On US-China relations and the future of economic globalisation
Is the US and China doomed to confrontation? And is the trend of further economic globalisation certain?
Introduction
A key special concern regarding the global business environment is US-China relations. Deteriorating US-China relations will likely limit business. However, while US-China tensions is likely to increase, it is still possible for other countries and businesses to find alternative paths of economic growth via globalisation. I conclude with my opinions on the future of US-China relations, and the future of economic globalisation generally.
Why US-China relations are important for the global business environment
Not only are the American and Chinese economies highly interrelated[1] (In 2019, US-China trade was worth US$636.8b and supports ~2.6 million American jobs, while US companies invested US$105b in China[2]), they are the top 2 contributors of global GDP (24.42% & 16.34% respectively[3]).
More importantly, many countries, especially in Asia, have deep ties — economic and otherwise — with both the US and China. China is the largest export partner of more than 120 countries, including Singapore, Japan and South Korea[4]. At the same time, these countries have also strong ties with the US. For example, Japan and South Korea are allies, and Singapore is a strategic partner.
Therefore, if the US and China become rivals only, who cannot separate the economic sphere from the political, then this would result in greater uncertainty for the many other countries (and their companies) who have relations with both, especially if they are forced to choose one or the other.
How US-China relations affect the global business environment and doing business with China
If US-China relations worsen, it would be harder for American and Chinese businesses (and countries who need to align themselves with either for business or strategic reasons) to do business with either. For example, increased tariffs as part of the ongoing US-China trade war have resulted in higher costs for US importers, who incurred 90% of additional costs[5]. Lower investments are also likely given the increasing list of Chinese companies blacklisted for investments under both Trump and Biden[6].
More dangerously, a potential bifurcation of the world into two economic spheres of influence could disrupt supply chains and hinder economies of scale. For example, there are increasing demands in the US to decouple its tech industry from China’s[7]. This would affect the production of goods with components produced in both countries (see Figure 1), or the usage of common platforms for communication and cooperation (e.g. 5G networks).
Why I think US-China relations will continue to deteriorate (at least for now)
China’s rise should not be surprising. Indeed, for most of human history, China, with a population 4 times the size of the United States’, accounted for the largest share of global GDP. Therefore, China’s economic rise itself is not unusual (it is the speed that is unprecedented), but rather a return to the historical norm (see Figure 2). However, it is rising in a world where the US is presently leading, and on whose economic system the world has operated for the past half-century.
This leads to what American political scientist Graham Allison calls the “Thucydides Trap”, when a rising second power challenges the incumbent hegemon. Allison’s argument has a lot to criticise, and an actual military conflict (still) seems unlikely. However, a confrontation is likely, especially if fatalists, acting in the very belief of the Trap, ironically create a self-fulfilling prophecy. For example, former US National Security Advisor John Bolton recently said, “Creating a new, hard-power alliance is America’s most significant play against China”[10].
This seems irrational, and it is. And yet, despite our optimistic and idealistic notions about human rationality, it may not prevail. This is because, psychologically, it is very difficult for anyone, especially America with its sense of exceptionalism, to accept the rise of another. This is compounded by the fact that China has a very different political system and values, which many Americans do not fully understand or accept. We may also need to acknowledge the subconscious influence of the racist “Yellow Peril” mindset towards Asians[11]. (We can contrast this to the time when America overtook Britain — both of which are Anglo-Saxon countries — as the global hegemon, but which was relatively peaceful.[12]) This perhaps explains why the US’s increasingly confrontational foreign policy towards China could be the last issue with bipartisan consensus in Washington[13].
At the same time, China increasingly seeks greater respect on the world stage. After a century of humiliation following the Opium Wars, China is not keen to be (seen to be) bullied by the West, and is therefore more than willing to respond to American retorts in kind.
However, I would also argue that there is also a rational motivation for increasing confrontation by both sides — domestic concerns — which mean current tensions may increase in the medium-term.
Some have argued that American society is in decline — at least for now. It is the only developed country whose bottom 50% have falling incomes since the 1980s[14]. And it is a common tactic to distract one’s population from one’s political incompetence by redirecting discontent towards a common, foreign enemy (an example of “false consciousness”). Placating underlying racist tendencies is also a political boost for many right-wing candidates.
Similarly, China’s economic growth is declining as it transitions to a developed country, and there is a need to ensure the population remains confident in the Chinese Communist Party’s abilities, which is reflected by not backing down from Western threats.
Because these domestic concerns drive both countries’ foreign policy considerations, and they are unlikely to change soon, I believe that US-China relations will continue to deteriorate. This means that countries and businesses will need to be ready to address the uncertainty and potential decline in business partnerships and economic cooperation, if the US and China fail to reach a consensus on how they can mutually cooperate and compete in the global economy.
Why declining US-China relations need not spell economic disaster
I think it is important to note that choosing between US or China is a false choice for many countries. China and the US are not the only two countries in the whole world. Their combined population makes up less than 25% of the global total. There are still 193 other countries who would not accept extreme demands from either side[15].
Furthermore, economic development via globalisation will continue with alternative relationships. Even as the US walked away from economic globalisation, other countries would not[16]. For instance, even after the US withdrew from the Trans-Pacific Partnership, the remaining countries preserved it as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The Regional Comprehensive Economic Partnership (RCEP) is estimated to go into effect in 2022[17] (see Figure 3). The African Continental Free Trade Area (AfCFTA) began trading on 1 January 2021[18].
Therefore, even if US-China trade declines, it could ironically serve as a catalyst for other countries to diversify their linkages and seek economic cooperation with others in a new, multipolar world.
The future of US-China relations
It seems it is harder to separate political considerations from business or economic ones. This might be surprising, considering how the democratic-capitalist US was able to cooperate with communist China for more than 4 decades. And yet, with an increasingly political citizenry, and politicized governments, these considerations may result in stakeholders purposefully worsening relations and reversing the trend of economic globalisation. America, at least, increasingly views China solely as an existential threat on all fronts; not an economic partner.
While economic globalisation is generally agreed to benefit all countries involved, it may not be true for all companies. Indeed, it is not the benefits themselves but how they compare to the costs, real and/or perceived. It has been suggested that American businesses were willing to do business in China because the exceptional profits, when China’s economy was growing at 10% per year, is less than the costs of (what they believe to be) “unfair business practices”[19]. However, this cost-benefit analysis has arguably changed. The increasingly negative perception towards China in Western countries have seen companies voluntarily relocate their operations to preserve their brand image in the eyes of their customer base[20]. If future costs outweigh the benefits, especially if these costs are artificially increased (e.g. via tariffs), companies might find that doing business in China is just not worth it anymore.
At the same time, expectations may change. It has also suggested that American willingness to trade with China was partly due to their (unrealistic) expectation that it will eventually adopt Western democracy as it develops economically[21]. This is an expectation that has not panned out, and now, America may seek to cut its losses.
Both parties may also be unable to find common ground, which is not a given. If America continues to hold on to, and is unwilling to adjust, absolute preconditions that are not accepted by China (who has its own), such as its stand on issues like Taiwan, Xinjiang and Hong Kong, then it seems any reconciliation or agreement is unlikely.
And while China may be eager to continue building economic ties, as seen in its recent application to join the CPTPP[22], it takes two to clap. Both sides need to be willing to develop relations. One side can simply walk away. It does not even need to be illegal: less welcoming countries may find any legal or diplomatic tactic in the book to stall or prevent economic integration.
Furthermore, not all industries will be subject to the same consideration that cooperation is beneficial. It may be an overgeneralisation to predict economic globalisation will advance in all sectors and all countries. Indeed, strategic and sensitive industries, such as defence and communications would likely see greater protection, as seen in the US ban on Huawei and ZTE[23], and on investing in Chinese stocks with supposed ties to the military[24]. Even non-controversial industries may not escape unscathed, if governments are unable to separate these industries in their policies. The ongoing US-China trade war affected not just tech, but also the automobile and agriculture industries[25].
The thrust of economic globalisation
Broad historical trends, economic rationality and the current evidence suggests that economic globalisation will continue to advance — even with minor, short-term setbacks. The key question, however, is whether these “setbacks” are really just a temporary deviation from the norm, or if they represent the start of a fundamental reversal of global trends.
Steger (2013) questioned whether expanding economic activity is the driver of economic globalisation; instead, he showed that globalisation is set into motion by many political decisions[26].
Increasing economic interconnection and dependence is no guarantee of further cooperation. Economic globalisation did not prevent the outbreak of World War I[27]. The Second and Third Wave of globalisation only started after the decisive (but not destined) end of World War II and the 40-year-long Cold War respectively[28]. One side won and was thus able to propagate their economic system on the losing side. It would not be difficult to imagine an alternative scenario where a stalemate results in a world divided into two spheres of influence, limiting further economic globalisation. (The decisive American entries into the world wars were largely due to a German blunder — the Zimmerman telegram — and the Japanese bombing of Pearl Harbour, which provided a domestic casus bello to persuade the isolationist US. These causes were not destined.)
Indeed, some economists have argued that globalisation is not an upward trending process, but a cyclical one, increasing with its benefits, but then regressing due to the inevitable social backlash[29]. Karl Polanyi, a political economist, argued that the social crises that led to the world wars were due to ill-conceived efforts to further globalisation. The failure of adequate social security for many people compelled them to support radical measures to protect themselves from globalisation. The most extreme nationalist-protectionist impulses resulted in the Nazis and Italian fascists[30].
There are worrying parallels today. Research has shown that economic globalisation worsens income inequality[31]. Many feel exploited and oppressed[32]. Steger (2013) worries that many reactions to problems involve fortifying the existing system with mild reforms, but the underlying instability has the potential to release radical social forces that could have long-lasting effects. Whether we are able to reform the structure of economic globalisation, for the benefit of all, remains to be seen.
Similarly, I am reminded of what mathematician Jordan Ellenberg described as the “false linearity” trap[33], where optimists believe that there’s no such thing as too much economic globalisation. Instead of considering economic globalisation as a straight line (where greater economic globalisation will have greater benefits), perhaps there is an optimal point: too little and too much is detrimental to society (in both economic and non-economic ways). The following graph is just a conceptual illustration (Figure 4):
What is more important is what countries perceive the “return profile” of economic globalisation to be, and where they are at. It seems the increasing protectionist sentiments in the US (and other countries like post-Brexit UK) reflect an underlying belief that they are on the excessive side.
Moving ahead
So, what is the future of economic globalisation? We can only know for certain after much time has passed.
Regardless, I think that we need to, at least, consider the possibility that further economic globalisation is not inevitable. We should not be caught unawares. Just as Thucydides was arguably mistaken about the Peloponnesian War being inevitable, so too we should not suffer a failure of imagination in thinking that full economic globalisation is also inevitable. As historian Donald Kagan explains, the Peloponnesian War was “caused by men who made bad decisions in difficult circumstances” [34]. We could make similar bad decisions on globalisation, especially in the difficult circumstances now.
It would thus be dangerous to be overly optimistic, leaving the promise of increased economic globalisation to fate or theory, not consciously and actively put in the effort to cultivate ties and win-win arrangements, and ensuring, domestically, that the gains from globalisation are shared by all segments of the population. What happens in practice matters just as much, if not more, than in theory.
These individual choices and actions matter. They can shape the future in either direction. Some advances in economic globalisation were arguably due to the individual actions of people who “made” history, and not necessarily as part of some fundamental structure that will inevitably lead to greater integration. (e.g. Kissinger’s secret trip to China; Stamford Raffles’ unilateral actions, against British East India Company policy, to open up a free port of Singapore to overcome Dutch monopoly of the spice trade).
Of course, there would always be (rational) champions of economic globalisation, but we have seen the rise of irrational stakeholders who have defined their self-interest not in economic terms, but nationalist ones, and are willing to suffer economically for the (perceived) preservation of their national pride. It may thus be politically useful (and rational) to support deteriorating relations. These anti-global nationalists could (and arguably already) overpower the will and policies of the globalists. For example, both the left and the right in America increasingly oppose free trade[35], and even Biden will not immediately end Trump’s tariffs on China[36].
In his book, Has China Won? (2020), Professor Mahbubani arrives at a paradoxical conclusion regarding US-China relations: a geopolitical contest between China and the US is both inevitable and avoidable.
What remains to be seen is if we will realise the former or the latter. Professor Mahbubani is optimistic — he believes we could “marshal the forces of reason”, and discover that, “there should be no fundamental contradiction between the two powers” (of which he identifies 5).
While I agree with his noncontradictions, I am less certain if they will be realised. There are worrying signs that governments are unable to make rational long-term decisions for the common (national and international) good, in favour of short-term political points. Anti-globalist personalities, passionate emotions, political incentives and false perceptions can, and unfortunately do, trump economic rationality. Just as humanity is capable of rationality, we also have the capacity to choose. And we could choose something else. Current and future generations could choose not to follow their predecessors in advancing economic globalisation. There is a big difference between “should” and “would”.
As I write, there were times when I was filled with pessimism about the state of US-China relations and the nationalist trend in many countries, and sometimes, when I am optimistic that things could change for the better. However, any prediction, even with the best of information, could easily be overturned with new developments. Much of what happens depends on the situation, and the choices of the people involved moving ahead (including us).
It is conceivable that some shared, urgent crisis would compel the two powers, and the world, to cooperate (though global warming and the Covid-19 pandemic have not seen a much-needed drastic increase of that, so far), or a change in the personalities of leadership — more crucial in international relations than conventionally assumed — can improve relations. (Professor Mahbubani describes the “unusual combination” of 4 personalities — Chairman Mao, Zhou Enlai, President Nixon, and Henry Kissinger — who “came together to forge a remarkable partnership” in the 1970s, and without whom, “no breakthrough between the two powerful adversaries would have happened”[37].) If so, the balance between the pro-globalists and anti-globalists could revert back towards the historical trend.
Nevertheless, for now, I am cautiously optimistic overall, provided we do the work to get there, even if that work is not easy or obvious. Perhaps part of it is due to my faith in our humanity — our compassion and our capacity to get things done for the common good. Books like Professor Mahbubani’s Has China Won? could better educate policymakers and inform future policy. Rational and reasonable voices, especially from the business community, could prevail.
At the same time, having had several opportunities to interact with students from China and the US in online exchanges in 2020 and 2021, and now being part of this Programme (all of which have continued despite Covid-19), I have encountered individuals who are more open to cooperation, more willing to understand, and more respectful of people from different cultures.
These may be personal experiences, but if these are the future leaders, who actively make rational decisions, then perhaps US-China relations, and economic globalisation, will see better progress.
Sources and References:
Acknowledgement: I must acknowledge that I have gained much knowledge and insight from Professor Kishore Mahbubani, a Singaporean academic and former diplomat with whom I had the honour and pleasure to hear from and speak to during an online seminar and discussion in June 2020 about US-China relations, and from reading his book, Has China Won? (published 2020). I have referenced him whenever I have used his points, and any misses are unintentional.
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[11] Mahbubani, K. (2020). Has China won?: the Chinese challenge to American primacy. Hachette UK.
[12] Ibid.
[13] Sarlin, B., & Kapur, S. (2021, March 22). Why China may be the last bipartisan issue left in Washington. NBCNews.com. Retrieved September 25, 2021, from https://www.nbcnews.com/politics/congress/why-china-may-be-last-bipartisan-issue-left-washington-n1261407.
[14] Hin, D. Q. L. S. (2019). The US is, indeed, the Exceptional Nation: Income Dynamics in the Bottom 50%.
[15] Mahbubani, K. (2020). Has China won?: the Chinese challenge to American primacy. Hachette UK.
[16] Ibid.
[17] Nian, Y. (2019, August 2). What can RCEP learn from TPP failure?. Retrieved September 25, 2021, from https://news.cgtn.com/news/2019-08-01/What-can-RCEP-learn-from-TPP-failure--INKZeSjgTC/index.html
[18] Thomas, D. (2021, September 7). What you need to know about the African Continental free trade area. What you need to know about the African Continental Free Trade Area. Retrieved September 25, 2021, from https://african.business/2021/09/trade-investment/what-you-need-to-know-about-the-african-continental-free-trade-area/.
[19] Mahbubani, K. (2020). Has China won?: the Chinese challenge to American primacy. Hachette UK.
[20] Chao, S. (2021, April 1). The New Reality of Doing Business in China. IndustryWeek. Retrieved September 25, 2021, from https://www.industryweek.com/the-economy/trade/article/21159780/the-new-reality-of-doing-business-in-china.
[21] Mahbubani, K. (2020). Has China won?: the Chinese challenge to American primacy. Hachette UK.
[22] Reuters. (2021, September 18). China applies to join pacific trade pact to boost economic clout. Reuters. Retrieved September 25, 2021, from https://www.reuters.com/world/china/china-officially-applies-join-cptpp-trade-pact-2021-09-16/.
[23] Shepardson, D. (2021, June 18). U.S. FCC votes to advance proposed ban on Huawei, ZTE gear. Reuters. Retrieved September 25, 2021, from https://www.reuters.com/technology/us-fcc-votes-launch-further-crackdown-huawei-zte-equipment-2021-06-17/.
[24] Jacobs, J. (2021, June 4). Biden blocks 59 Chinese companies in amended Trump order. Bloomberg.com. Retrieved September 25, 2021, from https://www.bloomberg.com/news/articles/2021-06-03/biden-to-blacklist-59-chinese-companies-in-amended-trump-order.
[25] Reiff, N. (2019, June 25). What industries are most affected by the trade war with china? Investopedia. Retrieved September 25, 2021, from https://www.investopedia.com/industries-most-likely-to-be-impacted-by-trade-disputes-with-china-in-2019-4580508.
[26] Steger, M. B. (2013). Globalization: A very short introduction (Vol. 86). Oxford University Press.
[27] Strikwerda, C. (2016). World War I in the History of Globalization. Historical Reflections/Réflexions Historiques, 42(3), 112–132.
[28] Peter Vanham. (2019, January 17). A brief history of globalization. World Economic Forum. Retrieved September 25, 2021, from https://www.weforum.org/agenda/2019/01/how-globalization-4-0-fits-into-the-history-of-globalization/.
[29]Swanson, A. (2019, April 29). The world today looks ominously like it did before World War I. The Washington Post. Retrieved September 25, 2021, from https://www.washingtonpost.com/news/wonk/wp/2016/12/29/the-world-today-looks-ominously-like-it-did-before-world-war-i/.
[30] Steger, M. B. (2013). Globalization: A very short introduction (Vol. 86). Oxford University Press.
[31] Heimberger, P. (2020). Does economic globalisation affect income inequality? A meta‐analysis. The World Economy, 43(11), 2960–2982.
[32] Steger, M. B. (2013). Globalization: A very short introduction (Vol. 86). Oxford University Press.
[33] Ellenberg, J. (2014). How not to be wrong: The hidden maths of everyday life. Penguin UK.
[34] Kagan, D. (1969). The outbreak of the Peloponnesian War (Vol. 1). Cornell University Press.
[35] Harwood, J. (2019, September 20). Bipartisan support for free trade has been left behind as the 2020 race Barrels ahead. CNBC. Retrieved September 25, 2021, from https://www.cnbc.com/2019/09/20/republicans-and-democrats-oppose-free-trade-in-2020-white-house-race.html.
[36] Lee, Y. N. (2020, December 3). Biden says he won’t immediately remove Trump’s tariffs on China. CNBC. Retrieved September 25, 2021, from https://www.cnbc.com/2020/12/02/biden-tells-nyt-columnist-he-wont-immediately-remove-trumps-tariffs-on-china.html.
[37] Mahbubani, K. (2020). Has China won?: the Chinese challenge to American primacy. Hachette UK.
