US-China Relations: Where to from here?
January 25, 2013, 6:11 am

China has in recent years overtaken the US as the largest trading partner for many countries in the world, trade analysis by the Associated Press has shown.

In 2006, the US was the larger trading partner for 127 countries, versus just 70 for China. In 2011, these numbers were almost exactly reversed with China taking the lead.

But while trade between these two nations is enormous, their relationship is fraught with escalating tension amid accusations of “protectionism”, “currency wars,” and other hostile activities. It certainly is in no one’s interest for these tensions to disrupt current trade flow, which could inhibit economic growth or lead to even worse outcomes.

However, despite the obvious need to tone down the damaging political rhetoric, the leaders of both countries — and particularly those in the US — have exercised little leverage over the minority interests who foment such acrid discourse. The challenge then is what the leaderships of both countries should do to avoid the slippery slope of hostilities.

At the heart of the problem is the fact that the US elite feels increasingly vulnerable when more and more actors are able to challenge the status quo. While the US still dominates economically and militarily by a wide margin, the rapidly changing geopolitical landscape has nonetheless caused anxiety and concern among some Americans, justified or not.

China, in particular, has risen economically – and by extension politically – around the world.

The natural reaction from the US, unsurprisingly, has been to label it a threat, even though China shows no ability to challenge US dominance from any standpoint in the foreseeable future.

In fact, the US has perhaps benefited the most from China’s rise as its primary beneficiary – from a corporate profits standpoint. Yet its political rhetoric and actions would have one believe otherwise.

This animosity results from certain actors trying to protect their interests by obscuring the truth. In the case with China, American firms have profited far more from doing business in and with China than doing it solely in the US.

According to the China Business Report in 2011, up to 80 per cent of US companies operating there saw profits in 2008 and 2009 despite the global economic crisis. AmCham Shanghai says more than 70 per cent of American companies in China registered sales growth that outpaced performance in other global markets.

But when the fruits of distribution are being shared unevenly, especially when the senior management takes the lion’s share, such elite actors would rather scapegoat China than to face the wrath from labor and unemployed Americans who have been left out of the profit margin.

It is certainly much easier to blame China, who cannot effectively defend itself in the short run, than to take a steep pay cut in the name of sharing the wealth with fellow Americans.

In fact, a proposal at the World Economic Forum in Davos – based on the 1984 suggestions of renowned management guru Peter Drucker – to limit the compensation of managers to no more than 20 times the lowest paid worker will likely be ignored by the vast majority of attendees who are accustomed to receiving in excess of 300 times or more what their lowest paid employees receive.

So unless the US elite embrace this more enlightened outlook and behaviour, we are unlikely to see harsh anti-China rhetoric diminish any time soon.

The power elite will likely continue to think and act in their short-term interests, a mode of behaviour that can only end in tears if taken to its logical conclusion. The challenge for the US elite then is to exercise a bit more vision and largesse.

China, on the other hand, also has a role to play in ameliorating trade tensions and thus political rhetoric.  Multinational insurance and investment company Allianz Group says that average incomes have increased by 500 per cent since 2001, indicating that China is becoming a richer nation with more developed infrastructure and institutions.

China can afford to grant more freedoms to its people such as greater investment options and encourage even greater consumption levels to allow China’s middle class to grow for years to come.

If it allows more openness in these two areas, the Chinese people will likely be less cynical towards their own government and the Americans will likely be less hostile when they realise that they desire to take advantage of such attractive once in a lifetime economic opportunities.

Of course, the Americans will likely come up with other criticisms to level against the Chinese even after the Chinese meet all the current US demands. But in the short and medium term, such actions by the Chinese government can be used as an olive branch to smooth over relations while the bigger issues of American insecurity get worked out.

The trade relationship between the US and China will occupy center stage in the coming years as China continues to grow, and US entanglements in the Middle East slowly wind down.  How healthy or dysfunctional this relationship will become is anyone’s guess.

But by understanding the motivations and fears that drive the current trade dynamics, it is possible that leaders on both sides seize the opportunity to urge their respective nations to modify their behaviour and avoid some looming problems.