The U.S. and China Should Avoid an Economic Cold War
When the first G20 summit was held in Washington at the end of 2008, many people believed that the moment had finally come for developed and developing countries to jointly determine important international policies. But in the past five years, the United States and China have made little headway in jointly governing international economics, and more importantly both countries are at odds over the standards of new economic reforms. On one hand, the United States and 11 other countries have tried to establish the Trans-Pacific Partnership (TPP) without China. On the other, China is mulling setting up the Regional Comprehensive Economic Partnership (RCEP) without the United States. It is no bad thing for there to be competition in the process of liberalization. However, if the world's two largest economies choose to reject each other and act like its every man for himself, it is very likely to send significant shockwaves throughout the structure of international trade and investment.
It seems as though the problems facing Sino-U.S. relations today are caused by a lack of mutual trust. In 2008, when Washington joined the TPP and went about trying to establish the new standards of 21st century globalization, many in the United States felt that China would not be capable of achieving those standards in a short time. Meanwhile, a number of experts in China believed that United States was simply using the TPP as a tool to isolate China, and recommended that Beijing adopt new methods of promoting international trade and investment reforms.
In both countries, there is some belief that the RCEP is a significant part of China's strategy to defeat the TPP. This line of Cold War thinking is damaging to not only the economies of both countries, but even to the world economy. Today, China is the main importer for practically all the TPP member states, and holds a core position in the global manufacturing supply chain. Therefore, if the proposed TPP reforms are implemented, a vast amount of trade and investment activity could well shift from China to TPP member states. In the same way, if RCEP reforms go through, major economic activity would shift from the United States to other countries. This prospect stands in direct contrast to the close cooperation the two have enjoyed in the past few decades. China is one of the major beneficiaries of America's advocacy of economic globalization, and without the continuation of international free trade and investment, China could not rely on internal reforms to achieve economic growth.
Of course, in the past Washington has always been the formulator when it came to international economic trade. The United States never saw China as a major rival, and China was always passive in its acceptance of international economic laws. Things have changed. Although the United States is still the world's largest economy, China is now the world's second largest, and looks set to overtake America in the coming decade. Therefore, the requests of China and other developing countries wishing to participate in International economics have become more logical and reasonable. But the problem is that China becoming the world's biggest economy may well make people particularly nervous, given that such a transition has often led to war in the past. Therefore, U.S.-Sino relations are more important than ever, not only as a means of avoiding conflicts, but more importantly to help establish a new and improved world economic order.
The "new type of relationship between major countries" doctrine of mutual trust and cooperation proposed by Chinese leaders will perhaps provide a meaningful framework for future cooperation, and it appears to have won the approval of U.S. leaders, too. As a first step, the two governments could consider close cooperation in promoting the TPP and RCEP reforms.
Recent times have seen some positive changes. In China, more and more experts are publicly calling on the government to enter TPP negotiations, even as they point out the difficulties China may face if it does join, such as higher labor and environmental standards, better protection of intellectual property rights, and opening up the services industry. In fact, these are the very issues that the Chinese government is looking to tackle in the coming years. In the United States, a significant number of officials have highlighted the fact that it would be globally beneficial for China to join the TPP. But this is still nowhere near enough. For Chinese people, if the United States was to invite China into the TPP after negotiations have been concluded, then it would simply reflect the old 20th century line of thought. China wants to become a key player in terms of decision-making, and not just a passenger in the overall process. Objectively speaking, if China really does become the world's biggest economy, then it is entirely possible that when it does finally join the TPP it will seek to amend the original regulations. With this in mind, why not just let China become one of the founding members of the TPP?
Of course, China also needs to make the world believe that it possesses the determination and capability to implement high-quality globalization. This is especially important in terms of industry reform, labor standards, protecting intellectual property rights and Internet freedoms. Even more important is that China presents itself as a world leader on a number of topics, and not always be seen to play the role of challenger in international negotiations. The Communist Party's recent third plenum of the 18th Central Committee approved a highly ambitious plan for comprehensive reform, resolving to transform the current planned economy into a market economy by 2020. This plan possesses a strong persuasive argument. What is needed now is an acceleration of the implementation of the reform measures, especially with regard to the pilot scheme of the Shanghai Free Trade Zone.
One obstacle that may arise is whether China should join the TPP as a developing or developed country. This also posed problems when China joined the WTO. Considering the country's current income and administrative levels, its government wants to participate in negotiations with the status of a developing country, which is understandable. Of course, given the huge scale of China's economy and its influence in world affairs, America objects to this idea, and you cannot say that is completely without reason. Perhaps a suitable compromise would be to let China sign a high-level TPP agreement, but allow it a period of transition in the implementation process given its current situation. Officials from Washington and Beijing understand that since TPP negotiations are already at an advanced stage, it would be technically impossible for China to join now. A conservative estimate would be that the earliest time China could join would be 2015, but this does not mean the two should just sit back and wait. In fact, there are numerous areas where they can proceed. For example, both governments should consider establishing a working group under the existing Sino-U.S. Strategic and Economic Dialogue framework to share information from the TPP and RCEP negotiations; organize feasibility research; and work out which obstacles they may encounter on the way and propose some meaningful countermeasures.
The TPP and the RCEP are only one area where Beijing and Washington can cooperate in in their burgeoning relationship. Negotiations for investment agreements on both sides have already begun, and if they can be concluded swiftly, then it would help accelerate the process of China entering the TPP. Both governments should seriously consider setting up a free-trade zone. Economic analysis has found that free trade between the two would be economically beneficial – exceeding the United States' gains from the TPP by 50 percent and surpassing China's gains from RCEP by 50 percent. Furthermore, China and the United States should set up wide-scale and intimate cooperation in other international economic spheres.
As an emerging power, China should not only propose ways to reform the international economic system, but also clarify to the international community that it plans to preserve "unification," and will not seek to turn the whole system on its head. To promote economic globalization together with the United States and other countries is also beneficial for China. Within the next few years, America's position as the most developed economy will not be challenged, but it is only a matter of time before it loses its ranking as the world's biggest economy. It is important that America should learn to share the leadership of international economic affairs with China and other developing countries in order to ensure a smooth transition of the world's economy.
The author is professor at Peking University National School of Development
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