The U.S. and China: Friends or Foes? - Global Trade Magazine
  July 23rd, 2015 | Written by

The U.S. and China: Friends or Foes?

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  • Over the last six years, China has been using more investment to produce less growth.
  • China launched new initiatives to strengthen infrastructure on land and maritime routes.
  • Sino-American competition will lead to deeper integration throughout Asia-Pacific.

China’s economy has slowed down in recent years, down from a stratospheric 11 percent annual average before the global financial crisis to a still-enviable annual rate of seven percent since that time.

Although still growing at a rapid clip, the slowdown has caused dislocations which are being met by changes in China’s policy toward investment and consumption.

The investment piece, concentrating on infrastructure that will increase China’s integration with its Asian neighbors, is seen by some as a setback for the United States and its trade initiatives in the region. But according to a recently-released report from the Brookings Institution, a Washington think tank, China and U.S. aspirations are flip sides to the same coin and will likely to result in greater cooperation between the two.

Here’s the background to the current situation. For the six years up to 2007 China’s GDP grew at an average rate of 11 percent, with investment equaling 41.5 percent of GDP. The current account surplus rose during this period, reaching over 10 percent of GDP. In the six years since the global crisis, the surplus has fallen to the range of two to three percent of GDP. The shortfall in demand was made up by an increase in investment, which has reached more than 50 percent of GDP in recent years.

“China’s growth has been impressive compared to the rest of the world,” notes the report, “but lost in the admiration is the fact that the growth rate has slowed down to around seven percent—down more than four percentage points from the pre-crisis period. Thus, in the recent period China has been using a lot more investment in order to grow significantly more slowly than in the past.”

China’s slower pattern of growth manifests three problems: technological advance has slowed down; the marginal product of capital is dropping, taking more investment to produce less growth; and consumption is very low.

“The real world indicators of this falling capital productivity,” says the report, “are empty apartment buildings, unused airports, and serious excess capacity in important manufacturing sectors.”

China’s response to this changing growth pattern has its external and internal components. Externally, China launched new initiatives, such as the Asian Infrastructure Investment Bank (AIIB), the BRICS Bank, and the One Belt, One Road initiative to strengthen infrastructure on the westward land route through Central Asia and on the southerly maritime routes from China through Southeast Asia to South Asia, Africa, and Europe.

The domestic response to China’s over-capacity problem is a set of reforms to rein in wasteful investment, increase innovation and productivity growth, and enhance consumption.

“China’s initiatives in Asia are seen in many quarters as a setback for the United States,” says the paper. “The U.S. government contributed to this narrative through its efforts to discourage allies from joining the new AIIB. In the end, major American allies, such as the United Kingdom, Australia, and South Korea, did join the Chinese initiative, and Japan is seriously considering becoming a member.” But all this is likely to be a temporary setback for the United States, according to Brookings.

The main U.S. economic initiative in the Asia-Pacific—the Trans-Pacific Partnership (TPP)–seems likely to be completed by the end of 2015. Major economies in Asia, such as Australia, Singapore, South Korea, and Vietnam want to be part of both Chinese initiatives, the AIIB and the One Belt, One Road, and the U.S. effort to reduce trade barriers.

“These different efforts are in fact complementary,” says he report. “The kind of infrastructure financed by the Chinese initiatives is the ‘hardware’ of trade and investment, necessary but not sufficient to deepen integration. TPP, on the other hand, represents the ‘software’ of integration, reducing trade barriers, opening up services for trade and investment, and harmonizing various regulatory barriers to trade.”

The competing initiatives of China and the United States carry the risk of regional blocs and a disintegration of trade, the report notes. “But it is more likely,” the report concludes, “that Sino-American competition will lead to strengthened institutions and deeper integration throughout Asia-Pacific.”