U.S.-China Relations, an Update

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 Susan Shirk previously served as deputy assistant secretary of state (1997-2000), responsible for U.S. policy toward China, Taiwan, Hong Kong and Mongolia. She answers questions about U.S.-China relations, Chinese foreign policy and the Chinese economy.

Chinese foreign policy under President Xi has arguably been more robust than under President Hu. Is this a reflection of personality types or is it a result of China having reached a position of economic and military strength such that it can now be more unyielding?

As a rising power that’s improving its economic, political and military capabilities, it’s natural that China would have ambitions to exercise influence and leadership regionally and globally. So I think it’s a combination of increasing capabilities and Xi Jinping’s own aspirations for China. There is no reason for the United States to fear this or to see this in zero-sum geopolitical terms. If China exercises influence in a way that provides public goods that are welcome by other countries and if it opens economic opportunities to others rather than monopolizing them, then great; we will all benefit from that.

China’s claims in the South China Sea look set to put it on a collision course with the U.S.  Is there a way to resolve the broad issue without armed conflict but which leaves both sides content?

Unfortunately, the disputes over maritime territory and navigation rights are becoming a defining feature of U.S.-China relations. It’s a dangerous situation and it’s not in China’s national interest to elevate the South China Sea issue or other maritime claims above its own national security.  It’s a formula for continued friction with its neighbors after decades of working to reassure them that it’s not a bully. China is subverting that earlier effort to reassure its neighbors that as it gets stronger it’s not a threat to them, and secondarily it’s bringing the U.S. military into the region in a way that appears to be the opposite of what China might have hoped.  So it seems very counterproductive.

It also raises troubling questions about China’s character as a rising power and its intentions. Is its expansive claim in the South China Sea about force projection?   Why is it willing to pay the cost of damaging relations with neighbors and causing them to try to join the U.S. in a coalition to restrain China or to balance China? It seems perverse and counterproductive. This is why the South China Sea is so troubling. It’s not only because the U.S. cares about the South China Sea or the principle of freedom of navigation – it’s because it raises perplexing questions about China’s intentions and character as a rising power.

Some commentators view the U.S. response to the AIIB as a misstep.  Do you think the U.S. should have been more collaborative at the outset?

There is a consensus among the China policy community that the U.S. response was a mistake. It was a mistake because it made us look pathetic and insecure. My view is that China is inevitably going to be more ambitious so it’s natural that it would want to take initiatives and take leadership in certain areas. From the standpoint of the United States, I think we should welcome China’s leadership in economic diplomacy and I would much rather see leadership in economic diplomacy than see efforts in arms races and territorial claims. By and large it was a positive initiative that we should not have reacted negatively to.

Some voices have suggested that One Belt, One Road (OBOR) is a tool for talking up slack in the SOE sector.  A more positive view is that it will help the development of China’s interior and improve its relations with Central Asian states.  How do you view OBOR?

I think it forwards both goals from their standpoint. I see it as one of those economic diplomatic initiatives which can have some positive contributions to public goods in the region beyond China’s borders. If it’s welcomed by China’s neighbors, it should be fine with us; and I don’t think the United States should frame it in a primitive geopolitical competitive framework. The diplomatic objectives are real because China found itself without many friends in its own neighborhood.  This is an effort to cultivate new and friendly relationships, especially in central Asia which is not a region where the U.S. has strong strategic interests. There’s no reason that this should be viewed as a problem from the U.S. perspective. I think the Russians view it as more of a problem because it is their traditional sphere of influence, but right now they are being polite about it in order to maintain good relations with China.

How would you critique the Obama administration’s handling of U.S.-China relations? Where have things not gone as well as you might have expected? 

They have made the appropriate adjustments to these changes in China’s behavior. They have done it in a cool-headed way, not in an emotional way, and with recognition of the stakes involved in retaining a decent relationship with China while also being increasingly willing to impose costs. We saw this with cyber sanctions, and I think that message was communicated loud and clear and actually achieved results.

The more we can cooperate on things, the better. Look at the mutual compromises that were required to handle the penalties the U.S. Commerce Department imposed on the Chinese firm ZTE that had violated our Iran sanctions. Our Commerce Department and ZTE did a really good job at negotiating how ZTE could correct its behavior that involved ZTE firing its top executives and the Commerce Department delaying the penalties while it watched to see if ZTE had cleaned up its act. And that’s in the face of a political environment in the U.S. where, because of the souring of public and congressional opinion on China, it’s not that easy to work things out.

How do you think the next administration, regardless of who is in the White House, will approach U.S.-China relations? Will some changes be inevitable? Will we see increased calls for more “reciprocity” by the U.S. government?

Our efforts to engage China over 40 years, since the Nixon administration, have been successful for both parties. But some things have changed recently in China’s international behavior and in its domestic behavior. First is the priority on maritime territorial issues that damages China’s own national security. Second, the discrimination against foreign firms in the service of building national champions and becoming an innovative power, this after years of being relatively open to foreign companies operating in China. Third is the increasingly repressive political situation that looks like it’s going backwards to Mao-style governance.

These changes call out for some modifications in our approach to China. I think you see the modifications starting already in the Obama administration and I suspect they will continue. It’s basically a tougher approach and a willingness to impose costs if we feel our interests are severely harmed as well as considering ways of applying the principal of reciprocity. We’re not throwing out engagement, and on the global level, on global governance, we don’t really have any big problems. Things are going pretty well and we should just do more of the same.

What role should the business community play in U.S.-China relations? If you think that role is not being realized, why is it?

It would be good for the business community to try to develop some common front in its approach to China.  I understand why they often depend on the U.S. government to defend their interest, but I think a sector-by-sector approach might not be a bad idea. Businesses are competing with one another but they also have some common interests.

American businesses are great models in China for corporate governance and corporate social responsibility; I think they have really had positive impacts. It’s part of our soft power.

The United Kingdom appears willing to placate China in order to win business. Do you think this approach may prove short-sighted?

I was recently in Oxford talking with Europeans about China policy and I got the impression that the tide may be turning.  European firms are just as frustrated with market access problems in China as American firms are. So while on the one hand they would like to attract more Chinese FDI, they are feeling frustrated and resentful at the difficulties that their firms are facing in China. It was interesting that Angela Merkel started talking about reciprocity when she was here [in China] last week.

Several of the European countries, but particularly the U.K., were punished for meeting with the Dalai Lama. What I found unfortunate was the effort to ingratiate themselves with Beijing after being sent out to the diplomatic and economic wilderness because of meeting with the Dalai Lama. That reinforces China’s inclination to leverage its market power in the world to achieve political objectives on its own, but it’s not the way a great power like China should be behaving. So by playing the game you reinforce that.

One outcome of Chinese economic planning is GDP targets, yet many economists see the current target of 6.5 percent as unrealistic.  When do you think China will abandon these targets?

I thought they would have abandoned them way before now. GDP targets are a legacy from Soviet-style central planning and they lead to so many distortions in the economy. The [focus on] quantity of growth is neglecting quality of life issues like environment and health. Focusing on GDP targets gives local officials the wrong incentives for promotion. It was considered a huge step forward to provide a range for the target in the new five-year plan, but I think they ought to just give up the target and let the market determine the growth rate.

At best, China’s commitment to SOE reform seems weak; at worst, the country appears bent on creating state-owned behemoths rather than letting the market allocate resources. Is the government serious about economic reform or is it determined to create a dirigiste state?

In recent days it looks like people in the leadership have different views about economic priorities. There is great worry about a financial crisis and slowing growth; about how you keep the economy growing and create jobs and maintain social stability and middle class support for the Chinese Communist Party. One camp says that China can’t afford to take any risks by major economic reforms at this point – we just have to keep the economy humming along by some forms of stimulus – and another camp says that this approach will increase the debt problem and make matters worse in the long run, so we have to bite the bullet and undertake structural reform.

Pretty much all outside observers of China’s economic policy making are disappointed with the pace of implementation of the Third Plenum commitments. The SOE reform package was very flimsy and not substantial. Important things like fiscal reforms and [changing] the relationship between center, province and locality, which should be a very important part of motivating lower level officials to get behind the next wave of economic reform, just haven’t been done. It’s an interesting paradox because Xi Jinping is supposed to be such a strong leader but he made these big commitments in the Third Plenum that haven’t been fulfilled. It raises questions about how serious an economic reformer is Xi Jinping. Is it really just the opposition of vested interests that’s the problem?

Xi hasn’t taken any actions that are politically costly to himself to achieve economic reform.

He has put his energies more into military reform than economic reform.  But he appears to want the party, not the State Council, to lead the economic reform. Maybe he’s just become a bottleneck because of not having sufficient time and attention to put into it. Another possibility is that he just isn’t that strongly committed to market reform. Right now there seems to be a premium on control across the board.

Looking ahead five years or ten years, what do you think Chinese economic policy makers should be most concerned about?

The quality of growth, quality of life and income distribution. Also, keeping the door open. Deng Xiaoping had such foresight and courage to not just introduce market reform but also to open China to the global economy. And obviously once the walls came down China really took off and that has been hugely beneficial to Chinese economic modernization. The highest priority should be to not start putting walls up again in the service of protectionism and social control.

The growth of a middle class is often associated with calls for greater rule of law. Do you think this will be the case in China, or do you believe that China’s economic and political development trajectory is set to follow a very different path from Western and Asian democracies? 

I do not think China is immune from the imperatives of economic modernization and political change. I don’t think that China is exceptional, and I don’t buy the arguments about scale. I think China is a very large country and should therefore probably adopt a federal form of government; we have other large countries that are federal democracies. If you look at the growth of the middle class, especially in Asia, such as the transformations in Taiwan, Korea and South East Asia, I believe that it means that sooner or later, China is going to experience the same kinds of middle-class demands. We recently observed how the middle class was very upset when the middle-class fellow was abused by the police in Beijing. You’ve got the middle class speaking out about the need for people to have oversight over police.  Also the environmental movement is a kind of middle-class demand for better quality of life and health.  I’m pretty confident that the same pattern will occur in China. It’s slower than we anticipated, for sure, and it’s a really interesting puzzle for social scientists to explain why it’s been slower.  What is it about the nature of the Chinese political system that is so resilient?

[After China’s opening up] people were so busy improving their living standards and were basically satisfied with the government because their living standard was so much better. They weren’t demanding anything more than that.  But now there are a lot of quality of life problems, with the environment, health, education, etc. That’s why Xi Jinping and his colleagues are extremely anxious – because they look out and they see a society that’s been so dramatically transformed over the past 35-40 years and there are no precedents for Communist party rule of this type of open market society.

 Susan Shirk is Research Professor and Chair of the 21st Century China program at UC San Diego. She founded and continues to lead the Northeast Asia Cooperation Dialogue, an unofficial forum for discussions of security issues. She is the author of China, Fragile Superpower and other books.

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