Bridging the trust deficit in US-China ties

Chinese President Xi Jinping’s state visit to the United States last week took place amid great uncertainty and heightened tensions in US policy toward China.

The relationship between the two largest economies and two biggest military powers, arguably the world’s most important, could be at a tipping point. Mr Xi’s visit marked a major juncture in their ties. Despite positive speeches and glad news of White House fact sheets, there are few signs that Mr Xi is altering his nationalist economic policies biased towards creating “national champions”, and using opaque, discriminatory legal and regulatory policies that complicate life for US investors. Nor are there indications that Beijing is rethinking its assertive foreign policies that challenge the US posture in East Asia.

Over time, Mr Xi’s success in implementing sweeping market reforms aimed at changing China’s economic model from an investment- and export-driven one to an innovative, consumer-driven and service-oriented one may be critical in shaping Beijing’s economic and foreign policies.

Many of the assumptions that have guided US policy on China since US President Richard Nixon’s visit in 1972 and still employed by the Obama administration are being called into doubt by US businesses as well as strategic analysts amid rising Chinese nationalism. Concerns over cybersecurity, Chinese techno-nationalism, difficulties for US businesses in China as well as China’s assertive posture in the South China Sea pose challenges on US policy toward China.

Despite the concerns, though, agreements on cybersecurity, a Bilateral Investment Treaty and climate change appear to have tamped down US anger and moved the relationship towards a relatively more stable path.

ISSUES clouding TIES

The economic relationship is key, as demonstrated by the remarkable array of top chief executives gathered in Seattle to meet Mr Xi. By all accounts, he was impressive, addressing many US concerns about China’s direction.

Both sides sought to reassure the other. The White House welcomed Mr Xi with a 21-gun salute and red carpet treatment usually reserved for US democratic allies, a recognition Mr Xi has sought for China as a great power. In his speech and meetings in Seattle, Mr Xi emphasised that “opening up is a basic state policy of China” and pledged to implement reforms to give the market a “decisive role” and to “protect the legitimate rights and interests of foreign investors”.

Arguably the most contentious issue facing the two leaders is cybersecurity. The two countries have markedly different views of the Internet: The US focus is on access, and China endorses “cybersovereignty” and its Great Firewall to control access.

Massive cyberespionage of the US Office of Personnel Management, hacking information on 21 million current and former US officials, and the cybertheft of intellectual property belonging to US firms reached the boiling point such that President Barack Obama was gearing up to issue sanctions against Chinese companies for benefiting from cybertheft of intellectual property rights.

This threat led to unprecedented closed-door negotiations between top aides to Mr Xi and US officials including US Attorney General Loretta Lynch and FBI Director James Comey. These talks appear to have paved the way for a common ground achieved at the summit.

The agreed formulation is that “neither country’s government will conduct or knowingly support cyberenabled theft of intellectual property, including trade secrets or other confidential business information, with the intent of providing competitive advantages to companies or commercial sectors.” In addition, Mr Xi and Mr Obama agreed to create a Cabinet-level mechanism and a hotline to address concerns. Both pledged to cooperate in creating a global code of conduct for cyberscecurity.

Underscoring lingering scepticism that China would stop doing what it insists it has never done, Mr Obama questioned if words would be followed by actions. Nonetheless, the agreement marks the first time for such a commitment from Beijing and, if implemented, could be a breakthrough.

Cyberissues are among the larger concerns over the economic relationship, which totalled US$590 billion (S$842 billion) in two-way trade last year and in which China holds US$1.2 trillion in US Treasury bonds. In pre-summit meetings in Seattle with several dozen leading CEOs, Mr Xi heard complaints about deepening obstacles facing foreign businesses in China, as reflected in comments from US Commerce Secretary Penny Pritzker: “We — and our companies — continue to have serious concerns about an overall lack of legal and regulatory transparency, inconsistent protection of intellectual property, discriminatory cyber and technology policies, and, more generally, the lack of a level playing field across a range of sectors.”

Mr Xi and Mr Obama announced progress on the Bilateral Investment Treaty that has the potential to strengthen the key, yet beleaguered economic pillar of the relationship and revive waning US business enthusiasm. Talks had stalled as each side offered “negative lists” of items to be excluded. These lists can wall off industries considered strategic such as energy, aviation, telecommunications or access to state-owned industry procurement. Many were on the initial lists, and these appeared to have been pared back, with both leaders pledging to accelerate efforts on the investment treaty.

There were also agreements on finance and development cooperation, including Beijing commitments to the Bretton Woods system as well as on a range of global issues such as wildlife protection, development, infectious diseases, terrorism and non-proliferation — the cooperative dimension of the relationship.

The showcase global issue is increased US-China climate cooperation. Mr Xi’s announced commitment to a cap-and-trade carbon scheme, similar to the European Union’s, is emblematic of the Sino-US climate partnership, as is China’s cooperation in obtaining the Iran nuclear accord. However, the EU system has been problematic, with mismatches between carbon prices and the allowance of permits, leaving prices too low to provide incentives for industry. Implementing reforms would be tougher in China’s much larger and more complex carbon market.

On key security issues, apart from a modest confidence-building measure of improving air-to-air military communication, there appears little progress on maritime issues in the South China Sea. Mr Xi reiterated Chinese claims to the entire area, but offered only a vague pledge not to “militarise” some 800ha of reclaimed land on disputed islets where China has recently built ports and airstrips. There is little indication that the summit will alter US-China strategic competition in the Asia-Pacific and confrontation over China’s maritime behaviour.

A solid single

Mr Obama has described his foreign policy as “hitting singles and doubles”, not home runs — baseball terminology for moving in spurts rather than with big plays. All told, the summit appears to be a solid single. One problem in assessing Sino-US ties is that the bilateral relationship is so massive and intricate that areas of friction cannot be avoided.

The increasingly difficult challenge is to sustain a relationship that is more cooperative than competitive, and not allow one area of disagreement or confrontation overwhelm overall ties — for example, letting tensions over maritime issues lead to sanctions that would undercut more cooperative areas of the relationship.

Implementation of many of the agreements reached at the Xi-Obama meeting can serve as metrics of whether China is moving towards cooperation. If so, China could reduce the trust deficit in Sino-US ties and put it on a trajectory that encourages Mr Obama’s successor in 2017 to also pursue a policy that is more cooperative than competitive. YALE GLOBAL

ABOUT THE AUTHOR:

Robert A Manning is a Senior Fellow of the Brent Scowcroft Center for International Security at the Atlantic Council.