprecedented level for a major trading country (Bergsten and Gagnon 2017). The United States urged China to desist, increasingly from about 2005 and with growing Congressional threats to take action, but never was willing to label China a “currency manipulator” as called for by US legislation, on the grounds that such a public confrontation would make it harder for China to accede, and to avoid risking Chinese cooperation on other issues.
China never admitted liability but, at least partially in response to US pressure, let the RMB begin to rise gradually, while still intervening heavily to limit the pace of appreciation, in 2005 and in 2010–11 again after the global financial crisis. The RMB eventually climbed by 40 percent against the dollar with a subsequent decline in the external global surplus to about 1 percent of GDP (though with continued growth of its bilateral surplus with the United States). Manipulation ceased by 2014, and in fact gave way to sizable intervention to limit depreciation of the currency in 2015, and there was no repetition of the practice after that time. The semi-annual reports of the Treasury Department concluded that China was no longer manipulating and Secretary Mnuchin’s embarrassing designation of China as a “manipulator” in August 2019 was clearly ordered by President Trump solely to fulfill a pledge he had made, without factual basis, during his Presidential campaign in 2016. That designation was undone in January 2020 under cover of the Phase One trade agreement between the two countries, in which China agreed to “enforceable obligations” against any future manipulation that it might undertake.
Thus, the major systemic problem of the early part of this century was resolved (though with sizable economic costs to the United States and other victims, especially during the difficult period of the global financial crisis, because of the delay in achieving the resolution). It will be crucial to see whether China will be willing to implement similar de facto responses over time to the US (and other foreign) complaints about its objectional trade policy practices.
The Policy Options
The key issues posed throughout this volume are now being brought into sharp relief. Will China simply seek power or will it also accept leadership responsibilities, including required changes in its own policies? Will the governance structures and institutions of the extant system be flexible enough to accommodate China’s continuing rise? Will the United States, in particular, be willing to accept such changes, or will it exhibit the typical resistance of the incumbent power to giving up any significant portion of its leadership perquisites? Will China, at some point, insist on modifications that will lead to clashes? In short, can the economic version of the “Thucydides trap” and the “Kindleberger trap” be avoided?
What are the policy options facing the United States, and how do they relate to the alternative futures for the international economic order outlined earlier? The options range from the hawkish extreme containment, à la Cold War, to the dovish extreme of full accommodation to China’s rise, and thus a new G-1 (figure 1.1). The overarching question is whether to seek to include China in global leadership activities or to exclude it as much as possible, recognizing that its size and impact virtually require its participation in many of those activities.
Eight consecutive US presidents, from Nixon to Obama, essentially pursued engagement with China, albeit after sometimes (especially during their election campaigns) threatening to adopt much tougher stances. Engagement basically meant increasing economic interchange between the two countries, to the extent that they became labeled “Chimerica” (Ferguson and Schularick 2007). The policy enabled China to continue strengthening its own economy, and national power more broadly, on the view that this was a good thing for the US and world economies (as had been the earlier US support for the economic strengthening of its allies and friends in Europe, Japan, and many developing countries).
Figure 1.1 US policy options toward China
It was recognized that engagement would enable China to add to its ability to compete with the United States, as had been the case with the other countries (including Germany and Japan) whose development the United States had supported. It was also recognized that China was very different from those other countries, being neither an ally of the United States nor (as in the case of the Europeans) of similar cultural orientation. But every other country that has modernized economically has become a democracy to at least some extent so it was not unreasonable that engagement was undertaken with the hope, and at least a degree of expectation, that such economic interaction would lead over time to liberalization of China’s political system.5 It was also undertaken on the conviction that any effort to contain China’s rise would be both futile, because of its economic strength, and counterproductive, encouraging China to intensify its resolve to succeed and to do so in ways that would sometimes be hostile to the United States, and the West more generally. One implication was that the United States and China would work together to support the global economic order.
The engagement strategy recorded numerous successes. Most fundamentally, it prevented major confrontations and kept the peace – not a given in light of the Thucydides trap. On the economic side, it produced successful cooperation as just noted, in countering the Asian financial crisis in 1997–8 and the global financial crisis in 2008–9, and in forging the Paris Accord on global warming in 2014–15. It was instrumental in enabling China to participate fully in globalization and join the WTO, whose dispute settlement mechanism limited (though by no means avoided) trade conflict between the countries prior to President Trump. American consumers and anti-inflation efforts gained from cheaper and more diverse Chinese imports. Chinese investments in the United States helped to finance the large American budget deficits and held down interest rates (though this also helped to bring on the global financial crisis in 2007–8).
Over the past five to ten years, however, it has become increasingly apparent that China was moving in the direction of greater authoritarianism, and indeed repression, as well as state/party control of the economy. At the same time, the economic challenge became more and more formidable as China became a bigger and bigger player and charges of unfair Chinese behavior intensified. Some wondered why the United States should maintain open markets to Chinese trade and investment, and continue pushing China to reform, if the results would be even greater economic success and enhanced legitimization of political control by the Communist Party. Many, notably in the Congress, pressed for much tougher negotiating postures toward China on trade and other economic issues.
A modified option of engagement plus hedging was thus adopted incrementally, notably during the latter part of the Obama Administration. Economic interaction continued to expand, if not as rapidly as in previous years, but more cases were brought against Chinese trade policies. Both inward and outward direct investment, especially when related to high technologies, were subjected to greater scrutiny. China’s increasing international initiatives, notably the AIIB and BRI, were resisted and even overtly opposed.
China’s rise continued, however. It passed the United States as the world’s largest economy in PPP terms and world’s largest trading nation. Its capabilities on a wide range of high technologies accelerated, with important implications for the national security as well as economy of the United States. Its military activities, especially
