I take no pleasure in the thought of a more confrontational relationship between the U.S. and China, and I certainly hope it can be avoided. The only way to do that, I suspect, would be for the Chinese government to drastically change its policies by promoting increased consumption among Chinese consumers, thus reducing its domestic savings and easing global imbalances, a prescription championed by the veteran China analyst Michael Pettis. Under the current dispensation, state-owned enterprises and the export sector are heavily subsidized at the expense of Chinese consumers. By cutting taxes on Chinese households, and strengthening the country’s threadbare safety net, the government would greatly improve living standards among ordinary Chinese. And indirectly, a consumption-led approach would increase China’s appetite for imported goods and services, thus addressing some of the grievances of its trading partners. At times, Beijing seems to be moving in this direction, albeit in fits and starts. Yet moving too quickly might cause fissures within the Chinese Communist Party, as the economic interests that benefit from the status quo remain inordinately powerful. Don’t expect an economic perestroika anytime soon.
It’s more likely that the symbiotic relationship between the U.S. and China, in which U.S. firms rely heavily on Chinese intermediate inputs and vice versa, will unravel in slow motion. Automation will, over time, offer U.S. multinationals an alternative to China-centric global production networks. And perhaps Trump’s America First agenda will give way to an Americas First agenda, in which U.S. dependence on Chinese manufacturing prowess is supplanted by deeper integration with neighboring economies, not unlike the way German industrial firms are enmeshed with suppliers in central and eastern Europe. All this may sound fanciful. But China only entered the World Trade Organization in 2001; our mutual entanglement is not quite old enough to vote. The forces pulling the U.S. and China apart are more powerful than those keeping them together.