The US and China: Entente dis­cor­diale

Financial Mirror (Cyprus) - - FRONT PAGE - Mar­cuard’s Mar­ket up­date by GaveKal Drago­nomics

The US-China re­la­tion­ship is a strange beast. The world’s two big­gest na­tional economies, which to­gether ac­count for more than a third of global out­put, are locked in a close eco­nomic and fi­nan­cial em­brace, but are also strate­gic and (to a much lesser ex­tent) mil­i­tary ri­vals. This makes the re­la­tion­ship more in­tri­cate than any the US has had with a num­ber-two coun­try since it rose to the top of the world eco­nomic charts in the late 19th cen­tury. Bri­tain was the ge­nial un­cle from whom it would in­herit the scepter of global dom­i­na­tion. The Soviet Union was a pure vil­lain, to be worn down by a long bat­tle of po­lit­i­cal con­tain­ment and eco­nomic at­tri­tion. Ja­pan was a re­li­able if of­ten in­com­pre­hen­si­ble vas­sal. China is au­thor­i­tar­ian and mil­i­tar­ily in­de­pen­dent, but not an en­emy; eco­nom­i­cally in­dis­pens­able, but not a friend.

These com­plex­i­ties tend to turn meet­ings be­tween the two coun­tries’ lead­ers into an un­com­fort­able va­ri­ety show of po­lit­i­cal shadow-box­ing and eco­nomic ac­ro­bat­ics.

This week’s state visit by Xi Jin­ping to the US is per­haps the most ex­treme ex­am­ple yet. It starts in Seat­tle with a fo­rum at which the lead­ers of some of Amer­ica’s lead­ing tech­nol­ogy firms will be forced to en­dure a sanc­ti­mo­nious speech by Chi­nese in­ter­net czar Lu Wei, who over­sees a sys­tem of cen­sor­ship and techno-na­tion­al­ism that has ef­fec­tively made it im­pos­si­ble for Amer­i­can in­ter­net giants such as Face­book and Google to op­er­ate in China, clear­ing the way for the growth of Chi­nese in­ter­net cham­pi­ons such as Alibaba, Baidu and Ten­cent. One of the at­ten­dees will be Tim Cook, whose com­pany—Ap­ple—has be­come the most valu­able on earth in part be­cause China’s fast-grow­ing mid­dle class en­thu­si­as­ti­cally pays high prices for Ap­ple gad­gets as­sem­bled by low-wage Chi­nese work­ers, with the prof­its flow­ing to Amer­i­can cap­i­tal­ists.

The high­light of the visit will be a White House state din­ner which was prob­a­bly saved from can­cel­la­tion only be­cause Bei­jing dis­patched a last minute del­e­ga­tion to beg Washington to de­lay the im­po­si­tion of eco­nomic sanc­tions to pun­ish China for its ag­gres­sive cy­ber-in­tru­sions and in­dus­trial es­pi­onage. At the pre­ced­ing press con­fer­ence, it’s pos­si­ble that we will get an­nounce­ments of a land­mark agree­ment to re­strict cy­ber-war­fare, a reaf­fir­ma­tion of the two coun­tries’ com­mit­ment to push for a strong global cli­mate agree­ment, and progress to­wards a bi­lat­eral in­vest­ment treaty (BIT) that would sub­stan­tially in­crease flows of di­rect in­vest­ment by US firms in China.

The BIT nicely ex­em­pli­fies the con­tra­dic­tions of the bi­lat­eral eco­nomic re­la­tion­ship. Amer­i­can big busi­ness, via the US Cham­ber of Com­merce, has loudly con­demned China’s pro­tec­tion­ism, dis­crim­i­na­tory anti-trust en­force­ment, and per­sis­tent dis­re­spect for in­tel­lec­tual prop­erty. Yet many of these same busi­nesses, through the USChina Busi­ness Coun­cil, have been equally loud in their de­mands that Washington ac­cel­er­ate talks on the BIT, so that they can put even more money at risk in China.

Two key points are worth remembering as we head into the week’s the­atri­cals.

First, prag­ma­tism trumps ide­ol­ogy. The out­ward po­lit­i­cal re­la­tion­ship be­tween the two seems as chilly as it has ever been.

Yet the un­der­ly­ing eco­nomic dy­nam­ics re­main pos­i­tive, and for all the blus­ter on both sides, the level of co­op­er­a­tion re­mains sub­stan­tial. Some of this co­op­er­a­tion is grand: the US-Iran nu­clear deal would have been im­pos­si­ble with­out China’s will­ing­ness to ad­here to strict eco­nomic sanc­tions against Tehran. Much is mun­dane: the de­sign of China’s de­posit in­sur­ance sys­tem, launched in May, de­pended on years of con­sul­ta­tions with the US Fed­eral De­posit In­sur­ance Cor­po­ra­tion. The point is that the con­ver­sa­tion that goes on be­hind the head­lines is far more ac­tive, and far more pro­duc­tive, than most peo­ple in ei­ther coun­try are aware.

Sec­ond, what ul­ti­mately sta­bilises the re­la­tion­ship is that the US re­mains vastly the more pow­er­ful na­tion, de­spite all the sto­ries about Amer­ica’s de­cline and “the in­ex­orable shift of power from West to East.” A key rea­son, of­ten over­looked, is that the US mag­ni­fies its power through the ed­i­fice of the global in­sti­tu­tions it built af­ter World War II, in­clud­ing a ro­bust net­work of al­liances; 700 mil­i­tary in­stal­la­tions in nearly 40 coun­tries; and mul­ti­lat­eral or­gan­i­sa­tions such as the OECD, the World Bank and the In­ter­na­tional Mon­e­tary Fund, whose im­por­tance stems less from the money they dis­burse than from the ideas they prop­a­gate.

China, mean­while, is a soli­tary coun­try with no al­liances and no in­sti­tu­tions through which it can in­flu­ence global opin­ion. Its much-touted “re­place­ments” for US in­sti­tu­tions, such as the in­ter­na­tion­alised ren­minbi and the Asia In­fra­struc­ture In­vest­ment Bank, re­main sketches on the draw­ing board, with lit­tle prac­ti­cal im­pact.

China has es­sen­tially one card to play, which is ac­cess to its large and fast-grow­ing mar­ket. It has played that card skill­fully for many years. In the end, though, it knows it can only thrive by com­ing to terms with its big­gest cus­tomer. The snubs and re­crim­i­na­tions will con­tinue, but so will the eco­nomic sym­bio­sis.

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