“The changing triangular relations between the Philippines, the United States and the People’s Republic China: From Obama, Aquino, and Xi and beyond”

 

Amado M. Mendoza, Jr. and Richard Javad Heydarian

Part III

It’s complicated between the new frenemies!

Relations between the United States and China were rebooted more than four decades ago when diplomatic relations were re-established between the two powers.  While initial relations between the two were predictably frosty, even hostile (as evident in the Korean war of the early 1950s), the fissures between erstwhile communist comrades afforded the strategic opportunity for the United States to partner with China versus the Soviet Union.  China gained a lot from the normalization though the dimensions were not apparent at the time.  While China gained entry into the United Nations Security Council at Taiwan’s expense as a consequence, the contrasting fates between it and the Soviet Union reveal the full extent of the paybacks.  While the Soviet Union disappeared into the pages of history in the early 1990s, China proved to be the greatest beneficiary of a Western-induced globalization that needed access to China’s relatively cheap labor force and extensive markets created by growing economic prosperity.

Barack Obama

Realist thinkers have long emphasized the tensions and conflict generated by a rising power that will inevitably seek to challenge an extant hegemon.  Complementing Organski’s theories on power transition, Mearsheimer (2001) argued that great powers are not content with existing power but seek hegemony instead for their security.  This is so since they cannot know how much power is enough for present and future needs.  For this compelling reason, Mearsheimer believes that great powers will strive for hegemony now and eliminate the possibility of challengers to best ensure their security.  He also notes however that a state cannot attain global hegemony since the too many oceans can effectively stop power.  States can only achieve regional hegemony   In the most recent update of his treatise, Mearsheimer (2014 and 2014a) elaborates that a rising China will seek to dominate Asia, while the United States, determined to remain the world’s sole regional hegemon, will go to great lengths to prevent that from happening.

Current headlines seem to indicate the verity of Mearsheimer’s words.  Nonetheless, his views are not shared by American IR theorists and practitioners.  The realist par excellence and the grand strategist who helped US President Richard Nixon re-establish ties with China, Henry Kissinger, wrote these words of caution:

An explicit American project to organize Asia on the basis of containing China or creating a bloc of democratic states for an ideological crusade is unlikely to succeed—in part because China is an indispensable trading partner for most of its neighbors. By the same token, a Chinese attempt to exclude America from Asian economic and security affairs will similarly meet serious resistance from almost all other Asian states, which fear the consequences of a region dominated by a single power. The appropriate label for the Sino-American relationship is less partnership than “co-evolution.” It means that both countries pursue their domestic imperatives, cooperating where possible, and adjust their relations to minimize conflict. Neither side endorses all the aims of the other or presumes a total identity of interests, but both sides seek to identify and develop complementary interests (Kissinger 2011).

An opposite view is held by liberal institutionalists.  Liberals argue that China’s membership in international organizations such as the United Nations, World Trade Organization, International Monetary Fund and the World Bank has brought benefits and has acculturated China to accept the existence of these same institutions.  In this sense, China is not really an out-and-out revisionist power seeking to alter the world order and institutions.

Whether one is a realist or a liberal theorist, it cannot be denied that economic relations between the two states have grown immensely over the past decades.   A US Congressional Research Service paper (Morrison 2015) reports that U.S.-China economic ties have expanded substantially over the past three decades. Total U.S.-China trade rose from $2 billion in 1979 to $592 billion in 2014.  China is currently the United States’ second-largest trading partner, its third-largest export market, and its biggest source of imports. China is estimated to be a $350 billion market for U.S. firms, based on U.S. direct and indirect exports to China and sales by U.S.-invested firms in China. Many U.S. firms view participation in China’s market as critical to staying globally competitive. General Motors (GM), for example, which has invested heavily in China, sold more cars in China than in the United States each year from 2010 to 2014.  In addition, U.S. imports of low-cost goods from China greatly benefit U.S. consumers, and U.S. firms that use China as the final point of assembly for their products, or use Chinese-made inputs for production in the United States, are able to lower costs. China is the largest foreign holder of U.S. Treasury securities ($1.24 trillion as of December 2014).  China’s purchases of U.S. government debt help keep U.S. interest rates low.

Despite growing commercial ties, the bilateral economic relationship has become increasingly complex and often fraught with tension. From the U.S. perspective, many trade tensions stem from China’s incomplete transition to a free market economy. While China has significantly liberalized it’s economic and trade regimes over the past three decades, it continues to maintain (or has recently imposed) a number of state-directed policies that appear to distort trade and investment flows. Major areas of concern expressed by U.S. policymakers and stakeholders include China’s relatively poor record of intellectual property rights (IPR) enforcement and alleged widespread cyber economic espionage against U.S. firms by Chinese government entities; its mixed record on implementing its World Trade Organization (WTO) obligations; its extensive use of industrial policies (such as financial support of state-owned firms, trade and investment barriers, and pressure on foreign-invested firms in China to transfer technology in exchange for market access) in order to promote the development of industries favored by the government and protect them from foreign competition; and its policies to hold down the value of its currency.  Many U.S. policymakers argue that such policies negatively impact U.S. economic interests and have contributed to U.S. job losses.

Chinese President Xi Jinping takes part in a meeting with his French counterpart at the Elysee Palace in Paris, on March 26, 2014 in Paris. Xi was set today to sign a series of major business deals on the second day of a lavish state visit to France.  Xi is on his first-ever European tour and after visiting The Netherlands and France will head to Germany and Belgium.   AFP PHOTO POOL CHRISTOPHE ENA

How important is China in economic terms, especially to the United States?  China has 1.36 billion people, the largest national population in the world. Its economy produced $17.63 trillion in 2014, (based on purchasing power parity), making China the world’s largest economy. The European Union is second at $17.61 trillion, while the United States fell to third place with $17.61 trillion.  However, China is still a relatively poor country. Its economy only produces $12,900 per person, compared to the GDP per capita of $52,800 for the United States.  This allows China to pay its workers less, making its products cheaper, which lures overseas manufacturers to outsource jobs there.  China became the world’s largest exporter in 2013. It exported $2.21 trillion of its production, beating the EU, at $2.173 trillion and the U.S., at $1.575 trillion.   China ships 17% of its exports to the U.S., creating a $315 billion trade deficit in 2012.  China does a lot of manufacturing for foreign corporations, including American firms.  In effect, a lot of China’s exports are actually for American companies for American consumers (Amadeo 2015a).

In addition, China is the largest foreign holder of U.S. Treasury bills, bonds and notes[1]. As of May 2015, China owned $1.27 trillion in US treasuries. This amount is a little over one-fifth (or 20.8%) of the $6.1 trillion public debt held by foreign countries (U.S. Treasury 2015).  Owning U.S. treasuries helps China by keeping its yuan weaker vis-à-vis the U.S. dollar, which in turn makes its exports competitive and creates jobs for the Chinese working people.  Specifically, the Chinese hold their currency, the yuan, at a fixed rate compared to a basket of currencies, mainly comprised by the US dollar.  When the dollar falls in value, China buys U.S. treasuries which increases the demand for the dollar and appreciates its value.  On the other hand, the sale of public debt to China allows the U.S. economy to grow by way of increased federal government programs.  This is especially important as the U.S. had been facing budget (albeit shrinking) deficits in recent years (Timaraos 2015).

China’s role as America’s largest banker obviously gives it some political leverage.  Every now and then, China threatens to sell part of its debt holdings. It knows that if it did, U.S. interest rates would rise slowing U.S economic growth.  China does this whenever the U.S. allows the value of the dollar to drop, which makes the debt China holds less valuable.  It is not an unalloyed weapon at the hands of the Chinese, however.  China would not call in its U.S. debt all at once. If it did so, the demand for the dollar would drop like a rock. This dollar collapse would disrupt international markets worse than the 2008 financial crisis. China’s economy would suffer along with everyone else’s.  More likely, China would slowly begin selling off its Treasury holdings. Even when it just warns that it plans to do so, dollar demand starts to drop. This hurts China’s competitiveness, as it raises its export prices, so U.S. consumers start buying U.S.-made products instead. China must further expand its exports to other Asian countries, and increase domestic demand, before it can call in its U.S. debt holdings.  (Amadeo 2015a and Amadeo 2015b).

The extended discussion above illustrates how economically co-dependent the U.S. and China had become in recent years.  This complicates the strategic relationship between the two powers.  In a way, the post-modern and hip concept of being ‘frenemies’ is apropos for both states.  This unprecedented relationship sharply contrasts the US-Soviet relationship during the Cold War.  Notwithstanding the détente period, the enmity between the two is undeniable.  In no way were both powers dependent on each other economically as trade and economic exchanges between the two were largely circumscribed by strategic considerations.  Embargos and trade controls were imposed by the U.S. and its European allies on the Soviet Union.  The basic idea is to prevent the Soviets from strengthening themselves through trade with the West.  No such similar inhibitions informed the U.S. China economic relations.

Both states realize this co-dependence and seek to leverage the fact to each other’s advantage.  From the American viewpoint, China has to weigh the consequences of recklessness and the possible loss of the opportunities and advantages of behaving responsibly within the context of U.S.-led international regime.  On the Chinese side, meanwhile, they seek to find out how much the envelope could be pushed before the Americans decide that strategic considerations are weightier than economic consequences.  The situation is one where two powers need each other but are mindful of power balance between them.  Obviously, being ‘frenemies’ is more complicated and less straightforward than being outright foes.  This dynamic is bound to prevail for decades to come.

_______________

Note:

[1] The U.S. debt is the sum of all outstanding debt owed by the Federal Government. It’s greater than $18 trillion, and is tracked by the national debt clock. America’s debt is the largest in the world for a single country. It runs neck and neck with that of the European Union, which is an economic union of 28 countries. Nearly two-thirds is the public debt, which is owed to the people, businesses and foreign governments who bought Treasury bills, notes and bonds (Amadeo 2015c).

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