Investment deal can smooth trade ties
Amid the many analyses of and comments on the China-US trade conflict, we have also heard endless strategic debates on whether the United States has begun to engage in "all-round" containment of China. A cool-headed historical and comparative analysis of the issue will help us find the essence of the matter.
Ten years ago, when China was developing at a rapid pace, the main drivers of growth were sectors such as (export-oriented) manufacturing and real estate. As the "factory of the world", China has paid a tremendous environmental and social price for the fast economic development. After proposing the idea of a "harmonious society" in 2004, the Chinese leadership advocated transforming the economic growth model from quantitative to qualitative development to enable China to avoid the "middle-income trap."
The thorny problem of middle-income trap
The middle-income trap is a particularly thorny problem, as only 13 of the 100 or so countries labeled middle-income economies in the 1960s could become high-income countries.
The US' high economic growth rate in the last century and its so-called victorious interventions in Iraq and Afghanistan in the early 2000s not only consolidated its belief in its "imperial identity", but also made other countries believe they were living in a US-led unipolar world. Based on this belief, countries bought large amounts of US bonds and financial products assuming they were safe assets, which not only fetched the US government and financial institutions huge amounts of funds but also prompted the spread of dubious financial products such as subprime mortgages.
And the resultant low-fundraising costs led to expanding consumption in the US, which ultimately resulted in the country's unprecedented reliance on the financial industry, over-consumption and low savings rate to fuel its economy.
Global financial crisis disrupts China's structural reforms
The global financial crisis which broke out in 2008 put tremendous pressure on China, which by then had decided to transform its economic development model. To ease the shock of the crisis, China announced a 4 trillion yuan stimulus package in November 2008, which focused on large-scale public infrastructure construction to expand the productive capacity in such industries as iron and steel, building materials, and coal.
But now Washington is criticizing Beijing for its overcapacity and trade surpluses. From the political and strategic point of view, Washington also believes Beijing is using the Belt and Road Initiative as a tool to compete with the US for global dominance.
But the fact is, in the decade following the global financial crisis, China has not only protected its own economy but also made enormous contributions to global economic recovery while more or less sacrificing its own structural reforms to help the world economy. Therefore, many unintended consequences arose from those emergency responses. And since China never sought to accumulate overcapacity and trade surpluses, there is no reason for any country to accuse it of pursuing hegemony.
US criticizes China even for lending a helping hand
In October 2008, the George W. Bush administration decided to allocate $700 billion for helping US financial institutions and issued large amounts of bonds. China, on its part, reportedly bought $70 billion worth of those bonds in October 2008 itself. Ironically, the US is now criticizing China for lending it a helping hand to overcome its dire financial difficulties.
The rhetoric about decoupling the Chinese economy from the US economy re-emerged last year when the US instigated the trade dispute with China, but it was first heard during the global financial crisis when China first talked about economic self-reliance.
Since the US launched timely operations to rescue its own financial institutions, most of the other countries had immense confidence in the health of the US economy. Also, it was more cost-effective for China to buy US technologies than to develop them on its own. As a result, China's export-driven model for trade with the US has seen no fundamental change.
But structural reforms in the US have not made substantial headway either.
China striving to work out a bilateral investment deal
President Xi Jinping has said that China's reforms have entered the "deep-water zone", which calls for a top-down response and proper handling of international pressure. After all, it is important to proceed with structural reforms together with the US. That is why China has strived hard to work out a bilateral investment agreement with the US-because such an agreement will help China promote domestic reforms and upgrade its industries.
Toward the end of the 1990s, China took advantage of World Trade Organization negotiations to press for domestic reforms, including the reorganization of State-owned enterprises. Since reforms in China are once again facing internal resistance, an investment agreement with the US will prompt the Chinese leaders to launch market-oriented reforms as well as help Chinese companies to enter the US market.
This is very important because it can help China overcome the "middle income trap", which for China is essential to realize the Chinese Dream of national rejuvenation. But unlike the negotiations for entering the WTO, which were essentially a process of the US proposing and China bargaining, the negotiations for a bilateral investment agreement are very complicated.
This time, though, China has asked the US to conduct corresponding reforms, which means China is playing the same role－as an external driver of domestic reforms－that the US once played. The truth is, the US faces similar resistance against reforms at home, and vested interests exert almost as much pressure on the reformers as they do in China. Under such circumstances, a bilateral investment agreement will motivate and create opportunities for both parties to carry out structural reforms.
Investment deal will prompt US to play bigger role in Asia
From a regional perspective, a bilateral investment deal will facilitate greater US participation in Asian economic integration, because it can help US companies to take part in Belt and Road projects and prompt China to even join a new version of the Trans-Pacific Partnership agreement. As a result, the previous pattern of China and the US going their separate ways in regional economic activities will give way to coordination and cooperation.
From the global perspective, a bilateral investment deal will also help improve global economic governance. The WTO offers the framework for international trade, but there is no high-end mechanism for international investment. So if China and the US sign an investment agreement, legally binding rules would follow to ensure investors from all countries get the same treatment that local investors get, which would be a historic shift in itself.
Unfortunately, however, owing to former US president Barack Obama's weak leadership and the rise of populism during the 2016 presidential election, a Sino-US bilateral agreement could not be reached, and the two countries have been engaged in trade dispute for the past year, leaving them little time to negotiate a bilateral investment agreement.
That the vital role of trade in Sino-US relations has not been properly evaluated is an important reason for the trade dispute between the two countries, which in turn has led to stagnation of domestic reforms in both countries. But since it is not possible to decouple the Chinese and US economies, the two sides may ultimately have to establish a relationship that is conducive to reforms in both countries.
The author is an associate professor at the National Niigata University in Japan.
The views don't necessarily represent those of China Daily.