The United States and China have embarked on one of the most hair-raising experiments in international history. Both sides are now locked in a steady, escalating, geopolitical competition. And yet both are deeply economically intertwined. Can these two trends — geopolitical tension and economic engagement — continue, or will one of them give?
Over the past few years, as Washington and Beijing have feuded, U.S.-China trade in goods has remained strong, reaching an all-time high of nearly $700 billion last year. Major American companies, from Qualcomm to Corning to Wynn Resorts, get large chunks of their revenue from China. American farmers’ largest export market is China.
The Biden administration has pursued a policy toward China that is more strategic than Donald Trump’s tariffs. It has sought to deny China access to some of the highest-end technology, chiefly the world’s most advanced computer chips. It has also made large-scale investments in science and technology, and is even providing manufacturing subsidies to revive high-tech manufacturing within the United States.
The effort here, using national security advisor Jake Sullivan’s metaphor, is to build a “small yard” of critical technologies guarded by a “high fence” around it (as opposed to coming up with a long list of technologies that would be hard to seal off from China). But the challenge will be to see whether all these efforts, and the hostile rhetoric that surrounds them, will scare off American businesses from dealing with China altogether.
Of late, the administration seems to have recognized this danger and has tried to send some conciliatory signals. Commerce Secretary Gina Raimondo has often said the United States does not want an economic decoupling from China. In November she said, “We need to continue to do business with China and trade with China supports American jobs.” Thursday, in a major speech on China, Treasury Secretary Janet L. Yellen called for a “constructive” relationship between the two countries. She stressed that the U.S. tech curbs on China are not designed to stop the Asian country from growing, but have been imposed solely for national security reasons — to prevent the Chinese military from gaining parity or an edge over the United States.
But the administration’s carefully crafted, surgical China policy lives in Washington, a town not known for nuance. The Republican primaries promise to be a festival of China-bashing. Rep. Mike Gallagher’s (R-Wis.) China committee has already announced that it is going to investigate companies doing business in China, which means any CEO with exposure to that market could be subpoenaed and cross-examined. And don’t forget that China has domestic politics as well. Xi Jinping’s tough line against the United States is popular in a country that is quite nationalist.
Decoupling is already happening. As the Peterson Institute for International Economics shows, the strong trade numbers actually mask a falloff in U.S. exports to China; because of inflation, the dollar value of the goods has risen even while volume is flat or falling. Companies such as Apple are searching for ways to diversify out of China. General Motors earnings in China have fallen by almost 70 percent since 2014.
Some of this is a healthy diversification, reducing excessive dependencies on China. But the real question is, where are we headed? If these trends continue and accelerate — which seems quite likely — we could see the world split into two zones, economically and technologically. And many countries will not want to limit their options by choosing just one zone.
French President Emmanuel Macron might have been too blunt about his worries about Europe becoming a “vassal” of the United States, but his views are in fact widely shared in Europe and beyond. The war in Ukraine has hurt Europe by raising its energy costs while benefiting the United States, which is the world’s top producer of hydrocarbons and sells many at low cost. European companies are shifting investment to the United States, lured in part by the Inflation Reduction Act’s generous subsidies. A German CEO said to me recently, “You cannot expect us to forgo cheap Russian energy as well as the Chinese market. That would be suicide for Europe.”
More broadly, if geopolitical tensions win out and economic ties continue to weaken, we will move into a very different world, marked by much greater chaos and disorder at every level. One sign of this can be seen in the impasse over debt restructuring. Dozens of the world’s most vulnerable economies are in or at high risk of debt distress. (Lebanon, for example, has been in default for three years.) Yet the International Monetary Fund cannot bail out these countries because China (which is one of the world’s largest creditors) cannot come to an agreement with Western nations on the terms of relief. The two sides blame each other and hundreds of millions of people suffer.
The last time two major world powers tried to manage a relationship of economic interdependence and rising geopolitical rivalry was Britain and Germany in the period from the 1880s to 1914. That experiment ended very badly, with a war that destroyed much of the industrialized world. Both sides should try to ensure we do better this time.