Future of US-China Economic Relations

China seems to be in a strong position right now If anyone else tries to boss it around, it's got the ultimate move It can restrict supplies of rare earths The US wants to apply tariffs or export controls Nice little car industry you've got there shame if anything were to happen to it The EU wants to force its manufacturers to diversify away from China such a shame they can't get the inputs they need Given the high stakes, it is crucial to try to understand each other. And it's become harder and harder in the West to argue that this isn't a zero sum adversarial situation So How should we understand China's economic diplomacy? This is The Economics showow with Sama Aainnes. I'm joined by Jessica Chen Weiss, Professor of China Studies and faculty director of the Institute for America, China and the Future of Global Affairs at the Johns Hopkins School of Advanced International Studies. Jessica, hello. Hi there, Great to be here Okay, so starting off with our very serious question, on a scale of one to ten How pleased is China right now with its position in the global trading system Hm. And maybe I would put it at eight Interesting, okay why Well, I think that China's strategy for the past number of years has been to diversify away from being so reliant on any single trading relationship, especially as the first round of the US China trade war accelerated and, you know, China's rapidly worked toward making sure that its relationships are broadly spread in the wake of the The strait of Hormuz crisis, know Brazil has become increasingly important to the source of energy, and China is less reliant on Saudi Arabia, for example And so I would say I think they're pretty satisfied. I think that the Chinese leadership, of course, is still concerned about the prospects for shocks and potential sanctions or cutoffs to China's inputs They're never fully satisfied. I think they'd like to do more and they're worried about the growing backlash. But I think Altogether, I think that they are pretty pleased with the strategy that they've adopted Okay, that's interesting because you frameed that as a kind of defensive position, right? They've diversified And so they're no longer so dependent on a single trading partner But also they have this in the form of you know its ability to shut off rare earths. How does that play into its perceptions of strength I think that that is a critical part of why the Chinese government feels like they no longer are suffering the chokehold of, for example, American restrictions on semiconductor chips or more broadly some of the terriff threats. Initially, China was dependent on imports of these materials. saw that as a vulnerability and they invested over many years And so at this point, the tables are turned. And I think that that has enabled them to kind of fight the United States to a standstill and really bring up about what I see as now a stalemate that could become the basis for a more durable detton So on the rare earths point, I hear differing views. So sometimes I hear, you know, this was all part of a grand strategy, a grand plan. You know, China's been trying for decades to build dominance in rare eararth. This is all part of the the strategy to essentially build dominance and then ultimately weaponize it And then the alternative view is that actually, you know, they have practiced industrial policy in many, many areas for many, many years, they almost accidentally picked upon one that proved to be very effective, but it was more accident than design. What's your take I'm very much of the view that this drive towards self reliance was not an effort to dominate other countries or even these supply chains, but rather to secure a position that was unassailable, that the means of achieving security was not being so dependent on others. China's economy, you know there are many different actors and they often overperform in search of particular targets. And it's a wildly inefficient system where we can see that in their investments in semiconductors, or there EVs now, right where you know every locality has their own kind of EV company. And so there's this vast oversupply of the things that the central government has sort of targeted. And so in some cases, there are there have been targets that were set sometometimes they have overshot. But I don't think that the emphasis or intention really was to then weaponize them against the rest of the world. Although you know I will say that the Chinese government has very much learned from the United States application of extraterritorial export controls in building the export control system that they have now begun to roll out with the rare earth It was very much modeled on the one that the United States had produced. So they are now weaponizing it for sure But I don't think that that was, at least in the rare earth case, necessarily the intention Okay You gave China an eight, right? They're pretty pleased with themselves. They think they've built this self reliance. Do you think that self perception matches the reality in every respect? Well, I want to say that within this system, of course, there's yes, R raa, we're doing well. But I think there is also a deep undercurrent of concern about what this means for China's own people. this emphasis on In manufacturing on industrial capacity on the supply side has really come at the expense of household incomes, right? There has been a concerted effort to reduce the overinflated real estate market, but that has come at the cost of incomes and consumer spending I don't think that that excessively rosy picture is necessarily at odds with these broader worries about ultimately the prospects for maintaining social cohesion at a time when there's double digit youth unemployment China continues to face a lot of frictions in its trading relationships. But I would say that they're quite diversified as well as increasingly self reliant. so that provides them with some insurance and I think, leverage as well Yeah, so I think that speaks to this tension. You've got on the one hand, this impression of China is this incredibly dominant, successful weaponizer of international supply chains, mighty export powerhouse, right? sending electric vehicles that know are on the technological frontier in many cases fearsome, fearsome competitors And on the other hand, you've got this sense that actually Some of what looks like strength is in fact a reflection of domestic weakness So, you know, essentially you've got domestic consumption not being great, comppanies trying to export their way out of that. As you said, leadership being concerned about the domestic economy, housing market slump And obviously which of those two you think is going to dominate in the long term matters for you know when you're perceiving China from the outside, how powerful this actor really is Are these external signs of strength really reflections of domestic weakness Or, you know, is it actually possible just to be both Both are true at the same time. I mean, I think that there are winners and losers of any policy in any society and that actually holding those contradictions together at the same time is part of having the full picture of the complexity that is China And you could look at similar strengths and weaknesses in the U. S. society, the U.S economy as well And so I think that that composite is really important. I think where we run into trouble is when we like to paint the kind of caricature of a China is juggernaut with Xi Jinping. kind of sitting behind this desk pushing buttons and pulling levers and you controlling the world. And he can't even control his own country in that way. He would I think like to wave a magic wand and have all these problems go away And so you always have that kind of contestation or debate within a country, especially one as large as China where their own objectives are in tension with one another, and that actually produces a very fraught relationship with the outside world. Okay, could you talk a bit more maybe giving some examples of other areas in which that external perception of China just doesn't with the reality Sure I mean, I think if you let me go beyond the economics domain, for example, on the question of Taiwan, I think there's a lot of concern that Xi Jinping has somehow set a deadline to invade the island. and of course, that would be catastrophic for the world, and not to mention the people who live onland there's a much more complex narrative that's essential to understanding the prospects for continued peace and stability in the Taiwan Strait And that is China's belief that time is on China's side that as China becomes more developed that the situation that this impasse politically will eventually resolve itself in China's favor And that has to do with their sort of long run belief You know, a country as vibrant and as prosperous as China wants to be will become increasingly appealing despite the differences in political systems. But for me, that that is a really important distinction that many of the capabilities that China is developing. Of course, they could be used offensively, but they are also in their mind, I think very much used to serve as a deterrent as a way to ensure that Taiwan couldn't declare independence and kind of get away with it. And they need to be able to hold the United States at bay for that purpose But that doesn't have as important implications for how we think about deterrence. In Washington, that's usually thought of as a military question, but I think it's as much an economic question that actually the stabilization of China's external economic ties, including with the United States, are a critical portion of that belief that Time is on China's side that they can afford to be patient and not rush if that begins to sour in the economic prospects of China's continued modernization Bleak I worry then that there will be less and less to hold back the advocates inside China of a more aggressive move to achieve what they call reunification But hang on, just just so I understand. What you're saying is that they want Taiwan Right? So I suppose in either scenario that you're painting there at the end China wants reunification with Taiwan Absolutely. I think that is an objective that regardless of whether Chinese in China want a democracy or a continuation of CCP rule reunification with Taiwan is pretty much an unnegotiable objective The question is what does that look like? right? And so the longer we can defer that question, than, you know, so far so good Okay, but just just so I get this straight. I mean, in both scenarios that you're still talking about China, you, wanting reunification with Taiwan sort of regardless of whether the Taiwanese people want that. So what's the best case scenario there In the best case scenario is that the situation is resolved peaceably, right on terms that both people in Taiwan, especially and in China can accept We don't know what that is. It's hard to foresee that in the near term But the idea that over the long term, we can kick the can down the road and eventually some formula will arise that both sides could agree to That's the best case scenario But You're right, There's no debate really within China as to whether or not Taiwan is a part of China. that is outside the bounds of debate is a debate as to how China should pursue that objective and on what time frrame Should it be peaceful as the government continues to insist, although they include coercive pressure within the category of peaceful, or should it be a military solution? And there are voices in China that want that I think the outcome of those debates is not a foregone conclusion And that means that the futures are still to collectively shape Okay, so on that question of, you know the future being ours to shape Could you talk a bit about the extent to which Chinese leaders are being shaped by external actors. Because obviously, you the risk is that you can seem very patronizing, right? You, Westerners come along, they lecture China on the right way to behave, not a good look On the other hand, you know seeing the Chinese as kind of invariant or completely impervious to any kind of Western behavior seems too simplistic How would you frame that That's a really important point because I think that Americans have too often fallen into the trap of thinking that outsiders could liberalize China or change China in terms of how it is fundamentally governed And I think that the Chinese government has shown over many decades now, that of course, there were certain elements that they were willing to liberalize, including in the economy. but it was always a partial liberalization. and there was I think no illusion about their desire to maintain the unchallenged rule of the Chinese Communist Party. And So that said, I do think that we also need to avoid the h of fatalism. around believing that everything that China is going to do is basically set inside the leadership compound without reference to the external conditions. And probablyb the best predictor of their behavior has been a sort of tit for tat strategy that they are very keen in retaliating in a very proportionate way, not going beyond, but retaliating in a very fine tuned way. to ways that they feel that they have been hit. Now of course, in some cases, you will say, o yes, they have overreacted But I think at least vis v of the United States, it's often been quite proportional in part to leave themselves room for further escalation., But there's a good deal of signaling, I think takes place here where they want to warn but not use up all of their ammunition or leverage early on That fact that there is that reciprocity baked into their thinking also then offers pathways to reciprocally de escalate as well, right? And so in some ways, that transactional approach means that some progress can be made, including under a quite transactional president here in the United States So I think fundamentally the goals are very difficult to shift. But the ways that the government and the people pursue them very much has varied over time. and the weight that is placed on security versus development bilateral or multilateral negotiations versus unilateral actions, all of these, I think are subject to and of recalibration, depending on who they think they are facing across the negotiating table Do you share my perception that the security weight in China's objectives has grown much stronger even over the past three to five years? I think that security has increasingly influenced the way that China has pursued development and that particularly the concern about being, as they say, encircled and constrained or suppressed by the United States has really accelerated their drive for greater self reliance and there's also controls and restrictions on Chinese companies' ability to get access to advanced technologies from the United States has also helped align the incentives of different actors inside of China, whereas a government would say, yes, please you know, buy local sourcing your chips, you know, from American designers private Chinese companies that, Well, we want to be market leaders, let's use the best that we can get. and they were more resistant. to those commands, but then once you have export controls in place, they have little choice. to try to innovate without access to U.S. technology. And so I think that there is, again, important to keep in mind that there are many different actors and their incentives do not all align, but the external conditions can in some cases force an alignment that the government would like, but wasn't there in the first place So I think there's this another other misperception of the Chinese government not helped by the Trump administration, which is that you know on the one hand, you've got the US government making strategic errors all over the shop. And meanwhile, the Chinese are this kind of you know galaxy brain master strategists, right, which got them to this strong position. How accurate is that? How right am I to question this perception of the Chinese as, you know faultless in their execution of international economic diplomacy I think the portrait of China as this sort of well oiled machine that has a glide path to, you global dominance, I think is really off base. It really misses a lot of the internal struggles and challenges that the government and its private sector face not to mention the state owned enterprises, you know, many of which are, you know, doing what they can, but often lack the Back the ability to innovate in the ways that many of the private companies do. know, a large part of the Chinese economy is private. And I think that you more broadly, one of the challenges looking at China from afar is overestimating both the intentionality and the coherence of the system There's often a belief that there's a kind of master plan behind what China is doing and that it usually comes at the expense of others. And the Chinese Communist Party does set targets and it needs in many cases to deliver on its promises that make China grade again basically The reality often apart significantly from that rhetoric. and there's a whole kind of phenomena in China now of lying flat of youth who feel that they are over educated and underemployed and you know feel that in fact, especially given the the housing slump, which the country still hasn't recovered from that there is a just whole generation Be You know, savings have been obliterated and that their incomes, their real incomes are shrinking And so It's hard to see this as a highly successful model that lots of other countries should emulate Of course, there's a tendency, I think, to say, oh, look at China's high speed trains you know, look at these latest innovations and there absolutely are many breakthroughs and achievements that you know Chinese are quite proud of But to say that there are not faults or fissures beneath that, I think is to miss some of the most important things that might actually constrain China's role on the global stage I think one of the most interesting areas where China's domestic challenges and insecurities constrain its global role is actually in the monetary system in order for the Reming be, the Chinese currency to play a bigger role as a store of value, as a reserve currency in the world system They would need to do a lot domestically, including the relaxation of capital controls But they don't want to do that because if you released capital controls, there would be this huge outflow of capital inside China. and they would really risk political and economic stability. And so that imperative on stability domestically has made it harder for them to achieve their objectives of reducing the global role of the dollar, for example, as much as they might chafe at it Do you have any more specific examples of that kind of policy incoherence that you were describing? Because I think so far what you've really been talking about is this tension between the challenges in the domestic economy and kind of international objectives But I suppose the thing I'm asking about is whether there are strategic mistakes. So an example might be when China applied export restrictions as part of the US China trade dispute It ended up applying them to everyone. Right? European companies were also struggling to get licenses to import rare earths from China. And that arguably galvanized the rest of the world to work together to try to reduce their dependence on Chinese rare earths. So that might be one example. And I guess first of all, do you agree that's an example? And second of all, are there any others or is that So I think this use of economic leverage as a kind of wasting asset where the more you use it, the more other countries have an incentive to get around it and diversify away from their dependence is Something that is not unique to China, but it certainly hasn't escaped it either Obviously, we've talked about U. S export controls in the same light. and people put different time frames around how quickly the United States or the world will be able to develop a China free supply chain in these rarest I think that there are some wildly optimistic takes. I would just point to the fact that Japan over the last fifteen years has only moved from ninety percent dependency to sixty percent dependency on Chinese raarers. I think other examples of which there are many and some of them are in my book, of this kind of incoherence and policy is where especially when local governments in China, whether, you know, it's the kind of Yunan province or others, you know, in Hainan that they start to move out on projects that as a benefit to the local economy or contractors which then gets out in front of the central governments foreign policy objectives and creates additional tension with China's neighbors whether that's across the border in Myanmar or in the South China Sea, there are these examples of where know Chinese foreign policy has experienced unnecessary friction, I think, from the perspective of Beijing due to the incentives of local governments and their actions on the ground Wait, how do they do that provroincial governments,, maybe they're green lighting projects or construction either in areas where it intensifies disputes locally, whether those are territorial disputes or economic and civil disputes You can also look at China's vast overseas presence along the Belt and Road Initiative where oftentimes corporate actors, whether they're private or state owned, are engaged in practices that Beijing doesn't necessarily have a lot of oversight. And so I think sometimes you know, folks from afar look at these as falling under the rubric of something like you know predatory diplomacy or debt trap diplomacy. when in fact, there's not one Chinese actor here. There's a lot of different Chinese actors. And when push comes to shove, Oftentimes Beijing realizes that this is actually was not at all designed, but is in fact many different actors working under the rubric of Xi Jinping's exhortation to kind of go out and develop these markets, these access to resources without oversight or knowledge of what's happening Okay, well I want to throw to a break now, but when we get back, I want to ask about how the rest of the world should be behaving differently when it comes to China We are back for the break Okay, so let's take the US first. What's the best that the US and China can hope for right now in their economic relationship Well, I think that the first thing to do is establish that the two sides aren't going to further weaponize these sources of leverage against the other. I think that that is at the heart of the stalemate. Is the recognition that both are too vulnerable to the other to wield these kind of with impunity. And that creates a basis for perhaps reducing the risk of further escalation or a spiral. Beyond that, though, we need a lot of work to figure out what are the areas and ways in which the entities from both sides companies entrepreneurs can work with each other both in trade and investment to the benefit of both societies. And we're just starting to see that open up here. The Treasury Secretary Besent is you'll be leading some of this effort on what we're calling the Board of Trade and the Board of Investment. But it's far from clear What are the so called non strategic sectors where trade is permissible and beyond that How can we find ways to make investment in both directions workable given the security concerns particularly on the U.S. side I think there's a lot that Americans can learn from China and Chinese companies where they are out ahead especially in the clean energy sector There's a lot of political opposition and uncertainty. So I think it remains to be seen. But I think at a minimum, this broader understanding that ultimately decoupling is a fantasy And we pursue it, I think, at our peril. So the way I see it is that You know, this relationship, as it stands now is based on very, very little trust between the two sides, right? You know the U.S is concerned about China's weaponization, there are security risks. Do you think that the U. S. political leadership and I'm talking beyond you know the upper echelons of the Trump administration Do you think that that Distrust is misplaced. Do you think they should be more trusting of of the Chinese government. I don't think it's fundamentally a question of trust. I think what we need to do is move away from the assumption that China seeks to dominate the world and destroy the United States to open up more I have open ended understanding of how China's leadership is going to pursue their sovereignty, security and development. Is there a way for us to get what we want and let them get some of what they want too And so ultimately We need a much clearer understanding of our interests and their interests and where those may align, we can work together where they are at odds. We need to find ways not to come to blows literally in the Western Pacific, but also in terms of the kind of devastating spiral of these export control restrictions, which you know, last year nearly brought of American manufacturers in the auto sector to a screeching halt So I think that that of intercnectedness is real and you don't need to trust in order to recognize that they have immense capability, but so do we. And as long as there is that sort of mutual respect and a sense of reciprocity I think that you can build toward a sense of understanding that you we will have different interests. avoiding the negative sum outcome of conflict is necessary and that beyond that, there are positive some areas where the two can work together I mean, even in technologies that are likely to remain very competitive both within and between our economies say AI I think there is a shared recognition that this technology is too dangerous to not work together on in terms of governance to prevent the risks kind of from upending the societies that both countries want to preserve Are you saying that there should be lower tariffs in some areas or relaxed export controls in some areas, or a bigger welcome for Chinese investment, what practically do you mean when you're talking about this kind of bigger dent? know I think a lot of these things are reasonable, lower tariffs, allowing some number of Chinese EVs to help stimulate competition in the auto sector. Licensing agreements that would allow for a Chinese technology or investment into the United States where Chinese companies are in the lead batteries, for example I think that all makes good sense. I think the Chinese side will call that cooperation. I think we would just call that economically pragmatic and beneficial to a sector that might otherwise be left behind as know China's companies continue to be the global leaders moreore fundamentally I think there needs to be a recognition that neither side is going to somehow slip the and sort of achieve kind of this one sided escalation dominance that beyond rare earths and semiconductor chips, there's a whole lot of other supply chains where there is as symmetry And so for the foreseeable future evenven though it does make sense to develop some kind of indigenous capacity for many of these that the degree of progress there is going to be slow and expensive. And so I think we also need to focus on other objectives rather than kind of preparing for future conflict Okay, well we're running out of time, but I just have one more question about Europe, right? And so in many respects, Europe has been behind the US and kind of becoming concerned about China, concerned about the effects of its export machine. You're seeing very active discussions in the EU right now about whether there should be trade barriers, whether something needs to be done to limit the extent to which China's export powerhouse can hurt the industrial capacity of the EU maybe set up some new dependencies that the Chinese could then weaponize Do you have any messages for, you know, senior European leaders, do you think that they're right to do something. They're obviously much, much more open than the US economy is right now What's your message to them Look, I think that the Europeans like the Canadians, are already out in front of the United States and recognizing that there are benefits to continuing to work with China, but that there are also real risks and dangers of being inundated And so I think having less kind of ideological conversation that is really focused on how to make this economic relationship work for both sides is really the right direction. I'm hoping that the United States is moving in the same direction. And so the approaches need not be so entirely dissimilar despite some of the turbulence in the transratlantic relationship. So some kind of trade restriction. I think that the How we think about trade restrictions and what are they designed to incentivize? what is their duration? and how do they arere they trying to support a kind of period of adjustment or additional capacity What is the place for Chinese investment? These are I think that There's a kind of a whole package with a clear goal which may not be aimed at preventing China's, technological development, but is instead about allowing one's own industries to become or remain competitive, not necessarily to win, but to stay in the competition and succeed in sustaining the livelihoods of those employed in those industries, especially as there's change within those industries All of that, I think, is the right approach rather than thinking about China bad Or here's the kind of way that letting Chinese companies or products in would be our undoing,? And I think that there's a way of ticaking down the temperature of the conversation that I think allows for a more pragmatic way forward Well, as you know, this is not a settled debate in the EU, so we will have to see what happens. Jessica, thank you so much for joining me. It was a pleasure and 'm deled to be here with you. That is all for this week You've been listening to the Economic show with Samaya Keainnes If you enjoyed the show, then I would be eternally grateful if you could rate and review us wherever you listen This episode is produced by Michia Frankl Duval with original music and sound design from Brene Turner Our executive producer is Manuela Saragosa. I'm Smer Kenes Thanks for listening