Why Can’t We Be Friends?
June 15, 2015
Senior officials from the U.S. and Chinese governments soon convene in Washington for the latest session of the Strategic & Economic Dialogue, a policy forum started (in a slightly different format) about a decade ago. For reasons including the two countries together accounting for about 40 percent of global output, this is the world’s most important bilateral economic relationship. This relationship has never been silky smooth, yet this upcoming meeting finds it unusually stressed because of internal and cross-border pressures and disagreements.
Last year, China’s gross domestic product grew by 7.4 percent. Yes, this would be remarkable for all other countries on the planet, but for China it was the slowest rate in 24 years—and even slower growth is projected for this year. Implementing pro-growth, structural policy reforms is very challenging, top officials are learning. Earlier this year, Premier Li acknowledged as much: “This is not nail-clipping—it’s wrist slashing,” he said. “It’s like taking a knife to one’s own flesh.”
As with China’s dramatic accession to the World Trade Organization in 2001, today’s reform efforts are focusing on deepening China's connections to the global economy. Late last month the Ministry of Finance announced tariff cuts on a range of consumer goods. Opening to trade in assets is in the works, too: to be announced soon is a plan to lift all limits on Chinese citizens and businesses making direct purchases of stocks, bonds, and real estate in foreign markets. International trade in assets can bring new risks, but for China this would likely bring benefits, which include offering its giant emerging middle class greater savings options. And those options would help spur consumption as more diverse portfolios trim the need to over-save in poorly-performing domestic assets such as Chinese equities. (The surge in Chinese equities notwithstanding, The Wall Street Journal recently reported that “from the beginning of 1993, when reliable data begin, through the end of 2014, Chinese stocks available to global investors have lost an average of 3.2% annually, after inflation.”)
China is also now hoping to have the yuan designated a reserve currency by the International Monetary Fund. While large economies like Germany and Australia have endorsed this, the United States has publicly thrown cold water on the idea—just as it foolishly resisted China’s leadership in establishing the Asian Infrastructure Investment Bank (a topic we covered here). Prediction: In the joint communique issued at the end of this next S&ED, discussions of the yuan’s status will be euphemistically characterized as “a full and frank exchange of ideas.”
Of course, the most contentious commercial disagreement between the two countries remains state-driven and/or state-sanctioned theft of intellectual property and related personal and business information. The latest kerfuffle here is the dispute over charges that Chinese hackers penetrated four million personnel files from the U.S. government’s main employment office. Think of your company’s IT policies for Chinese travel. Is there any other country with such draconian restrictions, such as banning any business IT devices?
So, is there any topic the next S&ED might address that is not brimming with rancor and distrust? We will modestly propose one: a U.S.-China bilateral investment treaty, or BIT in policy parlance.
In fits and starts since 2008, the two countries have been negotiating a BIT (as a paper co-authored by one of us discussed last year). As we have noted previously, this BIT would both eliminate restrictions that curtail foreign direct investment between the two countries and would create protocols for resolving disputes. Who cares? We all should care because greater FDI will support something both countries care deeply about: more jobs.
U.S. companies operating in China employed over 1.4 million Chinese workers in 2012 (the most recent year available), according to the U.S. Bureau of Economic Analysis. On the U.S. side, we will commend to you an important report issued recently by the National Committee on U.S.-China Relations and Rhodium Group. The report documents the scope of Chinese investment in the United States, broken down by state and even congressional district. It shows that there are now 80,000 jobs in the United States directly tied to investments made by Chinese companies—up from fewer than 15,000 jobs five years ago. (Fun fact: the Congressional district with the most jobs tied to Chinese companies is in North Carolina.) The report also shows that, contrary to the conventional wisdom, Chinese companies typically expand local employment after acquiring U.S.-based assets.
A BIT would help the United States attract a greater share of China’s surging outbound FDI—and thus more new jobs—in today’s competitive world where scores of countries are rolling out the red carpet to Chinese investors. Last year, China’s outbound FDI actually exceeded its inbound FDI. What share of that outbound FDI went to America? Only about 9 percent—up from just 2 percent in 2013.
We wager that some U.S. and Chinese officials are asking the question posed in a catchy American song released 40 years ago this week: Why Can’t We Be Friends? Yes, a number of deeply complicated matters divide the two countries. But the likelihood of resolving these matters will be higher if in other matters they can build mutual understanding, trust, and shared success. An S&ED that focused at least partly on these other matters—like the BIT—will help set the countries’ overall relations on a more-productive, more hopeful path.
Articles © 2015 Matthew Slaughter and Matthew Rees. All rights reserved.
Publication © 2015 Trustees of Dartmouth College. All rights reserved.