China-US relations

With Sino-US relations fraying, the world is losing its anchor for stability

Andy Xie says important foreign policy decisions may be increasingly dictated by knee-jerk responses, given that both countries are bogged down by domestic problems

PUBLISHED : Friday, 24 June, 2016, 5:14pm
UPDATED : Friday, 24 June, 2016, 5:14pm

China and the United States were never really pals. The relationship started as both needed each other to counterbalance the Soviet Union four decades ago. After the USSR collapsed in 1991, economic complementarity – that is, profits for American corporations, cheap goods for American consumers, and jobs for Chinese labour – became the foundation for the relationship. It worked well for nearly two decades, but has become frail in recent years.

The 2008 financial crisis was a turning point. It blew up the fiction that globalisation was good for everyone. American workers defended their living standards with debt, partly backed by inflated property values, as their income came under pressure from global competition. The crisis blew that away. Living standards fell amid declining wages. Globalisation has since become a dirty word in American politics.

Decades after the US embraced free trade, it’s clear who the losers are

Corporate America had a great ride in China. The big consumer companies saw their sales rivalling those at home and achieving bigger profit margins. American companies came to dominate the markets for fast food, personal hygiene, soft drinks, smartphones and the like. China became a magic word in the US stock market.

Lately, China’s economic slowdown and overcapacity are making the market less and less profitable. Chinese copycats are having an impact on profitability in the market and could make it completely unprofitable in a few years. The long-standing demands by corporate America for accessing China’s media and financial markets are falling on unsympathetic ears. In the past, corporate America stepped up to stabilise the relationship whenever a crisis happened. It is less and less inclined to do so.

Is China defending its interests in the South China Sea – or its pride?

On top of a weakening economic foundation comes the new element of strategic rivalry. China has been taking steps to flesh out its claims in the South China Sea. Despite its broad claims, the competing claimants have been extracting up to half a million barrels of oil in the contested waters with nothing for China. China feels aggrieved.

If the Sino-US relationship breaks down, global chaos becomes inevitable

China and the US have fundamentally different views of the South China Sea dispute. China sees it as a regional issue. China is by far the biggest country in the region and should have a big voice there. The US could still be the sole global superpower, but China should have a bigger voice in East Asia.

The US sees itself as an anchor because of its global domination. East Asia accounts for one-third of the world’s population and gross domestic product. And most of the world’s savings and manufacturing are located there. If the US is not the dominant force in East Asia, its superpower status is untenable. Hence, the US will commit more and more resources to limit China’s ambitions in the region.

The downward spiral in the bilateral relationship could get much worse in the coming years. The next US president will be protectionist in trade. Increasing anti-dumping measures and possible penalties for outsourcing will further slow or even decrease bilateral trade. That would decrease China’s incentives to open its domestic market further to corporate America, which in turn weakens the domestic voice for taming the strategic rivalry with China.

What really happens when Chinese investment goes bad, and is there any way out of the hole?

The only way out is for China to reform its economy and become an engine for regional and global growth. Its economy is stuck with overcapacity and excessive leverage. Other countries increasingly view China as a negative force, destroying capital value and suppressing labour wages. The current path is simply not sustainable from any perspective.

China must shrink the state sector and empower the household sector to break away from the vicious spiral of capital destruction and stagnation. It will earn the trust of the international community by demonstrating that economic development is for enriching the people, not merely empowering the government and affiliated elite.

China will earn the trust of the international community by demonstrating that economic development is for enriching the people

China has been driving global trade through rearranging the global supply chain rather than being the final source of demand. When it becomes a balanced economy by increasing the workforce’s disposable income to 60 per cent of GDP from 40 per cent, China will be a real driver for global trade and economic growth. Countries from far and near will sing its praises.

China will eventually be, and should become, the dominant voice in East Asia. That position can only be achieved by becoming a place that people look up to and try to join if possible. Pax Sinica during the Tang dynasty was achieved through a superior way of life that others, like Japan, earnestly emulated. Projection of force may be necessary and effective at some point in time. But, without a superior system at home, its impact would be fleeting.

Global stability depends on a solid relationship between the US and China. The European Union is failing. The fact that so many in the core of the system want out means that its influence in the world will continue to decline. Russia, on the other side, is severely weakened by low oil prices and has had to pull back strategically and focus on economic development. If the Sino-US relationship breaks down, global chaos becomes inevitable.

Is a new cold war brewing over the South China Sea?

The US has never developed a long-term view towards China. It has anchored the relationship on temporary strategic gains or money for influential companies or even individuals. This is the fundamental reason for the constant flare-ups in bilateral relations. Now, with the US having second thoughts about China, the relationship is increasingly anchored by the consequences of a break-up. Without a positive force as a solid anchor, any accident, like a flare-up in the South China Sea, could send the relationship into a downward spiral and fast.

Unfortunately, the US is bogged down in domestic conflict. Its presidential politics has exposed the frictions from globalisation. Regardless of who becomes the next president, the disaffected working class will continue to rebel against the ruling elite that have reaped all the upside from globalisation. The US will become less and less able to develop a coherent global strategy.

As domestic issues bog down both China and the US, their foreign involvement will be increasingly left to fear and knee-jerk responses to accidents.

The unpalatable truth is that the world is losing its anchor for stability and could be sleepwalking into another era of conflict.

Andy Xie is an independent economist