Published daily by the Lowy Institute

US-China tensions: is this about economics or security?

The challenge might seem to be China’s economic behaviour rather than old-fashioned power rivalry.

Different, but similar (Photo: Vipin Kumar via Getty)
Different, but similar (Photo: Vipin Kumar via Getty)

The administration has recognised that the true challenge China presents is not fundamentally one of a rising power threatening to replace an established power. Instead it is the challenge that China poses to the fundamental principles embraced by market democracies globally: free trade and open markets, freedom of navigation, and good governance. Elisabeth C. Economy, Council of Foreign Affairs

With headlines dominated by President Donald Trump’s tariff war and bellicose rhetoric about “unfair” economics and stolen intellectual property, the challenge might seem to lie in China’s economic behaviour rather than old-fashioned power rivalry. But closer examination suggests otherwise.

Just how different – and incompatible – are the two economies?

Beginning with Deng Xiaoping’s “Southern journey” in 1992, the Chinese economy has been guided by market forces. Without this market-driven dynamic, China would not have achieved its decades of spectacular growth and produced a world-beating crop of billionaires. Instead, it would have been weighed down by the plodding inefficiencies of a planned economy. China is now a mixed economy, with two-thirds of output produced by the private sector.

Just as China is far different from the sort of centrally planned system seen in the USSR, America is far from the free-market paradigm.

China has its “Made in China 2025” industry policy; America had John F. Kennedy’s moon-landing commitment in the 1960s, and now Trump’s adviser Peter Navarro’s plan to make America self-sufficient in security-related production. Anyone doubting the extent of government intervention in the American economy might examine the policy response to the 2008 financial crisis.

In China’s state-capitalism system, Beijing directs industry; in America’s economic model, industry directs Washington through lobbying and political pressures. The interplay is different, but both countries have a symbiotic relationship between state and industry.

China’s development strategy doesn’t differ in principle from the successful development model of Japan, South Korea, and Taiwan. Competitive exchange rates and industry protection were used to establish viable scale in manufacturing, disciplined by a strong export sector. Singapore might be seen as a small-scale prototype for China, and who disputes its success or claims unfairness?

What, then, is the basis of Trump’s complaints about China’s economic rule-breaking?

The danger in Trump’s rantings lies in the confounding of economic issues with the real and serious security issues that should be at the heart of the debate.

The most straightforward explanation is that he hopes his arm-wrestling can achieve a better international deal for America. This involves repeating his NAFTA renegotiation with other trade deals. With China, he hopes to increase imports from America, allow more American investment, and encourage China to pay more for intellectual property (they paid US $26 billion in 2017).

He misunderstands the advantage of multilateral trade and the irrelevance of bilateral trade balances. His objective, however, is rational enough: to reset America’s trade relations more favourably. We might even take him at his word that he wants zero tariffs, eventually.

In this, he may be cruder than his predecessors and more confused: but the objective is not so different. Each American president has, understandably, tried to shift the rules in America’s favour. Whoever won in 2016 was going to move towards protection.

There will be some damage from Trump’s behaviour, mainly to America, but the tariff war is less harmful than the headlines imply. If “decoupling” means a return to pre-Nixon isolation of China, this is infeasible. Globalisation is robust and can operate with imperfect rules. When the arm-wrestling is over, the “fundamental principles” of free trade and open markets will remain a utopian ideal, observed by none, but good-enough general guidance for all countries to benefit.

The danger in Trump’s rantings lies in the confounding of economic issues with the real and serious security issues that should be at the heart of the debate.

We see this confusion in the intellectual property discussion. The commercial imperative to maximise IP earnings is incompatible with the security imperative to keep secrets. Security-critical technology (including dual-use technology) shouldn’t be part of the IP discussion. It has to be kept secret, not sold under license in the futile hope that it won’t be copied. When national security is misused to justify steel tariffs against allies, this muddle makes it harder to identify true security risks such as Chinese investment in Silicon Valley’s high tech.

At the heart of the security debate is some simple but uncomfortable arithmetic. China’s population is four times America’s. Even if China gets only half-way to matching America’s per-capita income, China would by then have twice the US gross domestic product.

Leaving GDP to one side, China’s military capabilities will remain far behind America’s for many years, but already, in this inferior position, China has been able to effectively seize the South China Sea, with no viable retaliation from more powerful forces. This was not about economics: it was about the crude exercise of power.

China’s dominant scale seems almost inevitable: growth at double the American rate seems likely for a decade or more. Attempting to delay this through “decoupling” makes no sense. The critical issue, then, is intent: what will China do with this power? This is an old-fashioned security issue, akin to Russia’s current clashes with Ukraine.

The starting point for sensible policy is to distinguish between security and economics, and between objectives and instruments. The response to a security threat may well involve economic instruments, such as sanctions. But let’s keep this analytically separate from sensible economic objectives, which include a multilateral trading framework with minimal trade distortions and enough well-functioning international institutions such as the World Trade Organisation to make globalisation work for the benefit of all.

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