US-China relationship in need of reparation

According to Yellen, “China is undercutting American companies by dumping products, erecting barriers, and giving illegal subsidies to corporations. It is stealing intellectual property and engaging in other practices to give it an unfair technological advantage, including forced technology transfer”.

"A transaction that benefits one US producer does not necessarily make the US economy better off.”

Yellen’s responses to the senators’ probing may have reassured Americans still coming to terms with the new bipolar world - but was it an entirely fair characterisation of China’s behaviour?

China’s subsidised or “dumped” steel may have put the US steel producers under pressure but it was a gift to US steel-using manufacturers. It increased their competitiveness. Former president Trump’s tariffs, on the other hand, are estimated to have cost between 170,000 and 300,000 US manufacturing jobs. More broadly, it is estimated that for every steel worker assisted by the Trump tariffs, 75 have been hurt by them.

And by the way, “dumping” - selling goods and services for less than their full cost of production - occurs commonly within the US economy and is welcomed by governments and consumers as a natural consequence of competition. You see it when airlines sell their surplus seats at deeply discounted prices or oil companies with unanticipated spare capacity engage in petrol price wars.  

Dumping is a more accurately an emotive description of price competition, typically used by politicians to justify the protection of vested interests at the expense of the wider community.

As for the “forced” transfers of technology, in most cases they seem to have been voluntary. US companies have agreed to China’s requirement they take in a local partner in return for access to the Chinese market. Presumably, their agreement was based on their belief they will be better off from that exchange.

Global prosperity

However, economists point out a transaction that benefits one US producer does not necessarily make the US economy better off. There may be other US producers using similar technologies that suffer as a result of the technology transfer.

That being said, the transfer of technology has long been cited as an important benefit of foreign investment. And the increased global prosperity that has resulted from the dispersion of US capital and technology has benefited the US.

Also, China is not the only country to insist that foreign investors take on local partners. It is a common practice.

Obviously, there are technologies the US does not want to share for reasons of national security. But it would be unfortunate if a legitimate policy to protect US national security morphed into a general assault on China’s economic growth.

Inevitably there will be pressure for it to do so because of the dramatic growth of defence spending in line with China’s economic growth. China’s vulnerabilities would make it all the more tempting. But a policy of impeding China’s growth also could end up being costly for the West.

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Relative power

As with people, countries’ behaviour tends to be shaped by their roles and responsibilities.

An example of that is the US itself. Economist Anne Krueger has documented how the US enthusiasm for free trade has changed as its relative power has declined.

At the end of World War II, the US was the dominant world economy, and the only country with the financial strength to lead the reconstruction.

The benefits of free global trade and economic integration were obvious to America’s politicians. The consequence of the new global order established under the auspices of the US was the most prosperous quarter of a century in history.

However, as Europe and Japan were rebuilt, and America’s relative economic importance declined, so did its enthusiasm for free trade.

Since the 1970s, Krueger says, US policy has become increasingly ambivalent and contradictory. While it has continued to support multilateral trade liberalisation, at the same time it increased its use of restrictive trade measures.

“In rhetoric, much of the discussion has used catch-words such as ‘free trade but fair trade’ to imply that intervention is warranted if other countries are ‘unfair’ traders,” Krueger says.

In the 1980s US official policy shifted to a “two-track” approach in which America’s support for multilateral trade reform was coupled with so-called free trade agreements with particular countries.

This relationship between behaviour and responsibility can work in both directions. It would be surprising if China’s attitudes towards the rest of the world did not change as its middle class grew.

Assertive middle class

President Xi may have raised his domestic popularity by increasing China’s military strength and foreign-policy assertiveness. But military parades and aggressive foreign policies are not middle-class enthusiasms.

In the West, the middle-class is more concerned with the economic success of the foreign countries on which their prosperity depends.

The middle class may not assert itself in China in quite the same way it has in Western democracies but it will assert itself. If history is a guide, the Communist Party will be increasingly middle class because high levels of education are needed to run a high-income economy.

Former senior US State Department officials Kurt Campbell and Jake Sutherland put it this way: China faces the “ultimate reality”, which is that it is very hard to have a highly dynamic, market-based economy with a middle class – while having a Leninist, centrally-run political system.

In the meantime, if the geopolitical analyst, Fareed Zakaria, is right, the US will face its own ultimate reality.

As Zakaria explained in his 2020 Lowy lecture, Washington will confront “a new kind of bipolarity in which you trade with China, you try to oppose it on human rights issues, you separate from it on certain technological issues, and join with it on others.”

“There will be hedging, deterrence, containment, co-operation, trade and partnerships all happening at the same time.”

That is likely to require a more nuanced approach to US-Chinese relations than the one Yellen sketched out at her confirmation hearing.

Alan Mitchell is a bluenotes columnist and former economics editor at the AFR