The Sino-American trust deficit

The recently concluded Strategic and Economic Dialogue (S&ED) between the United States and China was a major disappointment. It lacked strategy at a time when both countries face formidable challenges on many fronts. And what passed for dialogue was a series of speeches and tightly scripted talking points. Most significantly, it failed to address an increasingly corrosive trust deficit that poses the most serious threat to Sino-American relations in 25 years.

DARK CLOUDS OVER CYBERESPIONAGE

Conditions were tough heading into the talks. The US Treasury was complaining yet again about the Chinese currency, which had depreciated by 2.4 per cent against the dollar in the first half of this year after having appreciated by 37 per cent over the previous eight-and-a-half years. The US State Department and China’s Ministry of Foreign Affairs were engaged in a war of words over mounting territorial and sea-lane disputes in the East and South China Seas.

However, the darkest clouds were on the cyber front. Two months before the S&ED, the US Department of Justice indicted five officers of the People’s Liberation Army (PLA) on 31 counts of charges ranging from computer fraud and hacking to identity theft and economic espionage. In response, China suspended its participation in bilateral military exchanges on cyberthreats. Meanwhile, revelations of the pervasive scope of US cyberespionage activities reverberated from Capitol Hill to Berlin, giving rise to legislation aimed at controlling America’s largely unchecked National Security Agency (NSA) and casting a pall over the all-important US-German relationship.

Charges and countercharges on the cyber issue have focused primarily on motives. The US has been quick to distinguish between commercial and military espionage, but for China, this distinction rings hollow.

Chinese officials see little difference between the cyberthreat posed by the NSA and that posed by the PLA, especially given that America’s cyber-intrusions have also been aimed at foreign companies, trade negotiators and international leaders — all of whom are directly or indirectly engaged in commercial activity. In the end, moral hair-splitting is less important than the blame game itself — a visible manifestation of the deepening bilateral distrust wrought by a destructive phase of Sino-American codependency.

MUTUAL BENEFITS OF INVESTMENT TREATY IGNORED

Against this backdrop, it was hardly surprising that the S&ED produced so little. Cyber exchanges between the two militaries were not restarted and negotiations on a bilateral investment treaty — a mutually beneficial rules-based framework that would go a long way in opening up the markets of both countries to increasingly globalised US and Chinese companies — were particularly disappointing. A year ago, there was an encouraging breakthrough on the investment treaty; this year, there was a setback as the launch of explicit negotiations over which industries would be exempt — the always contentious “negative list” — was deferred until next year.

The problem with kicking the can down the road is that the road is leading directly towards the coming US presidential election cycle — a time when the debate over China always intensifies. Add to that a polarised and dysfunctional Congress, and the time frame for concluding a US-China investment treaty is beginning to appear eerily reminiscent of the decade-long process that was required for Chinese accession to the World Trade Organization in 2001. That would be bad for both countries, as each now faces urgent economic challenges.

I was in China during the week following the S&ED, and official circles were abuzz about the new growth opportunities of services-led rebalancing. There was also clear recognition of meaningful progress on this front, with China’s tertiary sector (services) growing more rapidly than its secondary sector (manufacturing and construction) for the third year in a row — sufficient to make services the economy’s largest sector for the first time.

And there is plenty more to come. At around 47 per cent of gross domestic product, China’s embryonic services sector remains well short of the 60 to 65 per cent share that a middle-income economy typically possesses.

At the same time, officials understand that further progress towards a services-led economic rebalancing will stall without the talent, systems, experience and scale of global multinational services providers. And who better to provide what is needed than the US — the world’s largest and most competitive services economy. Given that the US has experienced yet another year of weak performance, one might have thought that this growth opportunity would have resonated on the American side of the S&ED table.

The failure of US and Chinese leaders to recognise the mutual benefits of an investment treaty is disturbing. Going slow on such an obvious “win-win” reform suggests either that each country attaches little importance to its growth imperative or that both are unwilling to address that urgency by coming to grips with the increasingly insidious trust deficit that divides them.

I suspect that it is the latter. Leaders on both sides understand their countries’ growth challenges. But neither seems willing to address the intensification of distrust that has arisen during the past year from the cyber issue.

Here is where the blame game belies the obvious: Both countries hack and both have lost control of their hackers. Moreover, hacking itself is growing at an exponential rate in today’s interconnected world. In other words, the blame game is pointless.

Acceptance of shared responsibilities in coming to grips with cyber tensions is essential if the US and China are to re-engage on the other geostrategic and economic challenges that they both face. The failure of last month’s S&ED was a red flag and yet another indication that the bilateral relationship is headed in the wrong direction. Staying the course is not an option. PROJECT SYNDICATE

ABOUT THE AUTHOR:

Stephen Roach, a faculty member at Yale University and former chairman of Morgan Stanley Asia, is the author of Unbalanced: The Codependency Of America And China.