One crisp day in early March 2014, I found myself sitting in a sleek conference room high above Boston Harbor taking questions from a group of financial executives. These men and women worked for a range of institutions that managed well over $3 trillion of financial assets, including the personal savings and pension funds of millions of Americans. They were keen to learn as much as they could about the Chinese economy. Was it about to hit the wall? Was I worried about a real estate bubble? How fragile was the country’s financial system? Was the government serious about dealing with China’s environmental problems? One fellow had a more personal question for me.
“Hank,” he said. “You’re a real patriot. Why are you helping China?”
The question pulled me up short. Three years before, when I first began planning to write this book, I don’t think I would have been asked anything like that at a meeting of sophisticated financiers. They would have accepted that helping China to reform its economy, open its markets, protect its environment, and improve the quality of life of its people—all things I have been working on—would bring economic and strategic benefits to the U.S. as well. But that viewpoint has been changing as China has emerged as our biggest, most formidable economic competitor since the end of World War II and has started flexing its newfound military muscle in unsettling ways. As a result, many Americans, from all walks of life, have begun to view China with growing apprehension and resentment. Some would now prefer confrontation to cooperation.
I understand these sentiments. Partly they are a function of China’s choices and actions, and partly they are born of frustration with the recent economic troubles of the United States. I’ve spent a fair number of pages explaining how China must carry out meaningful economic reforms if it expects to continue its amazing success story. These arguments make sense for China and its people. But why should an American care? Why should we root for China to succeed? Shouldn’t we instead be hoping that this ungainly giant stumbles, if only to slow down its daunting economic and military growth? In coming years China’s weight and influence in the world, already substantial, is likely to begin to rival our own. Why take the chance now of helping the Chinese deal with so many of their problems and challenges? Why aid a competitor?
The answer is simple: we should do so because it is more than ever in America’s own self-interest that we do. To begin with, just about every major global challenge we face—from economic and environmental issues to food and energy security to nuclear proliferation and terrorism—will be easier to solve if the world’s two most important economic powers can act in complementary ways. But these challenges will be almost impossible to address if the U.S. and China work at cross-purposes.
If we want to benefit from an expanding global economy, we need the most dynamic growth engines, like China’s, to thrive. If we want to prevent the worst climate change outcomes and to preserve our fragile global ecosystems, we need China to solve its massive environmental problems at home and adopt better practices abroad. If we want to keep diseases from our shores, we need China and other countries to use the very best methods to prevent and halt epidemics. If we want to stem the spread of dangerous weapons to those who might harm our citizens, we need nations, including China, to work together to end illicit trafficking.
If we want all these things to happen, we must be proactive, frank, and at times forceful with the Chinese while seeking ways to cooperate, to develop complementary policies, and to work to more fully integrate them into a rules-based global order. If we attempt to exclude, ignore, or weaken China, we limit our ability to influence choices made by its leaders and risk turning the worst-case scenarios of China skeptics into a self-fulfilling reality.
At the same time, we have a real interest in seeing China do well economically, and we should want to benefit from its successes, just as it does from ours. China is America’s fastest-growing export market; problems there will only hurt our companies, and our workers, and cost us jobs. Today, when all of the world’s major economies are grappling with difficult structural issues, the need for stable growth can’t be overstressed. Any significant economic problems in China—with its extensive linkages to other countries—will disproportionately hurt global growth.
Despite its successes and the fears of many in the U.S., China is not an unstoppable powerhouse that has invented a better economic model and will soon take over the world. Quite the contrary. Its economic system is sorely in need of a major overhaul and has few imitators. Its political system has none. Exaggerating China’s strength is at least as big a risk as underestimating its potential. Either can lead to irrational responses and mistakes in the way we deal with China.
I don’t say cooperation will be easy. In fact, I can guarantee that for many years to come it will only become harder. A newly confident China is here to stay, and Chinese nationalism cannot simply be wished away. As a proud China grows stronger, it will become more assertive in pursuit of what it perceives to be its interests. We can’t know how these interests may change, only that they may increasingly diverge from our own. So we need to be strong, clear-eyed, and forthright in articulating our core principles to the Chinese and in sticking to them.
Since Deng Xiaoping began his transformative economic reforms in 1978, China’s top leaders have maintained that the country’s prosperity depends on a peaceful international environment. I see few reasons that the pursuit of peace and stability abroad should not continue to be the preferred strategy to complement China’s economic and social progress at home. The Chinese are students of history, and they know that rising nations have almost always come to blows with status quo powers. If President Xi Jinping and his fellow leaders seek what they call a “new model of great power relations” with the U.S., it is because they want to be treated like a major power while avoiding conflict as they continue to modernize and grow their economy.
Xi put the case simply in July 2014. “My concern is mainly reform and related issues,” he told me. “To enjoy a good environment for development in China, we also need a good external environment. So our path will be a peaceful one.”
This does not mean, however, that China will not assert its interests boldly, and in ways that we may think unwise. President Xi knows every great power has fielded a strong military, and he is determined to modernize his country’s armed forces. But China’s foremost task is retooling its economy for the long run. Xi knows he must keep China’s relationship with the U.S. on an even keel, because our cooperation, and that of the rest of the Western world, remains crucial to the success of this difficult challenge. As such, we retain great leverage; we can be helpful and exert our influence. As I explained to my colleagues in the Cabinet when we set up the Strategic Economic Dialogue, if we got the economic issues right, it would make other pressing matters easier to manage.
The Chinese may stand as our most imposing global competitors, but we of all people should not fear nor shrink from competition. We should embrace it wholeheartedly. For centuries, competition has made us stronger. Americans excel most in the face of a genuine challenge. Competition is the essence of the free market—the superior idea, product, service, or provider should win out. But the contest must be fair, the rules clear and agreed upon, and the referees impartial and consistent.
Nor does competition have to be a zero-sum game. We can find ways for both sides to advance their interests. At times, our conflicting aims will demand direct communication and skillful management to keep us on a steady course. At other times, common interests will create opportunities for us to work together or in complementary ways for our mutual advantage. The mix of cooperation and competition will be guided by decisions our leaders make, not least those that will determine our strength long into the future. I have little patience for fatalists who believe that America is in terminal decline or for triumphalists who don’t recognize that the world has changed and that we must continue to adapt. We can’t afford to rest on our laurels. We need to adopt domestic policies that respond to the economic and social challenges we face at home—from sky-high debt levels to widening income inequality. Given the changing international scene, we need to relentlessly prioritize so we don’t dissipate our resources by wasting them where we don’t have an important strategic interest or where we do not have a clear plan and the ability to achieve our objectives.
We can assume that China will do whatever it must in its own self-interest to continue to prosper and grow stronger. We should do the same. Our leaders must demonstrate the self-confidence to cooperate and compromise without the fear of looking weak and to take tough stands where they need to.
Before our rapprochement in 1972, China and the United States were implacable Cold War enemies that had fought face-to-face in Korea and indirectly in Vietnam. President Richard Nixon and his then national security adviser, Henry Kissinger, deftly took advantage of China’s even greater mistrust of a common foe, the Soviet Union, to build a strategic relationship. The “three joint communiqués” subsequently agreed to by the U.S. and China normalized relations between our countries, established an important part of the U.S. framework for dealing with Beijing on the sensitive issue of Taiwan, and laid the principles for our diplomatic relationship ever since.
An implicit understanding took root over time, based on a mutual recognition that China’s success was good for both countries. We supported China’s development, while it aligned with us against the Soviet Union and undertook its unprecedented economic Reform and Opening Up. Through eight administrations, Republican and Democratic, the U.S. worked ever more closely with Beijing. We reaped the benefits of low-cost imports, and China made a fortune catering to Americans’ seemingly bottomless appetite for consumer goods. China provided a ready source of capital, financing huge amounts of our debt and helping to keep interest rates and inflation low.
Washington’s relations with Beijing had no shortage of critics, although the general consensus held that a positive relationship with China was, ultimately, good for America and for ordinary Americans. But as China’s dynamic, rapidly growing economy has increasingly challenged our own, that consensus has begun to change. For many in the U.S., this shift was caused by a sense that we had been taken advantage of. Problems that were tolerated when China was smaller and less consequential—a reflexive protectionism that walled off much foreign investment, requirements that foreign companies invest through joint ventures, and demands that technology be transferred as a cost of entry—became increasingly unacceptable as China’s state-owned companies grew profitable and began to compete in global markets while still receiving anticompetitive subsidies and favorable regulation.
China’s success stung all the more when our economy began to reel after the global financial crisis. Popular opinion soured on both sides. A Pew Research Global Attitudes Project survey released in mid-2013 showed that Americans’ approval of China had plunged 14 percentage points to 37 percent in two years. Meanwhile, negative attitudes toward the U.S. among the Chinese had climbed to 53 percent, a seven-point increase. Politicians in both countries played to these negative feelings. China-bashing became a popular American campaign tool. Chinese nationalists urged Beijing to challenge the U.S.-dominated regional order in Asia. The urge to cooperate turned into calls on both sides to confront.
Doing so, however, would be self-defeating for both sides. Americans have gained much from our country’s relationship with China and stand to benefit even more if we can find new ways to work constructively with the Chinese and they with us. The country’s new leaders have restarted the process of market reform. They have outlined steps to promote their private sector, open more of the economy to foreign investment, and liberalize capital markets with the aim of moving toward a market-based currency and, eventually, an open capital account. These moves will benefit China—and they will open opportunities for American farmers, workers, and businesses.
What of the complaints Americans have about China? Some, like charges of rampant intellectual property theft, are legitimate, and we should be firm and determined in pursuing remedies. Other issues, like job losses and the amount of our debt China owns, are complicated, often distorted, and based, in part, on bad math and misunderstandings of basic economics.
Americans have suffered terrible job losses in recent years. It’s a problem that concerns me greatly, but the bulk of these losses come not from outsourcing to China so much as from disruptive technological advances in automation, computing, and robotics that are making many jobs obsolete, hollowing out our middle class, and leading to increased income disparities. Regardless of how quickly the economy rebounds, we will have to deal with this troubling trend as a country. The workplace of tomorrow, from factory floor to office cubicle, will look very different from today’s. This same technological transformation is affecting all major economies, including China’s.
As of November 2014 the Chinese held almost $1.3 trillion, or about 10 percent, of our publicly held debt. This worries some people, but their fears are misplaced. We should be worried about the sheer size of our debt, not who our creditors are. In any case, America’s biggest creditor is its own citizenry—in the form of the Federal Reserve, which owns a little less than $2.5 trillion of Treasury securities. The fact that the Chinese buy and hold U.S. debt benefits us, as their demand for our paper helps lower our funding costs. Nearly one-quarter of their foreign exchange reserves are in Treasuries, which the Chinese buy because it makes sense to own the world’s safest, most liquid securities. The Chinese have been responsible investors, as I saw firsthand during the financial crisis, when they refused to panic and held their securities, despite fears about the value of their investments.
Many of the benefits we receive from our relationship with China are tied to the very thing many Americans decry the most: trade. Although the balance of trade remains overwhelmingly in China’s favor, our exports are growing more rapidly than our imports. China is our second largest trading partner and our fastest-growing and third-largest export market after Canada and Mexico. In the decade between China’s 2001 entry into the WTO and 2011, U.S. exports to China more than quintupled, to $104 billion. China’s appetite for our goods has stayed consistently strong: in 2009, in the wake of the financial crisis, total U.S. exports fell by more than 18 percent, while exports to China dipped by less than one-half of 1 percent. In general, we export high-value-added products—machinery, aircraft, electronics, chemicals, and food—that support well-paying jobs here at home.
As U.S. investment in China has risen, so has Chinese investment in the United States, doubling to $14 billion from 2012 to 2013 as Chinese companies took stakes in, among other things, U.S. energy, agribusiness, and real estate. The amount is small compared with that of countries like Australia, Japan, and Canada, and piddling compared with what Chinese firms are capable of—and would like to do. Cross-border investment between our two countries has the potential to be an even more powerful and unifying force than trade. Americans abhor ownership of U.S. companies by any government, including our own, so there will always be some resistance to a Chinese state-owned firm acquiring a healthy American company. But investments that save or create jobs are more politically acceptable. That’s particularly true if they are made by a private sector company or in the acquisition of a failing U.S. company or through a greenfield, or start-up, operation.
Wanxiang Group, China’s largest auto parts maker, is one Chinese company that has made welcome inroads in the U.S. Founded in 1969 as a bicycle and tractor repair shop in Zhejiang Province by a budding entrepreneur named Lu Guanqiu and some friends, Wanxiang now has $23.5 billion in annual revenues and some 12,500 employees, just under half of whom are in the U.S., where the company owns 28 manufacturing plants in 14 states. My friend Lu was among the private sector business leaders with whom I shared dinner my first day in China as Treasury secretary in 2006.
Wanxiang’s Illinois-headquartered U.S. operations are run by Lu’s son-in-law, Ni Pin, a neighbor of mine, whose youngest child will start in the fall of 2015 at my alma mater, Barrington High School. Ni’s two oldest children have already graduated from there; one is at the University of Chicago, the other at Northwestern University. “America is our new home,” Ni told me. “And we’re going to build an important business here.”
In the early 1990s Ni dropped out of the University of Kentucky’s Ph.D. program in economics at the behest of his father-in-law and used his teaching assistant’s stipend to get Wanxiang started in the U.S. after the company had been unable to secure Chinese government approval to transfer funds here. Wanxiang acquired small U.S. auto parts suppliers and increased investments in clean energy technologies, flying under the radar until 2013, when it bought most of the assets of bankrupt battery maker A123 Systems. Some U.S. lawmakers opposed the deal, fearing the company’s advanced lithium-ion battery technology might be put to military use and decrying the fact that a Chinese firm was the recipient of U.S. government subsidies. But Wanxiang won official government approval. The company made more headlines in 2014, when it dipped into bankruptcy waters again to buy Fisker Automotive, makers of the first premium hybrid electric car.
I bumped into Ni Pin in July 2014 on a flight to Detroit, where I was scheduled to hold a public forum with Michigan governor Rick Snyder about the advantages to his state of Chinese and other foreign investment. As it happened, Ni Pin and his father-in-law had an appointment with Snyder for the next day to discuss expanding operations in Michigan. Wanxiang had approved an additional $200 million investment for its battery business, a significant portion of which was earmarked for that state.
The appeal of cross-border investment to U.S. governors is clear: jobs and growth. Wanxiang figures it saved 3,500 American jobs between 2007 and 2009, buying up struggling auto parts companies. It rehired the 857 employees of A123 post bankruptcy and was looking to hire more in Michigan. The Chinese company aimed to get Fisker relaunched by late 2015 and planned to move production back to the U.S. from Finland. Altogether, Wanxiang employs about 5,500 in its U.S. automotive businesses, up from 3,000 in 2012. By 2020 it projects it might have 10,000 employees in the U.S.
State and city government leaders are on the front lines working with companies on job creation. As Governor Scott Walker of Wisconsin told me at a Paulson Institute–sponsored discussion of investment among a group of Great Lakes governors in April 2014, “We’re a state of small businesses, and many, like those in our furniture industry, have been decimated by competition from China. What we need is a strategic effort to help those businesses. China is an important market for their growth, so maybe Chinese investment can be part of the solution.” The Paulson Institute, through a program headed by vice chairman Evan Feigenbaum, is working with Midwestern governors to identify opportunities and investment models in sectors like agribusiness and manufacturing where Chinese capital can be leveraged with the know-how and ability to sell products in China.
For decades China was too weak or too focused on domestic problems to pursue large-scale foreign adventures. Today, with a $10 trillion economy and an imposing presence on Asian and world stages, Chinese leaders are less content to bide their time in asserting their national interest. They have built up their naval and air forces and are more willing to project their newfound power—as shown by recent territorial disputes in the East China Sea and South China Sea with our allies Japan and the Philippines. Tough talk and action are broadly popular with the Chinese public and with the Party elite.
China’s muscle flexing is a dangerous phenomenon that has complicated its relations with the U.S., our Asian allies, and other countries in the region and has given more credence to the arguments of confrontationists. These territorial disputes have long and convoluted histories, and none will be easy to resolve. China’s fraught relations with Japan are the most troubling. Their mutually antagonistic feelings persist 70 years after the end of World War II and make economic and political coordination much more difficult in the region. They contribute to an unhealthy dynamic as China and Japan compete to make economic and security inroads with South Korea. Meanwhile, the U.S. is trying to facilitate a strategic relationship between our allies South Korea and Japan, which have their own historical and territorial disputes.
In the most likely case, the intensity of these disputes will ebb and flow. I support U.S. policy, which is not to choose sides on the underlying merits of competing claims of sovereignty but to stand firm on such long-standing principles as freedom of navigation—for example, in the South China Sea. We should oppose the use or threat of force or other forms of coercion to settle these disputes. Such behavior would only contribute to a debilitating cycle of provocation and response that could all too easily spin out of control. All Asian countries have a lot to lose if they take their eyes off their common interests in trade, investment, and economic growth.
I believe China’s objectives continue to be stability and economic development. You can’t have one without the other, and both depend, ultimately, on Beijing’s finding ways to ensure workable relations with its neighbors. Despite China’s recent assertiveness, it is clearly not in its interest to actively seek out conflict. Deliberately seeking conflict, especially with the United States, would be stupid, and Chinese leaders did not bring their country to where it is today by being stupid. Nonetheless, they are running the risk of jeopardizing their economic interests through a military or security conflict in the region.
For their part, China’s leaders believe they live in a tough neighborhood. China abuts four major powers with which it has fought wars, skirmishes, or proxy battles over the past 75 years: Japan, India, Russia, and the U.S., through our forward-deployed military presence. China has fought smaller neighbors, including Vietnam and South Korea, and it shares borders with the unstable nuclear powers of North Korea and Pakistan. Over its far western border lies Afghanistan, where instability may grow as the U.S. continues to withdraw its forces and reduces its commitment. China mistrusts the military bases and alliances that the U.S. maintains around its periphery and especially dislikes the fact that U.S. ships and aircraft operate and engage in surveillance nearby. Given all this, Americans should have no illusions that over the next decade we will face not just an assertive and nationalistic China but a more potent and capable one, fielding a modern and much larger navy, advanced weaponry, and sophisticated cyberwarfare capabilities and seeking to make its presence felt more broadly in Asia and beyond.
We need to figure out how to deal with this new force. To begin with, the U.S. must continue to invest in a state-of-the-art military capable of projecting power and bolstering deterrence. With the near certainty that budget constraints will be an ongoing reality, we must be disciplined about our defense spending, eliminating nonessential programs so that we can afford to maintain our position as the dominant military power. But to prevent security tensions from riding our relationship off the rails, it is more important than ever that we deepen our economic interactions. We should encourage other countries to do the same. The more economically interdependent China and Japan become, for example, the higher the costs of conflict will be for both countries.
It is important that we let the Chinese know how much we welcome their playing a bigger role in international governance. At the same time, we need to convince them that with increased international stature comes a greater responsibility to act in the broadest public interest. Global leaders need to be mindful of the rights and interests of other nations—regardless of their relative power.
Russia’s annexation of Crimea in March 2014 and its subsequent efforts to destabilize eastern Ukraine remind us of the dangers of taking the status quo for granted and underscore the importance of strengthening U.S.-China relations. We certainly wouldn’t want to face a united China-Russia strategic front that could frustrate American interests. Now, I don’t think four decades of goodwill and close cooperation between the U.S. and China are about to be tossed on the ash heap of history. Nonetheless, 50 years after their dramatic rift, China’s relationship with Russia is back on a stable track, buoyed by a growing bilateral trade relationship, a common mistrust of American power, and a shared embrace of a “multipolar” world that leads both countries to periodically take positions and actions at odds with our foreign policy.
Russian adventurism has been a gift to the Chinese. At a minimum it distracts U.S. policymakers by reviving European security issues that most had thought settled, tests our resolve and that of our NATO allies for the first time in more than a generation, complicates our so-called pivot to Asia, and stretches already strained resources. Faced with post-Crimea sanctions from the West, Russian leader Vladimir Putin is seeking to build even tighter links with China. In 2014 his regime struck two major long-term agreements to supply natural gas to Beijing on terms that were advantageous to the Chinese because of Russia’s relative weakness. The two countries also announced their intention to pursue closer bilateral military cooperation, including joint naval exercises in the Pacific. The potential for Russian arms sales to China is another concern. Many Chinese admire Putin and respect his show of strength in annexing Crimea and in exposing the apparent weakness of the West to resist him. Nonetheless, the Chinese are long-term thinkers and aren’t about to get dragged into unnecessary disputes with the U.S. and certainly not on behalf of a weaker Russia.
One fraught area where the U.S. and China must work together is cyberspace, which is vital to our economic and national security. As much as the world has benefited from becoming increasingly open and digitized, it has become that much more vulnerable to catastrophic attacks on global institutions and infrastructure like power grids, air traffic control systems, banks, water supplies, and national defense systems. But there are few rules or protocols governing behavior in cyberspace and no global enforcement mechanisms. This mix of excessive risk and minimal safeguards cries out for attention.
Concerning China, two key issues stand out for the U.S. One is a national security concern about cyber-war-making capabilities. It is only logical to expect China and other nations to develop offensive and defensive capabilities, just as we are doing. At a minimum, the U.S., China, and other major nations need to reach an agreement that imposes some restraints—perhaps through an updating of the Geneva Conventions—to protect civilian populations from the devastation that could accompany the use of cyber weapons on essential services and infrastructure. And we have a compelling interest to work with China to prevent cyberattacks from terrorist groups or rogue regimes.
The second issue is the pilfering of American companies’ secrets. Just about every U.S. CEO of a global company that I know has told me of a Chinese-originated attempt—often successful—to breach his or her company’s computer system. In one comically inept hack that I know of, data from a U.S. military contractor wound up in the files of a U.S. entertainment company. Companies don’t want to discuss these attacks; they shun bad publicity and fear damage to shareholder value. An exception came in early August 2014 when Community Health Systems, a large hospital operation based in Franklin, Tennessee, claimed that personal data, including Social Security numbers, was stolen from 4.5 million people by hackers working out of China. U.S. companies also don’t generally know much about the Chinese perpetrators. Some activity may simply be rogue behavior originating in a nation that has trouble enforcing its own laws. But there is evidence that a number of hackers have state sponsorship.
Corporate cybertheft is the most contentious and potentially destructive economic issue we face with the Chinese. It undermines our economic security, gives credence to the sense that China does not play fair, and makes it difficult to find common ground. The U.S. case against China has been set back by revelations from Edward Snowden, the fugitive former National Security Agency contractor who released top secret information detailing the U.S.’s most sensitive cyberespionage and counterterrorism programs. Among other things, Snowden revealed that the U.S. government had used U.S. technology companies—some wittingly and others not—to engage in espionage, collecting information about China and Chinese companies. The disclosures have made it more difficult for those companies in China and made it harder for the U.S. to claim the moral high ground. That said, I’ve heard of no evidence of U.S. companies stealing Chinese intellectual property on their own or with the help of the U.S. government. Moreover, a foreign government or concern gathering intelligence or trade secrets from U.S. companies for commercial use is different from governments spying on one another, which is a common practice. Nonetheless, the distinction between cyberespionage and cybertheft from a company for commercial use can become fuzzy.
The Snowden debacle and the massive breaching of corporate computer systems worldwide are a clear wake-up call. No nation has more to lose from corporate cybertheft than the U.S., and we need to protect ourselves. The attack on Sony Pictures Entertainment in November 2014 allegedly by the government of North Korea in an attempt to prevent the release of an unflattering movie about its leader, Kim Jong-un, certainly highlighted this threat. It is my hope that this will serve as an impetus to design tactical responses to thwart or mislead hackers, and devise better laws and enforcement. Major U.S. companies have to harden their systems to protect security and should have to report immediately to a government cybersecurity center when they are under attack. We need laws requiring them to do both.
Our government must work diligently on a multilateral basis with other major countries to establish norms and enforcement mechanisms for protecting commercial enterprises from cybertheft. This is a tall order but essential for the smooth functioning of an increasingly integrated global economic system. As we gain traction with other countries on corporate cybertheft, it should be easier to get China on board.
We should also look for ways to apply behind-the-scenes pressure by using carrots or sticks to induce China to begin working toward solutions, but here there are no easy answers. The May 2014 indictments returned by a federal grand jury in Pennsylvania against five officials of China’s People’s Liberation Army for computer hacking and economic espionage was an attempt to do just that. But I have my doubts about the effort. The Chinese officials won’t be coming to the U.S. to stand trial, and it is not clear that the Justice Department action will have succeeded in doing anything other than making things more difficult for some U.S. companies operating in China.
Chinese president Xi Jinping likes to say that the most important bilateral relationship his country has is the one with the United States. But nothing in my conversations with him suggests that Xi confuses “important” with “easy.” Or with “static.” Quite the opposite, in fact.
“To keep our bilateral relationship moving in the right direction will be complex,” he told me during a lengthy discussion we had in July 2014 in the Great Hall of the People. “The intensity of these differences [between our countries] will fluctuate over time, but the differences themselves will be with us for a long time. At the same time, I also believe that our mutual linkages and shared interests far outnumber our differences.”
He went on to note: “There has been a pattern of suspicion leading to fear, which in turn leads to hostility. This is the kind of logic we need to prevent. We need to identify where our common interests lie.”
This is easier said than done. Despite all of America’s efforts to assist China’s progress and to welcome it into the global economic system, many Chinese suspect that we now want to contain or thwart their rise. There is also a growing suspicion on the part of Americans that someday China might become our enemy. There is no quick remedy to this gap in understanding, because trust must be built slowly by better communication and successful cooperation.
Improving relations with the U.S. has been a long-standing focus for Xi. More than two years before our July 2014 meeting, I recall him zeroing in on this topic at a dinner he hosted for a small group of former U.S. policymakers in a private room at the Washington Marriott Wardman Park hotel during a visit to the U.S. It was February 2012, and he was vice president of China and expected to succeed Hu Jintao as Party leader in the fall. Relaxed, straightforward, and self-confident, he directed a lively give-and-take with a group that included former secretaries of State Madeleine Albright and Henry Kissinger; former national security advisers Zbigniew Brzezinski, Brent Scowcroft, and Sandy Berger; and my former Cabinet colleague and Labor secretary Elaine Chao. Xi said it was critical to find innovative, out-of-the-box approaches to improve the U.S.-China relationship as our countries and the world changed. He emphasized that it would require courage, or as he termed it, “pioneering spirit,” to take actions in our mutual interest that nonetheless might prove unpopular in both countries.
The substance of China’s U.S. policy under Xi hasn’t changed, but the tone has become more strikingly nationalistic, with its full-throated endorsement of a “Chinese dream.” Xi wants us to respect his nation’s accomplishments, understand its challenges, and deal with it as an equal. For us, too, that is the best way to build a stable and strong bilateral relationship, as long as we hold firm to our core principles and China lives up to its international responsibilities in a rules-based order.
China is a relative newcomer on the contemporary international stage. As it grows and prospers, it naturally aspires to play a greater role in shaping global norms and governance rather than simply accepting rules written years ago by Western nations without China’s involvement. The fact that the Chinese have not been very specific about what they want to change is a source of frustration to the U.S. but gives room to both sides to work out our differences. This would be more difficult to do if the Chinese had publicly locked themselves into proposals or policies that differed significantly from those we believe are best.
“We are ready to shoulder and uphold our international responsibilities commensurate with our capacity,” Xi assured me in July 2014.
Our two countries often disagree on exactly what China’s capacity is. We point to the strength of the Chinese economy; they poor-mouth their achievements by noting how far they still have to go to alleviate poverty. But we shouldn’t let such disagreements spoil opportunities to make whatever changes are possible. We must push China to improve its respect for established international norms as much as we reasonably can, but we should not let our profound disagreements in areas where we don’t like their choices scuttle our entire relationship. We’re long past the point of being able to cut China loose.
The most likely and best reasonable case is for China to seek to adapt international rules to suit its national interest and not try to create a rival international system or throw the existing rules and institutions overboard. Beijing has done very well inside the global economic and governance system that was largely shaped by America after World War II. But we should have no illusions that China will simply accept this system in its exact form forever. Indeed, China has been testing alternatives. One example is the high-profile launch in July 2014 of the New Development Bank by China and the four other so-called BRICS countries, Brazil, Russia, India, and South Africa. Informally known as the BRICS Bank, the new organization will have authorized capital of $100 billion; it will be headquartered in Shanghai and will fund infrastructure projects in the developing world. China also pledged $41 billion to a separate $100 billion reserve contingency fund that will be available to support countries with short-term liquidity or balance of payments pressures.
The initiative comes as a response to the tardiness of reforms in areas like voting power and quota shares at institutions like the World Bank and IMF. China has been eager to increase its ownership and influence in the traditional development banks, but existing shareholders have been reluctant to decrease their stakes. The U.S. should take the lead in helping the institutions of the international system adapt to the arrival of big new players like China while retaining the stability the world counts on. We want China in the room, not outside. It’s hard to communicate, much less cooperate, through closed doors.
The best way to ensure healthy competition is to find ways to turn shared interests into shared successes. Small or incremental steps, if they are concrete, can help build trust. Our countries might work jointly on humanitarian missions in the developing world or on a major environmental initiative, such as a project to generate renewable electric power in Africa. The more we promote understanding between our citizens, fashion economic and cultural linkages, and increase our interdependence—through cross-investment, tourism, academic collaboration, and educational, athletic, and cultural exchanges—the more incentive we have to avoid destructive conflicts. Much is being done below the national level: universities are partnering with Chinese institutions of higher learning, as Harvard Business School has done with Tsinghua University. U.S. mayors and governors are opening up to job-creating direct investments, perhaps the most enduring of economic links.
The U.S. and China should look for ways to build trust, transparency, and working relationships between our militaries, which are deeply suspicious of each other. We war-game conflict and view each other’s actions as threatening. Talks between the two sides have proved mostly symbolic and empty. But our armed forces can build bridges by working together, and with other nations, to provide, say, disaster relief or to combat narcotics trafficking. There’s more room for cooperation on “soft security” issues, where our interests clearly coincide. China is the world’s number one ocean trader and shipper of seaborne cargo. Joint antipiracy operations, building on recent efforts in the Gulf of Aden, won’t solve our big security differences, but they will give us some shared operational experience and a sense of common purpose.
The following are a few principles the U.S. should keep in mind in managing our relationship with China.
When the U.S. advances a constructive, affirmative economic agenda and negotiates hard for greater market liberalization and openness to competition, we help reformers, led by President Xi Jinping, achieve their economic goals—to China’s benefit and our own. Today’s Chinese leaders seek to use outside pressure to force domestic change: China rejoined negotiations for a Bilateral Investment Treaty with the U.S. in 2013 in part to accelerate the stalled process of reform. A successful BIT would require the Chinese to open up many more sectors of their economy to our companies. Doing so would help China shift its economy toward consumer-led growth. We would benefit from our strengths in financial services, telecommunications, accounting, health care, and consulting as those sectors opened to competition in China’s vast and rapidly growing market. A successful BIT would almost certainly lead to greater Chinese investment in the U.S. and create more jobs. To this end, the Paulson Institute is partnering with the U.S.-China Business Council; the Development Reform Research Center of the State Council, a government think tank; and Goldman Sachs to provide technical training for BIT negotiations and to rally the Chinese and U.S. business sectors as well as U.S. mayors and governors in support of a “high standards” agreement.
Supporting reform in China means pushing for greater transparency and improved adherence to universal standards in the widest possible range of products and systems. Transparency is the best way to fight corruption and to strengthen the confidence of Chinese citizens—and foreign companies and investors—in their government and in the rule of law. We should encourage the Chinese to disseminate reliable, accurate information across the board—from air and water quality data and the enforcement of environmental regulations to property sales and the finances of local governments.
We should push for complementary standards—from health care to industrial products—to ensure the smooth functioning of a global economic system that relies on ever more integrated networks. Too frequently, China and other countries have promoted local standards, ostensibly on grounds of national security, but really to mask protectionism. Chinese officials have long resisted common standards in telecommunications, for example, to prop up domestic telecom companies, shortchanging the public in the process.
Cyberespionage tensions have unfortunately given added momentum to initiatives by countries to require that data collected on people and companies be stored and processed only on local servers. Balkanization of the Internet impairs the flow of cross-border data that is the lifeblood of the global economy and essential to the smooth functioning of so many industrial and service businesses. This is why the U.S. is seeking in the Trans-Pacific Partnership and in other agreements to fashion rules prohibiting data localization requirements.
We need to define, prioritize, and coordinate our many issues to speak to the Chinese with one voice. Before I became Treasury secretary, the U.S. had scores of separate dialogues going with China. There was a heck of a lot of talk, but not enough was getting done. We devised the Strategic Economic Dialogue to engage China on short- and long-term matters across the government and at the right levels. This arrangement allowed us to deliver a clear, consistent message to those with direct responsibility for a particular economic issue as well as to the many others who would inevitably be involved in making any decision. It also ensured that all relevant ministries, departments, and agencies on both sides participated in the discussion and implementation of agreements.
The SED structure placed one person in charge on each side. I acted not as Treasury secretary but as President Bush’s designee to coordinate discussions of a broad range of domestic and global economic issues. My counterparts, Wu Yi and then Wang Qishan, wielded authority to deal with these same issues in the context of the U.S.-China relationship. This structure enabled us to reach agreements outside all of our formal portfolios.
The Obama administration repositioned the SED as the Strategic and Economic Dialogue to include foreign policy and national security concerns. But the expanded scope of the dialogue, while a benefit, can complicate communication and coordination and make getting things done more difficult. Today our side is headed by Jacob Lew at Treasury and John Kerry at State. Their Chinese counterparts are Vice Premier Wang Yang and State Councilor Yang Jiechi. All four are very capable individuals, but the Chinese decision-making process functions best with one senior person in charge so that clear direction from the top can help forge consensus below. And without one go-to person for the U.S., the Chinese often wonder who speaks for our president. I can’t count the number of times since leaving government that I have been asked by Chinese officials who President Obama is relying on to manage the China relationship or who the right person to talk to about a given issue is. The S&ED structure would work even better if each country designated one person to lead its side. In the U.S. that person should probably be the vice president; in China it could be the premier.
As the world’s preeminent power, the U.S. must take the lead on many issues, or no other country will step in. But we can do a better job of matching means to ends—prioritizing objectives, building alliances, and picking our battles more carefully. We should want China to play a bigger, more responsible leadership role in international groups like the World Trade Organization and in supporting the global economic system that it has benefited so much from. China should act as a leader and embrace higher standards: opening its markets and reducing its greenhouse gas emissions, for example. We differ with China on just how big and how responsible its role should be. We think China’s sheer size and scale—whether measured by GDP, trade, or carbon emissions—should help determine its responsibilities. China takes the view that it remains a poor country, with a low GDP per capita, and therefore deserves more leeway.
We should be pragmatic and prepared to make concessions or compromises to encourage the Chinese to take a more prominent role. This was the Bush administration’s approach. In November 2008 President Bush convened world leaders to deal with the financial crisis. The severity of the challenge required the participation of more than just the developed nations of the G8. We knew that if China agreed to work with us, other developing nations would, too. We faced opposition from traditional G8 powers, but China was eager to sign on, and other countries followed: the G20 provided important support during the crisis and has become the preeminent forum for consultation and cooperation on the world’s economic system.
Similarly, we overcame objections to prepare the groundwork for China to join the Inter-American Development Bank as a donor country in 2009—15 years after China had first expressed interest. Joining gave China greater legitimacy in Latin America, and I believe that having China work with the region’s biggest multilateral development bank will encourage its companies to observe more stringent social and environmental safeguards in a region vital to U.S. interests.
China is steadily building linkages via trade and investment throughout the world, betting that these will increase its influence as it pursues its economic security and foreign policy ambitions. The U.S. government must step up its game and compete with China from a position of strength. We should reassert our status as a Pacific power, reinforcing our long-standing economic ties with countries in that region. Closer to home, we should build on the success of the North American Free Trade Agreement to work with reform-minded governments like those of Mexico, Colombia, Chile, and Peru to free up trade, create greater economic integration, and enhance regional stability. All except Colombia are among the 12 nations currently negotiating the Trans-Pacific Partnership (TPP) trade pact.
Nothing will get Beijing’s attention and cooperation more than progress on the TPP; its appeal to Pacific Rim countries is one reason the Chinese have warmed to the prospect of negotiating a Bilateral Investment Treaty with the U.S. The TPP agreements will be difficult to complete unless the U.S. makes them a top priority on which the president is prepared to expend domestic political capital. I would hope China will one day seek to become a member of the pact, with its ambitious high standards for trade, investment, and environmental protection. China is more likely to make the reforms necessary to join the TPP when it recognizes the danger of being excluded from it.
In recent years, China has taken the initiative in the developing world, making deep investments in sub-Saharan Africa, among other areas. African countries want us to be more than a donor of aid—they want our capital and know-how. We should promote policies that make it easy for our businesses to provide both. Unlike China, our government doesn’t sponsor or back the building and financing of infrastructure abroad; many developing countries want this, so it is important that the U.S. government support the multilateral development banks that finance infrastructure. We should be willing to provide them with more funding as well as creative ideas to leverage this money with private sources from the U.S. so that our multinational companies can contribute more fully to building infrastructure with the highest environmental standards and best business practices. At the same time, we should not reflexively oppose China’s efforts to lead a new multinational initiative such as the fledgling Asian Infrastructure Investment Bank. We should accept the invitation to work with the bank, press for the adoption of high standards, and encourage the multilateral banks to do the same. We should also look to partner with China on some major projects in the developing world.
Rather than trying to persuade the Chinese to adopt our approach to everything, we might be better off devising new policies together—or recasting older policies in new, fresh terms. The U.S. and China don’t always need to do things jointly, just in mutually beneficial ways. The U.S. cannot “fix” China’s growth model any more than the Chinese can “fix” our fiscal problems. But separate U.S. and Chinese efforts to reform and rebalance our respective economies would put the two countries on a more complementary footing.
The most fruitful negotiations in the SED came after we found innovative ways to collaborate on solutions to shared problems. During the scare over tainted Chinese food products in 2007, then health and human services secretary Mike Leavitt negotiated to get U.S. food safety inspectors in China by allowing the Chinese to put their own in the U.S. Mike’s solution gave the Chinese a face-saving win that enabled them to continue exporting goods while helping protect our citizens from unsafe food. The Chinese were also able to improve their own inspection process by learning firsthand how we do things.
We should apply this approach to other areas. As the world’s biggest users of energy and emitters of carbon, the U.S. and China ought to work to eliminate global trade barriers and tariffs on all environmental goods and services and collaborate on the next generation of clean energy products. The U.S. EPA could help the Chinese Ministry of Environmental Protection clean up China’s dirty air. I also favor setting up a joint U.S.-China fund to commercialize next-generation technology in such areas as carbon capture and sequestration and energy storage.
The Chinese are famous for rigorous scholarship. True to that heritage, they do their homework. Mao Zedong once called Deng Xiaoping a walking encyclopedia, according to Ezra Vogel’s magisterial biography of Deng. I can’t recall a single Chinese business executive or government leader right up to the top who didn’t come to meetings thoroughly prepared. They expect no less from us.
Combining thorough preparation with a consensus-driven system of decision making leaves the Chinese more uncomfortable than most with last-minute changes or operating on the fly, particularly in areas that involve difficult or complex issues or clear differences. It makes sense not only to avoid surprises in negotiations but also to cooperate on contingency planning for events beyond our control that could put us at odds with each other. North Korea is a case in point. We share some positions but disagree fundamentally on others. Neither country is happy that Pyongyang has nuclear weapons. Its erratic and belligerent behavior frustrates and angers the Chinese. But it’s hard to imagine that Chinese strategists are enthused about the prospects of a reunited Korea allied to America with our troops stationed across from China’s northeastern border. We, on the other hand, have a security treaty with South Korea and a strategic interest in its strong and stable democracy. A contingency planning discussion about North Korea that could minimize the likelihood of conflict and provide a road map for stability on the Korean peninsula would have the added virtue of building trust between the U.S. and China.
At the same time, we should always be on the lookout for openings or potential paradigm-shifting events that could lead to a breakthrough in our relations. The key is to be opportunistic, creative, and unafraid to float new ideas or to grasp unanticipated opportunities, as the Bush administration did during the financial crisis in shifting the center of global economic discussions from the G8 to the G20.
Facts, not wishes or dreams, should direct our dealings. China is very different from the U.S., and we cannot be guided only by the understandable desire that it become more like us. We need to know as much as possible about what is going on inside China and be self-confident and realistic enough to focus on what is doable.
The diffuse, behind-the-scenes decision making of a one-party state coupled with low transparency and a lack of ordinary press freedoms makes China particularly opaque. Many of the country’s leaders, like Wang Qishan, have made a study of the U.S., and some have even gone to school here—as have any number of the children of the elite. Many speak English. In general, we lack a similar familiarity with China. There are plenty of China policy wonks in the U.S., but one needs to find advisers who know what can realistically be achieved and who are nimble enough to jump on openings when political pressures, priorities, or public sentiments shift.
I have been fortunate to work with superb colleagues who truly understand China. Knowing that Chinese citizens were increasingly angry about environmental damage and that the government wanted to improve energy efficiency helped my team anticipate that China would be receptive to a proposal for the Ten-Year Framework for Cooperation on Energy and Environment, which we signed in 2008. The Obama administration similarly capitalized on China’s growing environmental concerns to reach its landmark agreement on climate change with China in 2014. That agreement was closed thanks to some excellent work outside the formal S&ED structure by John Podesta, counselor to the president, as well as through the involvement of President Obama himself on the margins of the Asia-Pacific Economic Cooperation meeting in November 2014 in Beijing.
The simple truth is we will deal most effectively with China—and other nations—from strength, not weakness. For most of the post–World War II period, our strength and resolve were never in question. This is no longer the case. While the U.S. economy remains the biggest, most innovative on earth, we face two critical, defining challenges to our continued preeminence: our long-term fiscal situation is unsustainable, and our growth rate has been persistently anemic, exacerbating wealth and income disparities in our society. In the past decade we have seen just one year with a real GDP increase greater than 3 percent. We need to grow much faster to solve our fiscal problems and to create more and better-paying jobs.
Debt is our number one enemy. Our national debt now stands at just over $18 trillion, or $56,000 for every single American citizen. But when it comes to devising solutions, our government has proven to be dysfunctional, when it is not feckless. We need to make policy changes to restore our economic competitiveness or we will be far less able to lead from strength or by example. What nation will look to us as a model worth emulating? What nation will feel compelled to deal with us on our terms? I saw this up close when our economy was on the brink during the 2008 financial crisis: my views on reform didn’t carry the same weight with Beijing that they once had. It is difficult to argue for market liberalization when our financial system is in disarray and our economic house is out of order.
We must restore fiscal sanity to the way we manage our affairs—and soon. The longer we delay, the greater the reckoning will be. We need to do this while maintaining a strong military presence globally. This is a difficult, complex challenge, but we must meet it: there is no historical example of a nation that ignored its fiscal difficulties and was able to maintain its status as a global power for long. In the final analysis, our self-induced weakness is more of a problem for us than is China’s rise. We must take the long view and work to reinvigorate our economic prowess. We will advance our cause further and faster when we are once again comfortable projecting strength economically, militarily, and diplomatically. At the risk of sounding utterly simplistic, once we have dealt with our own problems, we will find it far easier to deal with China.