America's Self-Defeating China Policy

As you know, China is now public enemy No. 1. Serious legislators, afraid to be seen as soft or weak on China, utter flamboyant pronouncements of how tough we must be on the Middle Kingdom.

As it happens, and as happens with most macho posturing, such efforts often backfire. China is barely being hurt by our anti-China policies, and continues to sell into the world markets, with impunity.

So, former Treasury  Secretary Henry Paulson has just written a long and detailed  analysis of the state of play between the USA and China. He begins with his experience managing the 2008 market crisis.

At that time, self-interested cooperation was possible even amid political and ideological differences, clashing security interests, and divergent views about the global economy, including China’s currency valuation and its industrial subsidies. As Treasury secretary, I worked with Chinese leaders during the 2008 financial crisis to forestall contagion, mitigate the worst effects of the crisis, and restore macroeconomic stability.

This level of cooperation requires good relations. We no longer have good relations with China. 

 China and the United States jab accusatory fingers at each other, blame each other for bad policies, and trade barbs about a global economic downturn from which both countries and the world have yet to recover….

What has not changed, however, is the fact that without a stable relationship between the United States and China, where cooperation on shared interests is possible, the world will be a very dangerous and less prosperous place.

Without affixing blame or responsibility, Paulson describes the situation:

China and the United States are in a headlong descent from a competitive but sometimes cooperative relationship to one that is confrontational in nearly every respect. As a result, the United States faces the prospect of putting its companies at a disadvantage relative to its allies, limiting its ability to commercialize innovations. It could lose market share in third countries. For those who fear the United States is losing the competitive race with China, U.S. actions threaten to ensure that fear is realized.

And yet, our allies are continuing to do business with China. They are simply picking up the slack:

Although many countries share Washington’s antipathy to China’s policies, practices, and conduct, no country is emulating Washington’s playbook for addressing these concerns. It is true that nearly every major U.S. partner is tightening up its export controls on sensitive technologies, scrutinizing and often blocking Chinese investments, and calling out Beijing’s coercive economic policies and military pressure. But even Washington’s closest strategic partners are not prepared to confront, attempt to contain, or economically deintegrate China as broadly as the United States is.

Instead of decoupling or deintegrating economically, many countries are instead deepening trade with China even as they hedge against potential Chinese pressure by diversifying business operations, building new supply chains in third countries, and reducing exposure in the most sensitive areas. Perhaps that is why, in 2020, despite years of American warnings, China overtook the United States as the European Union’s largest trading partner. Both EU exports to and imports from China grew in 2022. And Asian and European leaders, spurred by the November 2022 visit to Beijing by German Chancellor Olaf Scholz, now look set to beat a path to Chinese President Xi Jinping’s door, with trips by Philippine President Ferdinand Marcos, Jr., French President Emmanuel Macron, and Italian Prime Minister Giorgia Meloni likely to drive a broader trend.

We have our policies. The rest of the world is not going along:

China is now the world’s largest trading nation. Nearly two-thirds of all countries trade more with China than the United States.

Animosity against the world’s largest trading nation might make us feel good, but it is economically counterproductive:

Americans benefit from access to the world, and China will remain a huge market that Americans can either partake in or abandon to competitors. China is the world’s second-largest economy, its largest manufacturer, and its largest trader. It will be a big part of the global financial picture for decades to come. Instead of fatalistically accepting the descent of an economic iron curtain, Washington should negotiate aggressively with China to win opportunities for Americans in its market. Administration officials should have serious discussions with Chinese leadership about how to manage the decoupling in a way that allows for mutually beneficial trade. Right now, the two countries are mostly trading charges and countercharges while doing nothing to expand mutually beneficial economic opportunities.