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US-China Relationship Tense, But Hope Remains For Harmonious Future

Nov 13, 2017

The relationship between China and the United States is difficult, but there is a chance for a harmonious path forward.

Yukon Huang, a senior associate at the Carnegie Endowment for International Peace, says the potential conflict comes from the United States’ traditional role as a dominant great power, and China’s status as an up-and-comer.

Huang says many Americans believe the rise of China has a negative impact on them economically, such as through unemployment.

“Then you have of course the security, international issues, North Korea, the sense that China could do more in curbing back North Korea's nuclear ambition,” Huang told KGOU’s World Views.

China, in the other hand, feels that it is now a richer nation and that it should have the international influence commensurate with its economic wealth.

“But in most institutions, in most international agencies, in terms of the global rules of the game, China feels that it doesn't have the authority that it is entitled to,” Huang said.

Americans believe their regional military presence in South Korea, Japan and Australia is a calming influence in East Asia and the Pacific region. However, American ships near the South China Sea can make China feel “encircled,” Huang said.

“If you go back generations ago when the Soviets put missiles on Cuba, from an American perspective, that was not tenable,” Huang said. “But there are actually missiles and things throughout Asia, manned by military or on land, and Chinese basically say, ‘We find this increasingly no longer acceptable.’ And this is creating a tension.”

Huang says Donald Trump and Xi Jingping are share some similarities, but their visions for their respective countries could lead to a clash. Xi Jingping’s “China Dream” vision would establish a greater role for China in world affairs, while Trump’s vision is based in “America First.”

“They're both nationalists, appealing to sentiments among their people. They're both appealing to people who feel perhaps they've been left out by the progress that's been occurring in both countries of the last generation,” Huang said.

Even though there is the potential for friction, both China and the United States have an incentive to establish a harmonious relationship. Huang says China’s leadership recognizes that their strength comes from trade, and their exports go to Europe and the United States. For the US, China is a big potential market.

Huang believes American services could have huge market in China, such as financial services, engineering, legal profession, education, media and entertainment.

“It's not just a competitor in many areas but it's an area where American skills, particularly in services, could actually play a very important role,” Huang said.

In his book Cracking the China Conundrum: Why Conventional Economic Wisdom Is Wrong, Huang points out what he perceives as misperceptions. First, he argues that America’s trade deficit is not due to China. The United States, he says, was running a trade deficit for many years when China did not have a substantial trade surplus.

“There's actually no analytical, conceptual relationship between America's trade deficits and China's trade surpluses. America has had a trade deficit every year for 40 straight years. The good times and bad times, when there is full employment when there was high unemployment, when it was growing rapidly and when it was growing slowly. And for much of those 40 years, China was not even a factor,” Huang said.

Secondly, Huang says Americans are incorrect to believe that US companies are investing too much in China. Instead, he says less than 2 percent of American foreign investment overseas goes to China.

“The question is actually quite different. It switches from that too much is going to China, to why is this so actually so little?” Huang said.

Huang believes America’s strengths are in sectors that don’t lead to foreign investment,  like agriculture, commodities and energy.  In the meantime, America’s other strengths are in services, and many services are restricted in China.

“So this is the area where you could actually liberalize, and they would be more foreign investment going to China,” Huang said.

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FULL TRANSCRIPT

Rebecca Cruise: Yukon Huang, welcome to World Views.

Yukon Huang: A pleasure to be here. .

Cruise: Well let's get right to the point there has been a lot of talk about the United States and the Chinese relationship particularly in the last year since Donald Trump came to the White House. How do you foresee this relationship? What do you see developing in the last nine or 10 months and how do you see it going forward?

Huang: Well the reason why it's important, and also tense of course, is you have a rising power. Some people think will be challenging the U.S. which has been the dominant great power for generations now. Its creating some tensions. You just had a party congress meeting in China, a couple of weeks ago, which basically confirmed Xi Jinping is a very powerful leader, and he set out a very long term vision. Here in the U.S., President Trump is soon going to go to Asia. He's going there for a time when there is a lot of debate in U.S. about priorities, concerns about where the U.S. is going, and many people in America see the future as being affected by China. So these U.S.-China relations is obviously a very important issue for both countries.

Cruise: Absolutely, and we seem to see it, even in the short nine or 10 months, wax and wane a little bit. The two leaders got together earlier this year in the spring, and they seemed to have a very productive conversation and then a month later, or a month or so later, some issues about North Korea and other things, that it seems to be going back and forth.

Huang: Well we have a interconnection between economic and political issues, and this is I think particular to the China relationship because for other countries it's often just purely political or international affairs issue. But here is a country whose role globally, comes from the fact that economically it's so strong and rising country. So that's unique to China.  You also have an American perspective, a sense that some of America's problems, whether it's unemployment or growth, is being negatively affected by China, and therefore by China's rise. This creates a tendency to think Well part of the problem is China. If I can somehow persuade China to pursue its growth policies in different fashion, that this would be good for America and good for the American people. So this is the source of the tension. And then you have of course the security, international issues, North Korea, the sense that China could do more in curbing back North Korea's nuclear ambitions. But they're not doing so. So you have not only the economic concerns, the insecurity generated by that, you also have these security-political concerns. Both of them are of course very important here too to Americans. They are also very of course very important to the Chinese, and they both sides look at it quite differently. So you have a ripe area for what I call tensions on both sides.

Cruise: Well you've given us a sense of some of the fears of the United States, but you mentioned that China looks at this a little bit differently. How is the relationship perceived there?

Huang: Well if you think about China, let's look at the politics of what's going on here. China is now feeling it is it is now what I call a much richer nation, that it should have influence commensurate with the fact that economically much stronger than it was before. But in most institutions, in most international agencies, in terms of the global rules of the game, China feels that it doesn't have the authority that it is entitled to. So that's an issue for the Chinese. If you look at North Korea, their perception is that in the region, America's strengths, America's military presence, is very strong. So they're in Japan, they're in Australia, they have stations in various countries throughout the region. Their ships are very strong in the whole neighboring waters in the East China Seas. So in some sense they feel encircled. And this is a difficult issue because from an American perspective it would be like, "Well we'd like to have freedom of navigation and try to be a calming influence in the region." But if you think about it from a Chinese viewpoint, I suppose there are a lot of Chinese ships floating around Florida, the Pacific.

Cruise: Sure.

Huang: If you go back generations ago when the Soviets put missiles on Cuba. From an American perspective that was not tenable. But there are actually missiles and things throughout Asia, manned by military or on land, and Chinese basically say we find this increasingly no longer acceptable. And this is creating a tension. And it basically comes from the fact that China's status its role the world has increased. So it wants a so-called new kind of great power relations. And for an American's perspective, they haven't actually recognized that a change that kind of relationship may be in store.

Cruise: Well you've also written that one of the issues may be that President Xi, and President Trump actually have some of the same aspirations, they have some of the same goals, and that this may prevent them from having a stronger or more profitable, or beneficial relationship.

Huang: And the great irony is that when you have two leaders who are similar in some ways, who both are trying to find a vision for their country, that can lead to a clash. From a Chinese perspective, Xi Jinping has laid out this something called a China Dream, essentially a greater role for China in the world, and in the region. President Trump has laid out his vision of America first.  They're both nationalists, appealing to sentiments among their people. They're both appealing to people who feel perhaps they've been left out by the progress that's been occurring in both countries of the last generation. They both see that trying to establish a greater presence suitable for their own domestic audience is very, very important. And then you put this in the context of the fact that U.S.-China relations are being affected by changing power structures, different perceptions about what they should be entitled to, and their roles. Then you basically have laid out the foundations for what I call potential concerns and tensions.

Cruise: So we should expect the relationship between these two presidents to continue on much of the same track that we've seen?

Huang: That potential for friction is out there, but both sides also have a very strong incentive to curb this, and to try to push this into a more harmonious kind of relationship. Now why is that? China realizes for example that its economic strength comes from trade, trade across a wide range of countries within the region. Its exports are ultimately destined for Europe and for the United States, as their major export markets. So for China to flourish or somehow to prosper, it requires what I call harmonious relationships across countries, because of these trading relationships. America sees China's a huge potential market.

Cruise: Sure.

Huang: It's not just a competitor in many areas but it's an area where American skills, particularly in services, could actually play a very important role. America's strength, tends to be classified into what I call three areas: agricultural, raw materials and energy, and high value services. So the U.S. is the leader in financial, engineering, legal, educational, in the media, entertainment, and in all these areas, there's a great market in China. And the Chinese are a bit restrictive in terms of letting foreign investment, and high value services come in. So that particular climate issue is actually a potential fruitful area for both sides to get into, because both sides could actually benefit. So I would see that the task in the future is trying to moderate the tendencies for friction in these kinds of security-related, or these trade conflicts. But to focus more upon beneficial investment relationships between the two countries, which could lead to what the Chinese would call win-win solutions rather than win-lose.

Cruise: You've recently published a book called Cracking the China Conundrum: Why Conventional Economic Wisdom Is Wrong, in regards to China. What has the West or western economists, what have they gotten wrong about China and what do we need to know?

Huang: Well let's start off with two general perceptions. You ask practically any American, you even asked policymakers in Washington, about trade and everyone realizes that America has huge trade deficits.

Cruise: Right.

Huang: And large share those deficits apparently seem to be due to China, because they account for the largest share of that deficit on a bilateral basis. So conventional wisdom would say that America's trade problems are due to China, and that if China's surpluses, huge surpluses, could be curtailed, that this would help reduce America's deficit. In my book, I basically point out there's actually no analytical, conceptual relationship between America's trade deficits and China's trade surpluses. America has had a trade deficit every year for 40 straight years. The good times and bad times, when there is full employment when there was high unemployment, when it was growing rapidly and when it was growing slowly. And for much of those 40 years, China was not even a factor.

Cruise: Right.

Huang: So how could China be responsible for America's deficits, when in reality, 10 years ago for example, it didn't have any surpluses that mattered. And yet the U.S. was having a very large trade deficits. At that time, if you go back to the late 90s and early 2000s, America's deficits were showing up as deficits with Japan, Hong Kong, Singapore, Taiwan, other kinds of Asian countries. Today it shows up as China, because those countries now don't produce the complete product. They produce the parts and components, which are then shipped to China, assembled in China, and then shipped to America.

Huang: So that iPhone or iPad that many Americans have, which are produced in China, and they sell it say a phone might sell for 600 or 700 dollars, only $25 of that actually goes to China. The rest of it goes to Taiwan, Japan, South Korea. Those parts come from other countries. So it looks like a China issue. It's not actually a China issue at all, it's an Asian issue. But it's not even an Asian issue. The basic issue is as long as Americans consume more than they earn, America will have a trade deficit. So how do you solve this? There's two solutions. Americans need to save more. They live off of debt.

Cruise: True.

Huang: They haven't been able to save. The second issue is the U.S. budget. When you run a U.S. deficit, a budget deficit, it translates ultimately into a trade deficit. And many people don't associate the two. They think a budget deficit, maybe it should be larger, maybe it should be smaller. But they don't realize that if there is a deficit, it automatically transfers into a trade deficit. And who the deficit is incidental, it doesn't matter. So that's one issue. And then the other issue is that Americans think that too much of US companies invest too much overseas, and they think that a lot of it is going to China, and therefore that these are job loss and loss of competitiveness. And so in my book I point out that if you look at the totality of America's foreign investment overseas, less than 2 percent of it goes to China. It's almost negligible.

Huang: So the question is actually quite different. It switches from that too much is going to China, to why is this so actually so little? OK. And I basically point out because America's strengths are in agriculture, and there is, or in commodities or energy. This doesn't lead to foreign investment in a country. You don't grow, America's not going to be farmers in China, or they're not going to become miners in China. So they don't invest a lot. Europeans actually invest a lot, because they're a manufacturing country. But where America is strong is services, and services are in fact restricted in China. So this is the area where you could actually liberalize, and they would be more foreign investment going to China. So the question is actually turned around, because we began with the assumption that too much was going and now we come to the real issue. The real issue is that more should be going, but it isn't. And if it did go there'd be more jobs in America and they'd be more jobs in China. It's a win-win situation.

Cruise: Well as you said it's all about the perception then, it sounds like oh we need to work to change some of those ideas. Oh, one of the perceptions that I think many have had for the last couple of decades is that China is a global polluter, and have hurt the environment in some ways, the smog. But we've seen in the last couple of years that China's actually taking the lead on environmental issues. Can you talk with us a little bit about what this motivation comes from. Is this another means of exerting influence, or where does this come from?

Huang: Well a couple of years ago the standard view would be China is the problem in terms of pollution and environmental concerns, and in climate change, because in terms of total emissions, carbon emissions, China exceeds the United States, just exceeds the United States. So you have the U.S. and China are in fact the two world's largest polluting nations.

Cruise: Right. Both of them, yes.

Huang: But China is, in terms of population, 1.3 billion people, four times the size of America, yet its pollution level's about the same. So the average Chinese is and somehow in some sense a contributing one quarter as much to the global problem, as the average American. And that's understandable because America is much richer, so they use much more energy. So China has now basically said this is a problem. So they're very supportive of climate change. They were not supportive 10 years ago because they're still preoccupied with growth. Now they're more concerned about the quality of life. So politically there's a sea change in China, that the average person basically says we should be worried about environment, we should be worried about climate change, even if it has some kind of a consequence upon growth in jobs. But the interesting thing is, from a Chinese perspective, they actually do not see environmental issues as damaging commercial business interests.

Cruise: It's an economic benefit.

Huang: It's a benefit, because then they say we can invest a lot in the technologies. We can produce the equipment that can deal with this. We can actually turn this into a growth driver. In the U.S., we tend to think of the environment or climate change as a growth inhibitor. So the Chinese think of it as a growth driver.

Huang: I think the third thing I think is quite interesting, is a very large percentage of China's leadership have science degrees. OK. If you go to the U.S. Congress, very few It's mostly lawyers. OK. So for the Chinese this is actually a scientific issue. Sure. And they look at the data and the facts, and the conclusion to them is fairly obvious: there is a problem. But it's easier for the Chinese leadership to absorb this because for them with science backgrounds, they tend to have more faith in these kinds of numbers. So you have not only what I call the conceptual issue, the political, the economic, and this is why China today is much more willing to play a leadership role in climate change, than for example America is today.

Cruise: Well this is just fascinating. As you say, we have some preconceived ideas of China and you've certainly enlightened us today on some new ways of looking at things. Thank you so much for your time.

Huang: Pleasure to be here.

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