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Gilman Louie and Joseph DeTrani address how the new administration can navigate the U.S. – China relationship. This article was originally published on The Cipher Brief.

President Trump said he wants to improve relations with China, but he has expressed concern with China’s theft of intellectual property, unfair taxes for U.S. companies in China, currency manipulation, product dumping and failing to reign in North Korea.  He took a congratulatory call from the President of Taiwan and questioned the “One China Policy.”  Many of his appointees have strong and divergent views on the issue.

Although the economies of the U.S. and China are mutually dependent, the possibility of a trade war cannot be dismissed.  Politically, tension in the South China Sea could purposely or accidentally devolve into military conflict.  Both scenarios can and should be avoided.

President Trump is an accomplished negotiator and in his book, The Art of the Deal, he describes several negotiating tactics that could be key to resetting U.S.-China relations. Here are a few we think are particularly applicable:

Think Big – Design a plan that benefits both the U.S. and China.  The U.S. has to modernize its manufacturing sector, return jobs lost to offshoring, incentivize U.S. companies to repatriate capital and invest that capital into infrastructure and manufacturing capacity – as well as open the Chinese market to U.S. goods, especially services.

While China has done well in some areas of consumer and manufacturing innovation, it needs to increase its innovation in all areas of its economy.  China graduates more PhDs in science and engineering, leads the world in patent applications and spends more in R&D than any other country outside of the U.S.  However, its level of creative innovation does not translate relative to their investments.  China must transform itself from the center of low cost manufacturing to a center of high quality innovation. The U.S. can help China to ”rebalance” from an export-driven economy to a domestic consumption economy.

The export growth that fueled China’s economic expansion is slowing, while industrial and manufacturing jobs have declined from a peak of 30.3% in 2012 to 29.3% in 2015.  Chinese exports fell by 2.8% in 2015, due to weaker global demand. GDP growth in 2015 and 2016 was below 7%, the weakest economic growth since 1990. Industrial production has been on the decline for the past six years.  Demand for production from State Owned Enterprises (SOE) has been close to zero while overseas demand for Chinese exports has been on the decline for the past two years.  The only strong sectors were financial services, e-commerce and big-city housing.

Many observers believe that Chinese political stability is directly tied to economic growth, which is required to provide 1.4 billion Chinese with a rising standard of living, full employment and social services.  For the past forty years, economic growth has been China’s path to international legitimacy, respect and envy.  It transformed China from a regional power into an emerging superpower.

Protect the downside and the upside will take care of itself — The downside of a mishandled U.S.-China relationship is the militarization of China, particularly if the Chinese economy tanks and hardliners decide that the only way China can project power is through aggressive military behavior — especially if that behavior is unchecked by the U.S.

A slowing economy should not be allowed to become a pretext for the hard-liners in China to use military and cyber power to augment or replace its economic power.  Hopefully, the hard-liners in China will not view Russia’s unimpeded military annexation of Crimea as a model for power projection in East Asia.  China’s aggressive military moves in the South China Sea must be countered by the U.S. and the international community.   The absence of such a response would encourage the hard-liners in China to use its military for territorial and political advantage.

Equally disconcerting has been China’s hacking into U.S. government and private networks and its theft of intellectual property. Chinese threats to U.S. naval ships in disputed waters in the South China Sea, the confiscation of an underwater drone in international waters and the buzzing of U.S. reconnaissance aircraft are all examples of China’s increasingly aggressive behavior.  Failing to respond adequately to these provocations will further embolden the hard-liners in China.

Maximize the options — Don’t assume win-lose outcomes. Create trade space and give China the ability to create workable options that address their needs while still addressing our requirements.

The irony is that since diplomatic relations were established in 1979, the U.S. and China cooperated successfully in defeating the Soviets in Afghanistan, in counter-terrorism, counter-narcotics, counter -international organized crime and counter-piracy initiatives; in programs to strengthen and modernize financial markets, healthcare, epidemic threats and environmental issues.

Economically, the U.S. and China are highly dependent on each other.  $659.4 billion of trade in goods and services took place in 2015 between the U.S. and China.  Currently, China is our largest trading partner.  U.S. foreign direct investment (FDI) in China was $65.8 billion in 2014, while China’s FDI in the U.S. was $9.5 billion.  China is the second largest holder of U.S. debt, owning 29% of the $3.8 trillion in Treasury bills, notes and bonds held by foreign countries.

Both countries have a vested interest in how carbon emissions are managed.  China is the largest carbon emitter on a country basis and the U.S. is the largest carbon emitter on a per capita basis.  Both countries are concerned that a radical reduction in carbon emission requirements would negatively affect both countries productivity.

Know your market — Understand China’s historical hot buttons.

Since the Chinese Communist Party established the People’s Republic of China in 1949, and the Nationalist Government of Chiang Kai-Shek fled to Taiwan, the issue of Taiwan has been a sensitive core issue for China.  The “1992 Consensus” agreed to by the leadership in China and Taiwan memorialized the “one China principle,” with both recognizing only one China and that the PRC and Taiwan belonged to the same China.  In 1996, when China believed Taiwan was moving toward independence, and away from the “One China Principle,” China conducted numerous missile tests that were meant to intimidate Taiwan.  The U.S. interceded with the introduction of two aircraft carrier groups in the Taiwan Straits, as a stark reminder to China that the U.S. would not permit China to use force against Taiwan.  China stood down.

All Chinese nationals are very familiar with the 100 years of humiliation that China experienced, between 1839 to 1949.  They study in school and read in the press about the West and Japan exploiting a weak and vulnerable China.  China’s history is filled with the West engaging in armed confrontations around trade, which were settled at the point of a gun and resulted in China being divided, humiliated and weakened.  China has a great distrust of the West and feels disrespected.  And although China has had forty years of economic growth, its economy is still vulnerable. A Chinese economic downturn hurts everyone. Again, a weakened economic China could become a militaristic China.

Beijing’s recent aggressive behavior apparently plays well to a domestic audience in China constantly reminded of the 100 years of humiliation by the West.  Many believe that the U.S. wants to contain and isolate China, being told by hard-liners in China that the U.S. is concerned with China’s economic prowess and military might.  These hard-liners predict an inevitable military conflict with the U.S.

Since 1996, China has pursued an ambitious military modernization program. China has the largest army in the world, with 2.3 million active duty personnel, the second largest navy and a robust air force. China has already announced that it plans to increase military spending by 55%, to 233 billion by 2020.  But despite this emphasis on military modernization, a recent Pew survey said over 54% of Chinese people believe the U.S. is actively trying to prevent China from becoming a powerful nation.

Use your leverage – Don’t be desperate for a deal.  China is good at playing the long game.  Be willing to also play the long game.

Fight back — Don’t let bad or aggressive behavior go unchecked.  Respond proportionately.  Don’t talk about it, do it.  Be humble and it will not be mistaken for weakness.

Deliver the goods — It will be critical that both sides deliver on whatever is negotiated.  Trust must be built on action, not words.  There should be no ambiguity on what is unacceptable behavior.

The Way Forward

China needs to evolve its economy and advance beyond being a low cost supplier of labor and the global supplier of cheap goods.  They must evolve into a value-added producer of innovative products and services, not only for the domestic market but also by developing brands that are respected worldwide.  China’s ascension as a superpower must be based on cooperation, partnership and diplomacy, rather than by coercion and aggression.

The United States should not play into the Chinese hard-liners’ rhetoric that the U.S. cannot be trusted and that the U.S. is trying to contain and isolate China all while deepening the divide between China and Taiwan. The U.S. cannot allow the narrative to continue that it is determined to prevent China from ever becoming a world power.

The U.S. should be sensitive to China’s historical mistrust of the West. Recognize the challenges China has in feeding, educating and providing jobs for a country five times larger than the U.S.  China witnessed the collapse of the Soviet Union and knows that their survival depends on a managed approach to economic transformation, market liberation and political stability.

Conversely, China needs to be sensitive to the need for the U.S. to reclaim lost manufacturing jobs and to improve the quality of life and income for its middle class.  The U.S. needs a level playing field for trade with China, ensuring that China opens its markets to U.S. products.

China also needs to appreciate U.S. core interests, to include access to international waters in the South China Sea. The U.S. must continue to invest in appropriate deterrent capabilities to counter China’s growing military capabilities and to dissuade China from the use of force to achieve its strategic goals.

Finally, it’s important that the U.S. develop a comprehensive strategy built around engagement that encompasses economic, military, social and global issues. Negotiations and cooperation must be based on mutual respect, with the goal of reducing tension and intensifying cooperation on those global issues of mutual concern.  This is an achievable goal.

The views are the authors’ and not the views of any Government department or agency.

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