The United States vs. China. C. Fred Bergsten

clearly ordered by President Trump solely to fulfill a pledge he had made, without factual basis, during his Presidential campaign in 2016. That designation was undone in January 2020 under cover of the Phase One trade agreement between the two countries, in which China agreed to “enforceable obligations” against any future manipulation that it might undertake.

Thus, the major systemic problem of the early part of this century was resolved (though with sizable economic costs to the United States and other victims, especially during the difficult period of the global financial crisis, because of the delay in achieving the resolution). It will be crucial to see whether China will be willing to implement similar de facto responses over time to the US (and other foreign) complaints about its objectional trade policy practices.

The Policy Options

      The key issues posed throughout this volume are now being brought into sharp relief. Will China simply seek power or will it also accept leadership responsibilities, including required changes in its own policies? Will the governance structures and institutions of the extant system be flexible enough to accommodate China’s continuing rise? Will the United States, in particular, be willing to accept such changes, or will it exhibit the typical resistance of the incumbent power to giving up any significant portion of its leadership perquisites? Will China, at some point, insist on modifications that will lead to clashes? In short, can the economic version of the “Thucydides trap” and the “Kindleberger trap” be avoided?

What are the policy options facing the United States, and how do they relate to the alternative futures for the international economic order outlined earlier? The options range from the hawkish extreme containment, à la Cold War, to the dovish extreme of full accommodation to China’s rise, and thus a new G-1 (figure 1.1). The overarching question is whether to seek to include China in global leadership activities or to exclude it as much as possible, recognizing that its size and impact virtually require its participation in many of those activities.

Eight consecutive US presidents, from Nixon to Obama, essentially pursued engagement with China, albeit after sometimes (especially during their election campaigns) threatening to adopt much tougher stances. Engagement basically meant increasing economic interchange between the two countries, to the extent that they became labeled “Chimerica” (Ferguson and Schularick 2007). The policy enabled China to continue strengthening its own economy, and national power more broadly, on the view that this was a good thing for the US and world economies (as had been the earlier US support for the economic strengthening of its allies and friends in Europe, Japan, and many developing countries).

      Figure 1.1 US policy options toward China

      It was recognized that engagement would enable China to add to its ability to compete with the United States, as had been the case with the other countries (including Germany and Japan) whose development the United States had supported. It was also recognized that China was very different from those other countries, being neither an ally of the United States nor (as in the case of the Europeans) of similar cultural orientation. But every other country that has modernized economically has become a democracy to at least some extent so it was not unreasonable that engagement was undertaken with the hope, and at least a degree of expectation, that such economic interaction would lead over time to liberalization of China’s political system.⁵ It was also undertaken on the conviction that any effort to contain China’s rise would be both futile, because of its economic strength, and counterproductive, encouraging China to intensify its resolve to succeed and to do so in ways that would sometimes be hostile to the United States, and the West more generally. One implication was that the United States and China would work together to support the global economic order.

      The engagement strategy recorded numerous successes. Most fundamentally, it prevented major confrontations and kept the peace – not a given in light of the Thucydides trap. On the economic side, it produced successful cooperation as just noted, in countering the Asian financial crisis in 1997–8 and the global financial crisis in 2008–9, and in forging the Paris Accord on global warming in 2014–15. It was instrumental in enabling China to participate fully in globalization and join the WTO, whose dispute settlement mechanism limited (though by no means avoided) trade conflict between the countries prior to President Trump. American consumers and anti-inflation efforts gained from cheaper and more diverse Chinese imports. Chinese investments in the United States helped to finance the large American budget deficits and held down interest rates (though this also helped to bring on the global financial crisis in 2007–8).

Over the past five to ten years, however, it has become increasingly apparent that China was moving in the direction of greater authoritarianism, and indeed repression, as well as state/party control of the economy. At the same time, the economic challenge became more and more formidable as China became a bigger and bigger player and charges of unfair Chinese behavior intensified. Some wondered why the United States should maintain open markets to Chinese trade and investment, and continue pushing China to reform, if the results would be even greater economic success and enhanced legitimization of political control by the Communist Party. Many, notably in the Congress, pressed for much tougher negotiating postures toward China on trade and other economic issues.

      A modified option of engagement plus hedging was thus adopted incrementally, notably during the latter part of the Obama Administration. Economic interaction continued to expand, if not as rapidly as in previous years, but more cases were brought against Chinese trade policies. Both inward and outward direct investment, especially when related to high technologies, were subjected to greater scrutiny. China’s increasing international initiatives, notably the AIIB and BRI, were resisted and even overtly opposed.

      China’s rise continued, however. It passed the United States as the world’s largest economy in PPP terms and world’s largest trading nation. Its capabilities on a wide range of high technologies accelerated, with important implications for the national security as well as economy of the United States. Its military activities, especially in the South China Sea, expanded. Economic policy reverted increasingly toward state control. Political authoritarianism intensified.

      This raised critical questions for the United States. Could it accept China’s rise to a position of global economic leadership while maintaining its own traditional supremacy? Or would its supremacy inevitably give way to a “post-primacy era” in which, at a minimum, it shared global prominence and clout with the new superpower? Even more crucially, did it matter? Was global economic leadership critical for the United States to defend key national interests or would it fare as well, or potentially even better, if China were to move up beside it in the international hierarchy?

The Trump Administration clearly tilted toward hostility toward China’s rise and thus adopted a new policy that could be called partial disengagement (Friedberg 2020) or selective decoupling.⁶ It sought to block further increases in economic interdependence and to selectively undo some past interactions. The chosen tools were tariffs on a wide range of imports from China, acquiescence in retaliatory Chinese tariffs on most US exports to China, a sharp cutback in Chinese direct investment in the United States, and discouragement of American foreign direct investment (FDI) in China (and even an ineffectual Trump “order” to US firms to “come home”). New visa policies cut back on students and other Chinese travelers to the United States. Trade declined and flows of investment, technology, and people were sharply curtailed. The “Asia czar” of the incoming Biden Administration, Kurt Campbell, affirmed in early 2021 that “The period that was broadly described as engagement has come to an end.”

      There are interest groups and political forces in China that also want to decouple. The application of tough US controls against key Chinese firms – such as ZTE and, especially, Huawei – has strengthened the hawks in Beijing who warn that dependence on US suppliers of important inputs (like semiconductors) jeopardizes China’s ability to chart its