Following the Grandview China-US dialogue on 10 May, Dr. William Overholt extended his talking points and hereby we are now publishing it as below.
By Dr. William Overholt, the Senior Research Fellow at John F. Kennedy School of Government, Harvard University
International relations theorists and many contemporary officials see Sino-American relations through the lens of studies by Mearsheimer, Allison and others who analyze pre-World War II competition between rising powers and established powers and conclude that war is likely. But pre-World War II geopolitics focused on powers using their military to seize territory from neighbors. Post-World War II geopolitical competition has been far more defined by economics, where both sides can win.
The U.S. won the Cold War with an economic strategy based on the Bretton Woods system together with various aid, institution building and diplomacy institutions. It created a sustaining and expanding network of prosperous allies and friends. The Soviet Union bet everything on its military and essentially went bankrupt, something both American and Chinese leaders tend to forget.
Rising powers also succeeded primarily through economic priorities
Japan became a big power without much of a military.
South Korea, initially inferior economically, militarily, and in political stability to its northern opponent, changed its bet under General Park Chung Hee from military to economic priorities and is now about 50 times larger economically than North Korea, which continued to emphasize military priorities.
Indonesia until the 1960s claimed much of Southeast Asia but was a hapless economy. Social distress made it home to more violent Islamic jihadis than the rest of the world combined. After 1966 it refocused on economic development and, having stabilized, became the unquestioned leader of Southeast Asia. Importantly it became a leader by giving up most of its territorial claims in order to focus on economic development. It played the new game.
In China, Deng Xiaoping cut back the military from 16 percent of GDP to 3 percent and settled most of its land border disputes in order to focus on economic growth. The subsequent economic takeoff made China a major power well before the current military buildup began. China’s military rise is impressive, but its global leadership lives or dies on domestic economic growth and its international economic strategy.
So the path to becoming a successful big power has become an economic strategy protected by a strong military—or an ally with a strong military. Economic strategies differ from military strategies in that both sides can win. When Germany and France war, one wins and one loses. When the U.S. and Japan, or the U.S. and China, compete, both can prosper. That is a vital aspect of US-China rivalry.
Moreover, China is 8000 miles away; US-China territorial issues are trivial.
The current situation
Having won the Cold War, the U.S. allowed its key geoeconomic institutions to atrophy. Its national security policy became truncated to a primarily military policy, driven by domestic Congressional politics rather than any grand strategy. U.S. support for the World Bank, IMF, WTO and free trade institutions like TPP weakened. The State Department budget and AID’s economic missions were drastically curtailed. U.S. Information Service was eliminated. National security policy became mainly military policy.
China’s Belt and Road Initiative, BRI, essentially tries to fill a vacuum left by US gutting of its Bretton Woods strategy. BRI emulates Bretton Woods—development banks funding infrastructure plus efforts to create common standards and liberalize international trade and investment.
The current U.S. response to economic relations with China has been to ignore the overlaps of Bretton Woods and BRI, to ignore common interests in the success of BRI, to ignore many of benefits of Sino-American collaboration, and to treat Chinese efforts in areas like standards setting as illegitimate challenges to the established order. It has failed to invent a strategy for the era of geoeconomics, leaving China as the only power with a leadership vision.
China’s BRI vision is inspiring, but it is beset by contradictions between China’s desire to retain all the advantages of a small power and its desire to be treated as a global leader. With the developed world, China wants its companies like UnionPay and Huawei to have the opportunity to dominate their global sectors, while crippling Western competitors by denying access to the Chinese market. Given China’s current scale, this creates a life and death crisis for a wide range of Western companies. Western governments will act decisively in response, defeating China’s ambitions to be accepted as a global leader. Although it has four of the world’s ten largest banks, China continues to use infant industry arguments to protect its banks. Toward its maritime neighbors China behaves as if it were a small power like Malaysia, grabbing everything it can without regard for the interests of its neighbors. While China is asserting itself as a global leader, it is also playing the victim based on its pre-1949 century of weakness.
The inspiring vision of BRI, or creating a community of common interest collides unpleasantly with the reality that every maritime country from North Korea around to India feels that China is a threat to its sovereignty. China’s justified aspirations to be a global leader are grievously damaged by its tendency in so many ways to behave as a small power.
Refocusing on common interests
Current commentary on both sides has tended to focus on conflicts and downplay common interests. Therefore it is important to highlight the scale of common interests.
At the same time we have enormous mutual interests. For instance, China is much more open to U.S. trade and investment than allies Japan and South Korea. Among many other things that enabled us to save a failing General Motors and a huge number of jobs. This is decisive for the American economy. Car companies, the movie industry, all major luxury goods manufacturers, and much of the rest of the economy can only survive with access to Chinese demand. The center of gravity of the world consumer market is now Asia, mainly China, in the way the baby boomer West once was. That is only going to increase, and advocates of decoupling, who typically focus only on China as a supplier, can only lead the U.S. into radical decline. These mutual interests are inextricable.
Effective Sino-American economic collaboration has led to the greatest reduction of poverty in human history. For the first time in 315,000 years of human existence mankind has more basic goods—clothes, shoes, toys, food, much else—than we actually need. There are immense unpublicized national security benefits from the resulting stabilization and reduced terrorism.
Sino-American collaboration has midwifed the world into a post-industrial era, where the majority of jobs are in the service economy, free of the backbreaking labor of the agricultural and industrial eras. Sino-American collaboration has given our world its only hope of addressing the fundamental challenges of the next generation, climate change and environmental degradation. If China were still mired in poverty like India, the world would have no hope.
The U.S. and China also share national security interests whenever the Bretton Woods or BRI systems stabilize a country.
When successful, Bretton Woods or BRI stabilizes countries, reducing the risk of war or terrorism. In the 1960s, Indonesia had more violent Islamic jihadis than the rest of the world combined. With Japanese-American help the growth of the Indonesian economy gave almost everyone a stake in society and jihadism mostly evaporated.
Likewise, in the 1970s everyone knew that Bangladesh was going to be a failed state. It should have turned into a gigantic jungle Somalia, spewing terrorists. Instead, the textile industry spilled over from China, employing millions, and stabilized the country. While the factories moved from China, the largest ownership of those factories was American. Bangladesh’s stability is a joint Chinese-American success.
Not long ago Ethiopia had six violent Leninist parties fighting for control, along with a great famine. But more recently it has been the world’s fastest growing country and its politics is more stable. The largest foreign contributor to this success is China.
As a rough rule of thumb, each of these successes saves the U.S. $1 trillion of anti-terrorism efforts. BRI mostly services the parts of the world least affected by Bretton Woods successes: Central Asia, the Middle East, Africa. Just denouncing it, as recent U.S. policymakers have done, has only one consequence: discrediting ourselves. Likewise the U.S. military presence in many parts of the world stabilizes areas in ways that serve China’s interest.
Current trade issues
Trump’s trade war has suffered from the chaos and irrationality typical of his domestic and foreign policies. His fulminations about the currency, which has actually been overvalued for many years, and about the trade deficit, which is determined by domestic U.S. developments, are nonsense. But concerns about intellectual property theft, about the destruction of Western companies’ market share by excluding them from the Chinese market, and about subsidized Chinese companies buying up Western technology companies, are widely shared by all American leaders of all political tendencies and by the principal leaders of Europe and Japan.
Up until a few years ago it seemed that China was on a course to play the economic game as a big power accepting big power responsibilities. But that has not happened. Quite the reverse. While treatment of trademark issues within the Chinese market has improved, cyber theft of technologies has continued to be massive. Behind the rhetoric of welcoming foreign investments, detailed Chinese regulations and Party interventions against foreign companies have made it very difficult for foreign companies to expand their roles in the Chinese market. This has alienated the foreign business communities of the U.S. and EU. Their transformation from advocates of good relations with China into advocates of decisive action against China has shifted the entire political relationship between China and the West.
In the U.S. this has led to talk of decoupling. Decoupling in any broad sense would be economically irrational, but across the Western world there will be rational new restrictions on what Chinese companies are allowed to buy and efforts to diversify away from dependence on China. Western markets are largely open to what China is good at, namely manufacturing, but Chinese markets are largely closed to what Western companies are best at, namely advanced services. If China continues to cordon off its market, Western countries will act to restrict Chinese companies’ access to Western markets and they will be justified in doing so.
The counterpart of U.S. talk about decoupling is Chinese plans to dominate all the major technologies of the coming era. Manufacturing 2025 is a Chinese declaration of decoupling. It is unlikely to succeed but it is a decisive announcement of intentions.
Resolution of current trade and investment problems would require the Trump administration to focus on the real problems rather than confusing them with phony issues like the currency and balance of trade. The U.S. business community wants problems solved, not escalation into a broad cold war that makes problems unsolvable. Resolution will require China to take replace empty rhetoric about continued reform and opening with decisive action to open markets and treat foreign companies fairly.
Both the U.S. and China have weakened their appeal as world leaders through things that have happened in their domestic societies. The Global Financial Crisis of 2008-2009 disillusioned China and many other countries with a global model based on dollar hegemony and market fundamentalist economic management. The advent of Trump, Brexit, and Bolsanaro, and the failure of countries like the Philippines and India to deliver benefits to the majority of their people, have convinced many in China and elsewhere that Western-style democracies can have trouble delivering rational governance. The result is a serious puncturing of what many in the West once believed would become a universal model.
On the Chinese side, recent heightened political repression creates tensions with the West but not a decisive change in attitudes toward dealing with China. The herding of the Uyghur people into reeducation camps has, however, rebranded China in the eyes of the West. Foreign scholars cannot tell China how to manage its domestic politics, but an honest scholar must mention the international consequences. While Trump does not care about the Uyghurs, when the French or Turkish prime ministers think about China, or the German or Spanish foreign ministers, or virtually any Western scholar and most business leaders, the situation of the Uyghurs is one of the top two or three things on their minds when they are considering policies toward China. They all want to do business with China but virtually all will say privately that the Uyghurs’ situation means that China cannot be morally accepted as a global leader.
Neither side wants to acknowledge these profound problems. Both sides tend to dismiss these concerns. Even scholars tend to ignore them because it is unpleasant to talk about them. But for both sides they are real and fundamental.
In an era of geoeconomics both the U.S. and China are facing new financial and economic constraints that will affect their quest for global leadership. Trump has grievously mismanaged the U.S. economy, first by massive government budget deficits cause by his tax cuts for the rich and then by mismanaging the Covid-19 virus crisis in ways that create both maximum infections and maximum damage to the economy. The U.S. will spend many many years digging itself out from this hole.
China has been experiencing a bull market mentality like what happens when the U.S. stock market becomes excessively exuberant. For three decades the economy grew very fast and government revenues grew roughly twice as fast as the economy. This created a mentality that everything was affordable—the world’s best infrastructure, care for an aging population, a military to challenge the U.S., an ambitious Belt and Road program, and much else. Now the economy is growing more slowly and revenue growth has to converge with economic growth. New policies are squeezing China’s private sector severely, alienating foreign investors, and imposing political controls on all Chinese companies that will inevitably slow growth.
The economic constraints on both countries will reshape their relations with foreign countries and with their own people.
Because the U.S. and China are both pursing deeply flawed strategies, they both fail to achieve their maximum goals and they gratuitously enhance conflict with each other.
The primary U.S. weakness is that it has adopted a Thucydides Trap mentality that treats every Chinese assertion—of proportionate influence in the World Bank, of joint regulation of space, of interest in setting IT standards, and much else—as a threatening challenge to U.S. leadership. For the foreseeable future China is going to be a great power and the U.S. will have to live with it and negotiate with it as an equal. In some areas, such as green energy, railroads, and digital commerce, China is the leader and will be the leader in setting standards. This is a very difficult adjustment for Americans, but it is an imperative.
For China, the fundamental adjustment is to move from being an adolescent power to being a big power that others can accept as a leader. When it was small, nobody minded that China had more access to Western markets than Western companies had to China. Now that Chinese companies like UnionPay and Huawei can systematically crush Western competitors by having full access to all the markets of the world while denying Western companies comparable access to China, the world will simply not accept China playing the role of the developing country victim.
These problems are resolvable but solutions require exceptional leadership on both sides. Failure to make the needed adjustments will lead to intense and potentially unmanageable conflicts.