Interdependence of Chimerica

Sino-US trade relationship is unconventional in many ways. It has been shaped during the past 40 years, as China seized the opportunity of the global industrial shift through its reform and opening-up, a process that relied on the framework of the World Trade Organization, driven by technological progress and improvement in the means of transportation and shipping. This paradigm had a profound impact on the emergence of China as the global center for manufacturing.

Sino-US trade differs significantly from any other bilateral trade relations in history. Unlike the Cold War period when the world's two largest economies, the United States and the Soviet Union had practically nothing to do with each other, China and the US today are closely intertwined in the global supply chain and value chain. There is practically a symbiosis between the two economies in multiple areas: the financial and investment sector, trade in goods and services, flow of capital and so on.

Compared to US-Soviet relations, which are classic cases of competition between two great powers that were isolated and independent from each other, Japan-US trade is marked by competition between allies. Even as it vied with the US for global economic dominance, Japan still counted on its rival to safeguard its national security. Hence, the then second-largest economy was never truly in a position to take an adversarial or confrontational approach against the US.

Sino-US relations are unconventional from this perspective. The "new Cold War" narrative and the decoupling argument both view global politics as a zero-sum game and are far from reality.

As two independent nations moving in tandem, the only two economies with over $10 trillion in GDP and the world's two biggest manufacturing powerhouses, China and the US are nevertheless connected through the global value chain and supply chain. This interdependence has led to the coining of the term "Chimerica", which attempts to capture the symbiotic process that is the bi-national economy. Therefore, decoupling, even partially, would severely hold back global development. Hence, the US and China must get back on track, and resume a rational and constructive partnership. The phase one trade deal is a case in point that illustrates the objective need for collaboration on both sides in this regard.

The Sino-US trade imbalance is deeply rooted in the context of globalization and has many structural causes. China's trade policy and exchange rate policy are not the culprits. The true cause of the imbalance lies in the structural differences between the two economies and the vertical specialization that has occurred as a result of globalization. As a developed country, the US has clear comparative advantages in international trade and investment as it controls high value-added segments such as patented technology, core components and R&D. The US trade deficit is a product of its economic structure. The US is a highly mature economy dominated by the service sector and the high-tech, and as most of the low－to middle-end products are manufactured elsewhere, the US has no choice but to rely on imports. When it comes to trade in services, however, the US has been running a surplus with China in recent years. There is a growing Chinese student population in the US; US-based financial institutions and insurance companies are busy expanding their presence and customer base in China. These interactions have provided US companies with enormous profits and market presence, and Chinese students, patients and customers have, in turn, benefited from high-quality services. These activities facilitate the balanced and healthy growth of both economies and represent a win-win approach.

If there is one thing that has been made clear by the trade war, it is that both countries are now fully aware that there is no going back. It takes time to build a rational and constructive relationship between the two great powers undergoing changing circumstances. Currently, egged on by the conservative and protectionist, the US sees China as a major strategic competitor, and the trade conflict with China is an externalization of this view. On the other hand, trade conflicts have escalated as a result of the different development stages, development paradigms and economic systems in both countries.

It would be unreasonable for the US to expect the trade talks to resolve all major issues between the two countries. Achieving an outcome in just a few months on a variety of issues including tariffs and non-tariff barriers, investment, market access, agriculture, services, intellectual property protection, technology transfer, exchange rate management and enforcement mechanisms requires herculean efforts, even though the two countries have already gone through multiple rounds of Strategic and Economic Dialogue, and Bilateral Investment Treaty talks. It serves the US to recognize that the issues which are structural in nature have been years in the making, and that it is unrealistic to expect a definitive answer in the short run or the solution of all major issues and concerns through trade talks alone.

China has effectively coped with the impact of the trade war. As the Chinese goods subject to tariffs have a growing number of export destinations, there are many options available were the conflict to continue. In particular, as China invests, builds industrial parks and contracts projects in countries participating in the Belt and Road Initiative, China is better positioned to expand its presence in these markets and leverage the potential of trade. China's self-confidence in the trade war also stems from its competitiveness in trade in goods. As the world's largest manufacturing hub with a complete industrial system and the world's largest goods trader, China has many options when responding to challenges from the US, which includes tariff-related countermeasures and import substitution for US products, just to name a few. Finding a new path and development paradigm for Sino-US trade requires a mix of Chinese and Western thinking. Even as the Sino-US relationship takes a decisively competitive turn, it remains necessary to find and commit to a path of constructive collaboration given the unconventional nature of the ties between the two superpowers. As constructive working relationship is in the interests of both countries and the world at large.