Lopsided Chinese-US relations

Chinese and Americans get along well, but their leaders are antagonistic

Are the United States and China drifting apart or growing closer? The answer depends on whether one places trust in the judgment of everyday decisions of individuals or in the wisdom of scholars and actions of states.

In tracking the behavior of each country’s citizens, the US-Chinese relationship looks large, lively and fundamentally healthy. Economic ties continue to grow quickly. Two-way trade has risen from $375 billion in recessionary 2009 to nearly $600 billion last year, and Chinese investment in the US doubled during the last three years.

People-to-people ties, though less frequently studied, are rising even faster than the trade figures. Just five years ago, 67,000 Chinese students were enrolled in American colleges and universities. Since then the total has nearly tripled, hitting 194,000 in 2012. Mandarin language classes are spreading through American elementary schools and high schools. Chinese tourist and business arrivals are growing at an astonishing pace, up from 400,000 in 2008 to 1.5 million and likely to reach 4 million – or 10,000 arrivals a day – by 2017.

Every day, the relationship is endorsed with thousands of individual votes of confidence from intelligent and well-connected young people, tourists and business managers. By this calculation, the future of the US-Chinese relationship is good, its problems manageable, and while the two governments may have little reason to love one another, they have even less to fight.

But the view from the top is more troubling. From this vantage point, the relationship’s troubles are multiplying, as long-established disputes over economics and security merge with one another. Consider a mid-April appeal by several well-placed congressional Democrats, asking the Obama Administration to designate China a “Priority Foreign Country” for intellectual-property violations:

It looks very much as though the Chinese government is stealing our companies’ trade secrets and passing them along to their SOEs, and possibly other Chinese companies. It is difficult enough for our companies to compete with the endless massive subsidies and other industrial policies of the Chinese government, but add trade secret theft into the mix and it is miraculous that our companies are able to compete at all.

The letter was a response to a new controversy in a relationship already troubled by a long list of disputes. In October 2011, the US Office of the National Counterintelligence Executive highlighted economic cyberespionage by governments, particularly those of China and Russia, as “significant and growing threats to the nation’s prosperity and security.” More recently, an expose of commercial espionage published by the Washington-area consultancy Mandiant – complete with names, photographs and malware types, all conducted out of an eight-story People’s Liberation Army building in Shanghai – has solidified Washington’s sense of cyberespionage as a new dimension of risk in the relationship, with at least one arm of the Chinese government accused of acting in a lawless and dangerous way; hence, the representatives’ call for action.

Admittedly, the terms and lists that signal dissatisfaction over trade policies are bureaucratic. In trade law, the use of the term “Priority Foreign Country” used by the US Trade Representative is a close cousin to a US Treasury Department decision to name a foreign country a “currency manipulator.” Both terms originate in a set of elaborations on a longstanding feature of US trade law, known as “Section 301,” dating to 1974 and redesigned in the Omnibus Trade and Competitiveness Act of 1988.

The 1988 act envisioned three annual lists of overseas offenders: “Super 301” for objectionable barriers to American exports; “Special 301” for intellectual-property piracy; and the third, though without a catchy name, for currency manipulation. Such citations would be followed by negotiating programs meant to rectify the problem, backed by implicit if vague threats of some sort of retaliation should talks fail. Priority Foreign Country designations of China in 1992 and 1996, in fact, did launch trade confrontations, complete with sanctions, over pirate factories making CDs and DVDs.

Over time, the naming procedures have faded even as some of the concerns heighten.

Not since 1994 has the US Treasury Department termed a country a currency manipulator. The Super 301 market access lists stopped even earlier. But annual intellectual-property reports remain alive and well.

Last year’s edition placed 26 countries, including on a “Watch List” and 13 – including prominent countries like Israel, Pakistan, China, Russia, Canada – on a higher-tension “Priority Watch List.” World Trade Organization rules do not block naming and may not prevent all possible trade retaliations. And in some cases the naming procedures have been used to launch WTO dispute cases rather than retaliate directly. Nonetheless, until this spring, the last countries to get the Priority Foreign Country stamp were Ukraine in 2005 and Paraguay in 1998. Though WTO rules make retaliatory tariffs harder to impose than in 1988, a PFC listing signals a decision to bring the issue to a head.

So far, it hasn’t happened. When the US Trade Representative published its lists on May 1st, it opted not to give China the Priority Foreign Country title. The report does, however, place China at the top of the Priority Watch List, and linked cyberespionage charges directly to the Chinese government:

Particularly troubling are public reports by independent security firms that actors affiliated with the Chinese military and Chinese Government have systematically infiltrated the computer systems of a significant number of US companies and stolen hundreds of terabytes of data, including IP, from these companies. The United States strongly urges the Chinese Government take serious steps to put an end to these activities and to deter further activity by rigorously investigating and prosecuting thefts of trade secrets by both cyber and conventional means.

The decision puts China on notice that the most significant action is not far away.

Tackling a problem directly can, of course, be helpful. Sometimes simple acknowledgement can settle it or at least reduce its severity. For example, congressional complaints and drafting bills may well have forced US executive-branch and Chinese government attention to currency policy. China’s currency rate did rise by about 30 percent, and for the time being, Chinese surpluses have narrowed and American deficits declined. Likewise, public warnings may suggest to those responsible for cyberespionage that their actions carry a cost.

In a larger sense, though, the controversy over cyberespionage suggests somber trends at the top of government. These are described in 2012 in Addressing Strategic Distrust, a Brookings Institution dialogue written jointly by Kenneth Lieberthal and Wang Jisi. The long-time eminences of Sino-American relations observe that despite 60 official “dialogues,” elaborate economic work-programs, regular presidential summits and consultations, the central feature of the official US -China relations is “that strategic distrust is growing on both sides and that this perception can, if it festers, create a self-fulfilling prophecy of overall mutual antagonism.”

If scholars like Lieberthal and Wang are correct, the cyber-spying clash can be seen as a problem in a long succession of mileposts in the relationship’s long-term deterioration,and if the Mandiant report is correct, one that fuses security-based concerns about Chinese military policy with business-community anger over intellectual property.

Perhaps the broadening of the relationship at the bottom – rapid growth of people-to-people contact, friendships made in grad-school, Chinese investment projects, planeloads of people arriving in Los Angeles and New York – can ease government distrust and slow the erosion of the relationship at the top. Or, more ominously, the opposite could happen. If so, Americans and Chinese alike will find themselves in a more dangerous world.

The writer directs Progressive Economy, a trade and global-economy research programme at GlobalWorks Foundation in Washington, DC.