By Yu Xiang
With rapidly rising Sino-US trade volume comes rising trade disputes. Governments on both sides must devote increasing time to calming and solving dissatisfaction incurred by said disputes. There’s a popular theory that trade is losing its importance in bilateral relations. In my view trade and economic relations have never been more important. Precisely because they are of such vital importance both sides must handle them carefully and keep relations stable. China and the US are building a new type of great-power relations. Through this grand framework, trade and economic relations play a key role that requires constant updating. President Xi Jinping’s state visit to the US in September is the perfect time to launch an initiative to set up this new type of relations.
The strategic macroeconomic situation is changing. The financial crisis has fundamentally altered Sino-US economic power relations. The new situation demands new economic and trade relations in support of this altered situation. China and the US are both devoted to rejigging their economic structure. Four aspects of the economy are changing in China: financial liberalization, service sector opening up, social mobility and systematic fiscal/budget reform. Similar economic restructuring is taking place in the US including economic deleveraging, rebuilding of fiscal discipline and increasing social equality. China and the US can cooperate in these new areas as well as through increasing commodity trade. For example, as the US enhances financial supervision, excess financial capacity transfers out of the US. China can be a good absorber. At the same time, China and the US should enhance cooperation on supervision of capital inflows and outflows, financial tools and derivatives.
Secondly, US corporate attitudes toward China are trending negative. The 2015 China Business Report by the American Chamber of Commerce in Shanghai indicates that US companies are increasingly concerned about the direction of China’s economic reform and its potential impact on foreign businesses, particularly long-standing issues of market access and regulatory obstacles. More than half of survey respondents believe foreign multinationals are likely targeted by China for investigation. Thus it is necessary to find more areas of cooperation areas so as to inject positive energy into the engine of Sino-US relations.
Thirdly, the basis for traditional Sino-US division of trade is collapsing. The US is driving a domestic manufacturing recovery, with real results. Beyond advanced industries like 3D printing and new energy vehicles, low-end manufacturing such as shoe manufacturers and packaging companies are also recovering. US imports are reversing to some extent. US high-end and low-end imports can now be increasingly satisfied by domestic production instead. What’s more, the difference between China and US manufacturing costs is shrinking. A Boston Consulting Group (BCG) report tells an astonishing story of China’s rapidly increasing manufacturing costs. To understand the shifting economics of global manufacturing, BCG analyzed manufacturing costs for the world’s 25 leading exporting economies along four key dimensions: manufacturing wages, labor productivity, energy costs, and exchange rates. In their report “Shifting Economics of Global Manufacturing,” BCG produced a global manufacturing cost-competitiveness index that ranked China’s manufacturing index at 96 in 2014, very close to the US 100. The traditional basis for Sino-US trade relations is this cost difference. As China loses its edge in manufacturing costs, it becomes necessary to find new profit areas to attract US firms.
Fourthly, Sino-US trade growth is slowing. According to US Bureau of Economic Analysis statistics, the total value of China and US imports and exports was $459.2 billion, increasing 24.6 percent from last year. But growth rates slowed from 10.2 percent to 5 percent between 2011 and 2014. Imports and exports now include nearly all sectors except arms and prohibited high technology. The remaining potential for traditional trade relations is limited.
Fifthly, Chinese direct investment is increasing fast in US finance, tourism and people-to-people exchanges. In the early days of Sino-US diplomatic relations, there were only a few thousand personnel exchanges a year, but now more than 14,000 people move back and forth between China and the US. According to US Department of Commerce statistics, China and US service imports and exports grew 10.5 percent year-on-year to $56.8 billion, much higher than growth China and US GDP growth rates. According to “New Neighbors,” a May 2015 report by the National Committee on US-China Relations and the Rhodium Group, Sino-US relations are at another inflection point as a wave of Chinese foreign direct investment penetrates the US. Since 2000, Chinese FDI has taken off, reaching nearly $12 billion in 2014 alone. Chinese-affiliated companies now directly employ more than 80,000 Americans, up from fewer than 15,000 five years ago. These areas could be new pillars for a new type of economic and trade relations.
All the above points prove it’s high time traditional trade and economic relations is to be updated. This new type of relations is not a totally new concept, but more like what I would call “traditional trade and economic relations-plus”. The core ideas include stabilizing stocks, increasing incentives, promoting trade by financing and reducing trade disputes by increasing direct investment. The Bilateral Investment Treaty (BIT) and Trade in Services Agreement can provide two principal tracks along which the new type of relations can unfold in an orderly fashion.
To stabilize stocks, China and the US could promote technology products in accordance with the newly signed Information Technology Agreement. Both sides can speed up discussion of the Environment Goods Agreement and encourage imports of US eco-products. China and the US should encourage local and private Chinese companies to enhance cooperation with US energy firms.
As for increasing incentives, China and the US should speed up BIT negotiations. There have been 19 rounds of formal Sino-US BIT negotiations so far. Progress still lags behind goals set by leaders from both sides. Xi’s state visit to the US could and should be a good opportunity to reach political consensus with the US side and make big decisions with the political courage to make real breakthroughs.
In addition to BIT direct investment, enhancing cooperation in the service sector could also form an important part of the new type of economic and trade relations. China has recently recognized that its service economy benefits the whole economy. Opening up the service sector has been listed as a top priority in China’s domestic economic reforms. The US is generally accepted as having the bigger and stronger service sector. There is sure to be enormous potential for cooperation.
In the multilateral dimension, China and the US should find out how to smoothly join up the Trans-Pacific and Regional Comprehensive Economic partnerships. The US Trans-Pacific Partnership can be characterized as software that connects countries through lowering barriers and facilitating investment. Backed by China’s Asian Infrastructure Investment Bank and One Belt One Road Initiative, the Regional Comprehensive Economic Partnership is more like hardware that connects countries through bolstering infrastructure. If software and hardware are connected, China and the US could complement each other’s partnerships.
A realistic and urgent problem on the road to setting up a new type of economic and trade relations is cyber-security. US companies increasingly worry that they are losing their high-technology materials and core economic competitiveness to cyber attacks. China is also a victim of cyber-crime. It’s time China and the US sit down and analyze mutual cyber-interests and shared vulnerabilities. To show Chinese determination to maintain a fair competitive environment, China has repeatedly emphasized its commitment not to hacking critical US infrastructure sectors including financing, hospitals and civilian nuclear energy.
Once China and the US have a solid investment and service foundation, the next step is establishing a comprehensive, bilateral free-trade agreement. In “Bridging the Pacific”, the Peterson Institute for International Economics concludes that such a trade agreement would be of great benefit to both countries. US exports would increase by almost $400 billion a year and China’s national income would increase by more than $300 billion a year. The relationship between China and the US is unarguably the most important in the world today. To ensure it remain so, China and the US need to act now.
*(Yu Xiang is a director at division of American economic studies, associate research fellow, Institute of American Studies, China Institutes of Contemporary International Relations. This article has been published in http://english.cntv.cn/2015/08/27/ARTI1440662988994965.shtml)