A strategic rivalry

As if it were ordained by providence, the fate of the world is settled by a show of strength between great powers. The cold war era (1945-89) was defined by the US-USSR rivalry to cast the world in their respective image.

The present age is being shaped by the attempts of the US, the world’s largest economy, to put the skids under China’s – the world’s second largest economy – possible ascendency to economic superpower status.

The Biden Administration has adopted a two-pronged strategy towards China called ‘constructive competition’: engaging with Beijing at senior government levels, while throttling Chinese companies’ access to key technologies, such as semiconductors, or otherwise penalizing them. The recent week-long visit (April 4-9) to China by US Treasury Secretary Jenet Yellen may be seen in this context.

At a press conference in Beijing, Yellen described the bilateral economic relationship as the most important of its kind in the world and reiterated that Washington did not seek to decouple from Beijing. At the same time, she expressed concerns about the ‘growing negative spillovers’ of the Chinese economy that may harm American enterprises and workers.

She particularly referred to ‘weak’ consumer demand and ‘business overinvestment’ in China on the back of government subsidies that may prompt Chinese enterprises to dump their cheap products in US and other overseas markets and thus price out local competitors. She also subtly warned of action against the Chinese firms that are allegedly supporting Russia’s industrial base and military procurement in the war against Ukraine.

In all, Washington-Beijing tensions stem from three sets of factors: trade, high technology and geopolitics.

Trade tensions between the two economic giants are rooted in both facts and perceptions. The US has been running a chronic trade deficit, which reached $1.06 trillion in 2023. China, however, has persistently been running a huge trade surplus, which was recorded at $830 billion in 2023. The principal source of the US trade deficit is China, and the largest source of China’s trade surplus is the US.

In 2023, the US-China bilateral trade reached $575 billion, which comprised $148 billion in US exports to China, and $427 billion in US imports from China, resulting in a whopping $279 billion trade imbalance for the world’s largest economy.

The US sets down its external deficit with China to the latter’s resort to allegedly unfair trade practices, particularly massive state support to enterprises and currency ‘manipulation’, which make Chinese exports cheaper than they would be otherwise.

Cheaper exports, the allegation goes, depress prices in the American market and thus harm local enterprises, usher in job losses and perpetuate trade imbalances. Shocks generated by this triple whammy year after year are severe enough even for as massive an economy as that of the US.

With a view to bringing down the trade imbalance, the Donald Trump administration slapped punitive import tariffs on a large number of Chinese goods in 2018, prompting retaliation from Beijing. Another motive behind the move was to make American companies doing business in China relocate back to their home country by raising the cost of exporting products.

However, the punitive tariffs fell flat. The reason: trade and current account deficits signify that an economy is consuming more goods than it is producing. China has the world’s largest and most complete manufacturing sector, while the core competence of the US lies in high-end services, reflecting its status as the world’s most developed economy.

Likewise, while manufacturing accounts for 27 per cent of the Chinese economy, its share in the US economy is only 11 per cent. The enormous size of China’s manufacturing sector confers on the country the advantage of the economies of scale, resulting in lower prices. The US is a post industrial economy well past the manufacturing phase, while China will remain in this phase for at least another two decades.

Not surprisingly, the US runs, and will continue to run, a big trade deficit with China. As for bringing manufacturing back to America, it does not hold much prospect because of much higher wages in the US compared with China, as well as the enormous size of the Chinese market. US-based multinational giants like Apple and Tesla will continue to find China a profitable production base.

Recent decades have seen a gradual downswing in the economic strength of the US and an upsurge in that of China. It is widely forecast that, at the current growth rates, China will overtake the US as the world’s largest economy by the close of the 2030s. Although Washington will remain well ahead of Beijing militarily, a redistribution of economic power will act heavily on each nation’s capability to shape international events. More than anything else, it was the increasing economic cost of its engagement in Afghanistan that forced Washington to pull out of that country. The USSR broke up because its economic power failed to keep pace with its geostrategic ambitions. Surely, the US would not like to tread its former archrival’s path.

A trade war has both economic and political dimensions. A nation running a massive trade deficit is more prone to starting a trade war than one running a comparable trade surplus. When a country is losing jobs to its trading partners allegedly because of trade imbalances, it is easier to sell a protectionist policy to key domestic constituencies.

No government, least of all a democratically elected running a superpower, wishes to be seen as being too toothless to effectively respond to the ‘unfair’ practices of its trading partners. Not only that, some important non-trade strategic objectives can also be perused on the presumption that the other side would not be able to respond in equal measure for long.

The economy is the mainspring of Chinese strength, and the country’s global projects, such as the Belt and Road (BRI) initiative of which the China-Pakistan Economic Corridor (CPEC) is a part, are underpinned by its accumulation of huge foreign exchange reserves based on a spectacular export performance.

As Washington sees it, by engaging Beijing in an apparently zero-sum game, it will be able to throw a wrench into the latter’s rise to the status of becoming the world’s top economy as well as dial down the corresponding strategic ambitions.

Already, the Chinese economy is slowing down. One reason is rather sluggish consumer demand in China as the country is recovering from Covid-19-related stringent restrictions. However, a more plausible reason is the Chinese government’s increasing emphasis on quality, as opposed to mere quantity, of development.

China, which is officially still a developing country, has set the target of graduating to a developed economy by 2049. This necessitates a shift in the country’s competitive advantage from low wages and abundant labour to high quality, capital intensive and technology-driven production. The structural adjustments involved in the process have put the brakes on China’s growth rate. However, this is a trade-off to which the Chinese leadership is committed.

Cognizant of the difficulties in significantly cutting its trade deficit and possibly with a view to hobbling China’s development efforts, Washington is seeking to block the supply of key technologies and components to Chinese enterprises.

A case in point is the 2022 CHIPS Act, which seeks to develop the semiconductor industry in the US and throttle that in China by requiring that beneficiary American companies will not build certain facilities in China and other “countries of concern”. The West’s sanctions on China’s technology giant Huawei are part of these efforts.

The Sino-US strategic rivalry is likely to continue in the years to come, with or without the return of Donald Trump to the White House after this year’s presidential election.

The writer is an Islamabad-based columnist. He tweets/posts @hussainhzaidi and can be reached at: hussainhzaidi@gmail.com