Mutual Benefit: The Essence of China-U.S. Economic Cooperation

From: English Edition of Qiushi Journal Updated: 2013-11-07 16:01
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Research Center for the Theories of Socialism with Chinese Characteristics of the Chinese Academy of Social Sciences

Mutual benefit is the essence of economic cooperation between China and the United States of America. Stronger economic cooperation between China and the U.S. will not only promote the continued economic development of the two countries, but will also contribute to prosperity and stability on a worldwide basis.

The economic difficulties of the U.S. cannot be attributed to China

The financial crisis of 2007-08 was a watershed in the development of the American economy. In the 1990s, American economy enjoyed rapid growth. After the dot-com bubble burst in 2001, the loose monetary policy of the Federal Reserve allowed the American economy to maintain the illusion of prosperity until 2006. However, following the outbreak of the international financial crisis, the U.S. began to experience major economic difficulties, with large numbers of companies going bankrupt and unemployment spiking.

The latest data shows that the American economy is making a gradual recovery, with 2013 looking likely to record slightly faster growth than 2012. The real estate market has begun to recover, and consumer confidence is also on the rise. The Shale Gas Revolution and other technological advances indicate that the U.S. is attempting to seize the strategic high ground by fostering the industries that will lead the next technological revolution. Given that the U.S. was primarily responsible for the current set of international economic rules, it is able to constantly adjust this system so that it plays to the benefit of developed economies, best represented by the United States itself. Moreover, the U.S. dollar is still the principal international currency in international finance. This makes the U.S. the only country in the world that can borrow money from around the world whenever it pleases and then repay these debts by printing more money.

However, even with a recovery in sight, and even though it boasts certain unique advantages, the U.S. is still facing serious economic problems. First, the U.S. is set to experience debt pressure over the long term. In 2012, the U.S. public debt-to-GDP ratio reached 107.2%. At the same time, the post-war “baby boomers” are now entering retirement age. This being the case, the U.S. government will not only struggle to increase revenue, but will also be unable to reduce expenditure for a considerable period of time to come. Thus, the U.S. faces the risk of being trapped in the vicious circle of growing debt accompanied by slowing growth. Second, continued Quantitative Easing (QE) may also bring about risks. The Federal Reserve launched four rounds of QE from 2008 to the end of 2012, which has resulted in too much liquidity. Therefore, the Federal Reserve will be confronted by the problem of how to withdraw QE monetary policy. Third, the imbalance of international payments is still serious in the United States. Current account deficit has continued in the U.S. for 21 consecutive years, reaching 3.1% of its GDP in 2012. From a long-term perspective, an overly large current account deficit will undermine confidence in the American economy, and will result in investors losing confidence in U.S. dollar assets. Fourth, the U.S. is suffering from high levels of unemployment and frequent social problems. According to data from the Department of Labor (DOL), the unemployment rate in February 2013 reached 7.7% after adjusting for seasonal factors, while the rate of unemployment for the same period in 2008 was just 4.8%. High unemployment, sluggish economic performance, and decreases in social welfare are posing a very real threat to the American dream.

However, when the U.S. should have been forging consensus and accelerating the pace of change in the face of numerous economic problems, some people instead chose to focus their energies on looking for a scapegoat. In an attempt to divert attention away from domestic problems and dissatisfaction, these people sidestepped pressing domestic issues by pointing the finger at China.

The signing of the China-U.S. Comprehensive Framework for Promoting Strong, Sustainable and Balanced Growth and Economic Cooperation on May 10, 2011. / Photo by Xinhua reporter Wang Fengfeng

Some Americans have condemned China for undervaluing the Renminbi (RMB), believing that the resulting flood of low-price Chinese goods into the U.S. has caused companies to go bankrupt and workers to lose their jobs. However, this opinion lacks both factual and theoretical support. First, with the continuous appreciation of the RMB since 2005, the value of the RMB at present has essentially reached equilibrium. From the implementation of exchange rate reform in July 2005 to the end of February 2013, the cumulative appreciation of the RMB against the dollar has reached 30%. The actual appreciation rate has been even higher, considering that inflation in China has been higher than that in the U.S. during this period. Second, the resolution of trade imbalances is more a matter of structural reform in the countries in question. Thanks to the efforts of the Chinese government to promote structural reform and transform the country’s growth model, China’s current account surplus as a percentage of its GDP has dropped from 10.1% in 2007 to around 2% in 2012. However, the current account deficit of the U.S. has only dropped from 5.1% in 2007 to 3.1% in 2012, which shows that the U.S. government has not made a major effort in structural reform.

Some American enterprises have complained that China’s state-owned enterprises receive various kinds of preferential treatment from the government, while American enterprises have no guarantee of being able to compete fairly in China. In fact, the total output of state-owned and state-controlled enterprises only accounts for around 30% of China’s GDP, while the non-state sector is responsible for 80% of urban jobs, 65% of patented inventions, 80% of technological innovations, and over 85% of import and export trade. As the reform of corporate governance structures in state-owned enterprises has progressed, the majority of state-owned enterprises have now become listed companies. As such, these companies are required to operate under the supervision of both domestic and international institutions and in accordance with market rules. The reason why some American enterprises feel less confident in the Chinese market can mainly be attributed to changes that have occurred in the market environment, such as rising labor costs and increasing competition from other foreign companies and domestic companies. China’s doors remain open to investment from the U.S., and American enterprises are still interested in the Chinese market. According to a 2012 survey carried out by the U.S.-China Business Council, 90% of American enterprises in China said that they felt optimistic about the future.

Despite all its talk of freedom and openness, the U.S. is extremely keen to impose discriminatory policies on China in trade and investment. For instance, it has restricted Chinese enterprises from exporting to the U.S. via trade remedy measures such as anti-dumping and countervailing investigations. It has used “national security” checks to obstruct the investment plans of Chinese enterprises in the U.S., and banned some government departments from procuring IT equipment from Chinese manufacturers under the pretext of “national security.” Moreover, the U.S. government also strictly limits the export of certain high-tech products to China. These practices are not only unfair from the perspective of Chinese enterprises, but have also harmed the interests of consumers as well as some industries in the United States. Even worse, through its own actions, the U.S. has sent out a signal of protectionism to other countries, openly violating its commitment at the G20 Summit to avoid introducing new protectionist measures. This could lead to a dangerous situation in the world economy whereby countries assume a zero-sum mentality and do harm to others for their own benefit.

China-U.S. economic cooperation benefits both countries

Although China and the U.S. have different national interests and cultural traditions, and despite the fact that differences exist in their mode of and approach to development, there is still great potential for economic cooperation between the two countries.

China and the U.S. have become closely integrated with each other through the course of international economic exchanges. First, China exports large amounts of goods to the U.S., which have benefited American consumers significantly with their low prices. At the same time, Chinese imports have also helped the Federal Reserve to keep interest rates at a relatively low level, which is a stimulus for economic growth. Second, American enterprises investing in China have made huge returns owing to China’s robust economic growth. According to a survey by the U.S.-China Business Council, 89% of American enterprises in China made profit in the year 2012. Moreover, two thirds of respondents said that their business revenue in China had grown at least 10% over the previous year, while 75% said that their profit rate in China was higher or equal to their average international profit rate in 2012. Third, China has invested a large proportion of its foreign exchange reserves in U.S. treasury bonds, which has provided a stable source of finance for the U.S. government.

Both China and the U.S. will need to restructure their economies in the future. This could give rise to new avenues of cooperation which accord with the interests of both sides. From an American perspective, the number one task at present is to secure stable economic growth and create more jobs. Under these circumstances, China’s efforts to transform its mode of development will present a new source of impetus to drive forwards the economic recovery of the United States. First, China’s continued urbanization and its efforts to double resident incomes over the coming years will create huge investment and consumption demands. This means broader prospects for American imports and investment in China. Second, as China continues to encourage its enterprises to go global, more and more Chinese enterprises will invest and open factories in the U.S., which will help to create jobs. As of the end of 2012, Chinese investment in the U.S. had created about 30,000 jobs. This figure is expected to increase to 200,000-400,000 by the year 2020. Third, the U.S. has realized that East Asia will be one of the most dynamic regions for economic growth in the future. According to the U.S., the goal of the “Asia-Pivot” strategy is to deepen economic cooperation with robust East Asian economies. If the U.S. does indeed hope to become a part of this economic family, it will need to strengthen its communication and cooperation with China, which has become a growth engine and a stabilizer of the East Asian economy.

From a Chinese perspective, the most important task at present is the transformation of the country’s economic development mode and the realization of growth that is comprehensive, balanced, and sustainable. Under these circumstances, the recovery of the U.S. economy will create better external conditions for China’s economic development. First, given that China is currently engaged in efforts to upgrade its industrial structure and enhance its ability to innovate, the introduction of high-end products and advanced technology from the U.S. will help China to make rapid progress in the development of technology. At the same time, the recovery of the American economy will provide more opportunities for Chinese exports. Second, although China’s manufacturing industry is highly competitive in the global market, its service industry is relatively weak. In contrast, the modern service industry happens to be one of the major competitive edges of the United States. Therefore, the industrial structures of China and the U.S. are highly complementary. Third, both China and the U.S. are preparing for the arrival of a new technological revolution. Whereas the U.S. possesses a large number of core technologies, China boasts a large contingent of talent in applied research as well as large domestic markets. Thus, the combination of American technology and Chinese personnel and markets will help to accelerate innovation and the application of new technologies in industry.

Although economic cooperation does not represent the full extent of cooperation between China and the U.S., the fact remains that no other field displays the same level of mutual complementation that is seen in economic cooperation. Moreover, economic cooperation between China and the U.S. also serves as an important means of promoting mutual strategic trust and expanding pragmatic cooperation between the two countries at present.

China-U.S. economic cooperation is conducive to the improvement of global governance

Pressure for change in the traditional system of global economic governance has been mounting along with the relative decline of U.S. economic strength, the prolonged economic downturn in Europe and Japan, and the gradual rise of emerging economies. Under such circumstances, China and the U.S. should play a stronger role in promoting the realization of common global interests.

In world trade, there has been a notable increase in various forms of protectionism since the outbreak of the international financial crisis, and the WTO’s Doha Round of talks essentially remains stalled. Many countries have turned to other alternatives, which has led to the establishment of various free trade zones. However, despite being beneficial to their signatories, these free trade agreements could potentially distort international trade and undermine global benefits. Therefore, all regional free trade agreements should be based on WTO rules. China and the U.S. should make joint efforts to preserve the multilateral trade system and global free trade.

With regard to investment, U.S.-led, developed countries should work together with emerging countries including China in order to establish a global framework for investment. Existing global investment conventions provide developed countries with a huge degree of flexibility, and are biased towards their interests. However, the rapid growth of direct overseas investment from major emerging countries has triggered huge changes in the international investment landscape. Due attention should be paid to the interests of emerging countries, because they not only represent the traditional recipients of foreign investment, but also represent emerging outbound investors. The future framework for international investment should see the establishment of a highly open environment with increased protection for the overseas investments of enterprises. Both China and the U.S. should shoulder greater responsibility in the establishment of an international investment system.

With regard to finance, China and the U.S. should work together to promote change in the international monetary and financial system. The international financial system has experienced several major crises over the past 15 years, with each crisis being more devastating than the last. This indicates a lack of internationally-recognized rules in the international monetary and financial systems. Moreover, this lack of rules will bring about huge systemic risks. There are two issues that need to be addressed with regard to global financial governance: the first is ensuring the free flow of capital and allowing capital to better serve the real economy; and the second is maintaining the stability of financial markets and guarding against crises, or at least reducing the damage that they cause. China and the U.S. should step up their collaboration in key areas such as promoting the reform of the International Monetary Fund (IMF), further correcting disequilibrium in the balance of payments, and establishing a more stringent system for monitoring the flow of international capital. Such efforts are not only in the interests of both countries, but will also help to maintain the openness and stability of the global financial system. 

China and the U.S. share common interests in many aspects of the global economy, but there is also strategic distrust between them. In particular, some people in the U.S. are still clinging on to the Cold War mentality, which is a source of obstruction in economic cooperation between China and the United States. When meeting with U.S. Secretary of State John Kerry, Chinese President Xi Jinping said, “The vast Pacific Ocean has enough space for two large countries like the United States and China.” Through stronger economic ties and collaboration, China and the U.S. should strive to achieve mutually beneficial cooperation, bring benefit to the people of both countries, and make due contributions to the prosperity and stability of the world economy.

(Originally appeared in Qiushi Journal, Chinese edition, No.12, 2013)

This article is written by He Fan.

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