U.S.-China Confrontation Runs Counter to Both Countries’ Interests

A tourism campaign is launched in eastern China’s Suzhou City in October 2016 as part of the China-U.S. Tourism Year.

At the present stage of globalization the economic relations between China and the U.S. are critical. The U.S. and China are the world’s first and second largest economies, accounting for 39 percent of the world economy at current exchange rates. They are hence the world’s first and second largest trading nations.

In summary, China and the U.S. combined are sufficiently powerful to play a decisive role in the world economy and in world trade. Approaching the question of how to achieve optimum development of world trade and investment, therefore, necessitates discussions between the U.S. and China.

Furthermore, it is easy, from the point of view of economic fundamentals, to understand and build on the framework of mutually beneficial economic trading relations between China and the U.S. due to the two economies’ different features.

China is the world’s largest “upper middle income” economy, while the U.S. is the world’s largest “high income” economy. Consequently, as regards medium technology items, China enjoys the combination of a comparable technological level but with much lower labor costs which the U.S. cannot match. Therefore, China has a decisive competitive advantage in medium and medium-high technology products. If, rather than importing these medium technology products from China, the U.S. were to manufacture them, the result would be substantially higher prices for U.S. consumers and producers, and consequently lower U.S. living standards and U.S. international competitiveness.

But, equally, the U.S. has competitive advantages over China as regards high technology. China’s per capita GDP, which reflects the contrasting productivity of the two economies, is only 27 percent of that of the U.S. measured in PPPs – the most appropriate unit for long-term comparisons. Even with the best economic policies, therefore, it would take China several decades to equal the U.S.’s level of productivity. In other words, the U.S. will continue to enjoy a comparative advantage over China as regards high technology products for several decades to come.

The “win-win” outcome of economic relations between China and the U.S., therefore, is clarity and stability in both the short and long term. China will continue to be able to produce medium and medium-high technology goods more competitively than the U.S., which will meanwhile enjoy a competitive advantage in the field of high technology products.

The two economies’ fundamental complementarity accounts for the dynamism of trade between China and the U.S. That the U.S. is China’s single largest export market is well known. But since 1999, China’s share of total U.S. exports has increased 5.3 percent, whereas that of the EU declined by 2.8 percent and Japan’s by 4.6 percent. In short, the growth of U.S. exports to China is much more dynamic than it is to either the EU or Japan. Simultaneously, China’s share of total U.S. imports rose by 11.2 percent, while that of the EU fell 0.2 percent, and Japan’s by six percent.

Finally, from a geopolitical standpoint, there is no call for any military confrontation between the U.S. and China. No significant force on either side envisages a nuclear war between the U.S. and China, because that would result in the devastation of both countries. As the U.S. is protected on one side by the Pacific Ocean and on the other by the Atlantic, a conventional military invasion of the U.S. is also inconceivable.

Having analyzed the mutual benefits of “win-win” relations for China and the U.S., I next examine the consequences for the U.S. population of any U.S. decision to confront China, that is, to progress from verbal to physical “China bashing.”