Wing Thye Woo

Tensions between the United States and China have reached such a high level that the G-7, led by the US, recently changed its objective in its relations with China from “decoupling” to “de-risking.” But the reality is that de-risking, like decoupling, requires the participation of both sides and a common agenda. And while the objective of de-risking may be clear, its substance is not, besides keeping communication channels open.

The first step toward a productive dialogue is to recognise that the interaction among three types of competition, trade, technology and geostrategy, is driving the spike in US-China tensions. To stop this vicious cycle, these three types of competition must be decoupled, and, to the extent possible, the policy instruments applied to each segment must be kept distinct.

Weaponising trade policy to address matters of national security, for example, has only reduced mutual benefits from the economic relationship without easing geostrategic tensions. China banned rare-earth exports to Japan in 2010 over a territorial dispute and restricted a range of imports from Australia in 2020 after the country called for an independent investigation into the origins of COVID-19. Yet, such retaliation was ultimately ineffective.

Likewise, the US ban on exporting advanced microchips to China, a similar form of economic coercion, is unlikely to guarantee America’s technological dominance in the long term unless all advanced economies commit to containing China permanently.

The successful segmentation of geostrategic competition requires that national security not be viewed as a zero-sum game. Efforts to gain strategic dominance over the other party only inflame bilateral tensions and bring about the lose-lose outcome of an arms race. Instead, each country should regard its national security as being adequately safeguarded when there is only a small chance that the other side could achieve victory after a first attack.

Interdependence, Adam Smith’s mechanism for maximising wealth creation, need not make a country less secure. Countries should undertake direct negotiations about force projection against others and conclude security treaties that include arms-control agreements and the creation of buffer zones. Unlike economic coercion, an inefficient instrument because it does not directly affect a country’s capacity to inflict harm (just look at North Korea), an arms agreement is a win-win solution, because it addresses national-security concerns without undermining the economic relationship.

Segmenting technology competition boils down to installing guardrails against the negative spillovers of industrial policy. Every country enacts industrial policies; the US, for example, has its recent Inflation Reduction Act, the CHIPS and Science Act, tax credits for investment in research and development, National Science Foundation grants, and Defense Department procurement practices. The fact is that only a handful of countries have implemented industrial policies successfully, and even then, most of their industrial policies fail to produce the desired results.

The problem with industrial policy is that its effects can be felt beyond national borders. When a small country’s industrial policy fails, it has only hurt itself. But the failed industrial policy of a large country hurts itself and its trade partners during the period of implementation by lowering the price and volume of the targeted product traded in the world market.

One way to decrease the excessive risk-taking of large countries’ industrial policies is to conclude a new World Trade Organisation agreement banning “unfair industrial-policy practices”, just as the organization currently bans “unfair trade practices”. A starting point for global negotiations would be the duration of industrial policy.

The most effective industrial policies focus on the supply side: a country will achieve better results by strengthening its own capabilities than by trying to impede innovation elsewhere. The US, for example, would do better if it focused primarily on improving STEM (science, technology, engineering, and mathematics) education in high schools, incentivizing domestic firms to pursue R&D, and attracting foreign talent, rather than on hindering trade, investment and academic engagement with China.

After decoupling geostrategic, technological and trade competition, trade-policy instruments could be used solely to expand trade. That could mean imposing countermeasures to discourage protectionist tariffs and creating WTO-plus trade areas like the Regional Comprehensive Economic Partnership and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.

The US and China will need to rebuild mutual trust before they can forge new agreements on arms control and industrial policies. Even if both countries are ready to take a leap of faith, the first side to make a move faces the risk of rejection by the other, which would then almost guarantee a serious domestic political backlash.

The Association of Southeast Asian Nations (ASEAN) could mitigate this risk of “unrequited love” by inviting China and the US to participate actively in the group’s projects on economic development, environmental protection, and climate action. All are designed to achieve the UN’s 17 Sustainable Development Goals and the Paris climate agreement’s target of limiting global warming to 1.5°C.

The US and China also committed to these objectives in 2015, so accepting ASEAN’s invitation would be in line with their national interests and international obligations. US-China cooperation would be virtually certain to succeed, because pooling the resources of China’s Belt and Road Initiative and the G-7’s Partnership for Global Infrastructure and Investment would create huge economies of scale. Successful cooperation would lead to greater bilateral trust, setting the stage for negotiations on separating geostrategic competition and technology competition from trade competition.

Economic interdependence does not undermine security; if anything, decoupling is far riskier. Rebuilding relations may test our creativity, but achieving greater security and prosperity for all is surely worth the effort.

Wing Thye Woo, vice president for Asia at the UN Sustainable Development Solutions Network, is Distinguished Professor Emeritus of Economics at the University of California, Davis and a research professor at Sunway University in Kuala Lumpur and Fudan University in Shanghai. Copyright: Project Syndicate, 2023.

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