Diplomacy: Can China See the Global Public Good?

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The beginning of China’s rise as a global power can be dated to the country’s accession to the World Trade Organization (WTO) in 2001. Throughout the next 16 years of the Bush and Obama administrations, the United States engaged in intensive bilateral diplomacy with China with the aim of getting ever-greater Chinese support on issues ranging from security to the economy to the environment. The Bush Administration launched a Strategic Economic Dialogue with China, and a separate Security Dialogue. President Obama combined these into a single Strategic and Economic Dialogue (S&ED). But the change in form was not important; the dialogues represented a continuous effort to draw China into the global system.

Diplomacy is the art of trying to get other countries to do what you want. In the case of the United States, we wanted China to support the economic and security institutions that were established under our leadership at the end of World War II. It is fashionable now to argue that the whole strategy of engaging China and inviting it into our global institutions has failed. But this assessment is too negative. In this essay, I identify eight specific issues on which we engaged intensely with China. The scorecard of these results is quite mixed. By my assessment, in three areas China’s actions have gone beyond what reasonably could have been expected; in two areas the outcomes are about what should have been expected; and on three issues China has failed to do what we want. It is interesting that these successes and failures don’t map onto particular arenas, be they economics or security.

It is this mixed record of diplomacy that makes it difficult to decide what to do next. Some voices call for decoupling and isolating China through a new Cold War, which would be very costly and is too hostile a response to the record. The objective here would be to prevent China from rising to be a coequal power, and is likely to fail. There is also a conciliation or adaptation camp that believes that the United States must accept the reality of our relative decline and Chinese emergence as the world’s foremost power. Specific actions here would be pulling back from our alliance system and from multilateral institutions. I argue that, alternatively, we can draw on these lessons of failure and success to tailor an engagement strategy going forward that would be effective in gaining Chinese cooperation in more areas, though probably not in all areas.

Track Record of Diplomacy

As China grew and emerged in the early twenty-first century, what we wanted diplomatically was ever-increasing support for global public goods, which include financial stability, carbon reduction, and nuclear non-proliferation. One dimension of this was economic. In the mid-2000s, China had developed a large current account surplus that ultimately reached a disruptive 10 percent of GDP, supported by an under-valued currency; the country was partially open but still had many import and investment restrictions; and its protection of intellectual property rights (IPR) was poor. The United States’s positions on these issues could be viewed as narrowly in the country’s self-interest, as the United States was the big deficit country and the largest holder of intellectual property (IP) in the world. But, more important, reciprocal openness, IPR protection, and limitations on global imbalances are the foundations of the global economic system. It might be annoying when small countries get a free ride, but it isn’t a threat to the global system. If China does so, on the other hand, it has the potential to undermine the entire global economy.

The United States also consistently urged China to cooperate on a number of security and military issues. One of these was nuclear non-proliferation, specifically in the cases of Iran and North Korea (DPRK). The United States urged China to settle disputes, including territorial ones, peacefully. This has become an increasingly important issue as China has militarized the South China Sea and confronted its neighbors over territorial claims.

The United States has engaged in intensive diplomacy on three other global public goods. First, climate change. China has emerged, overwhelmingly, as the largest emitter of carbon. So there is no way to address climate goals without strong cooperation from China. Second, development assistance. We have encouraged China to become more active in, and more generous to, development institutions such as the World Bank and the International Monetary Fund. Third is the issue of human rights, within China and outside of it, in the countries with which it has developed deep economic and political relations.

So, what is the scorecard on U.S. diplomacy in these eight areas? I divide them into surprising successes; predictable progress; and disappointing failures.

SURPRISING SUCCESSES

Imbalances and currency: China entered the global financial crisis with a current account surplus near 10 percent of GDP and a currency widely viewed as undervalued. China’s exports dropped sharply in the wake of the crisis, and because of the country’s stimulus program, its imports recovered quickly after a brief fall-off. At the time, it seemed likely that the resulting fall in China’s trade surplus would be temporary, and that with global recovery it would return. But, in fact, that did not happen because of a range of constructive measures implemented by the government. The currency was allowed to gradually appreciate, and on a trade-weighted basis it appreciated about 50 percent between 2005 and 2015, more than any other major currency. A trade surplus reflects a gap between savings and investment, and China introduced policies that encouraged consumption and reduced national savings: tax and tariff reductions, increased spending on health and education, and strengthened urban and rural safety nets. For 2018 as a whole, China’s current account will be very close to zero. Reducing the large trade surplus provided demand and trading opportunities to the rest of the world; by 2017 there were 144 countries that had more trade with China than with the United States, including 50 in Africa and all Asian countries except Afghanistan and Bhutan.

I participated in the first five S&EDs, in my role as the Treasury Department’s representative in Beijing. On the macro side, we argued that it would be realistic for China to bring its surplus down to 4 percent of GDP. I do not think any economist was expecting zero so quickly. For this reason, I list this as the biggest and most surprising success. It should be noted that U.S. bilateral diplomacy on this issue was complemented in important ways by multilateral institutions. The IMF played a constructive role through its analysis and engagement with China. The G20 was also an important forum. The issue of global imbalances was taken seriously in the G20 during the period between 2008 and 2013. Since then, it seems to have fallen off the agenda.

The success of engagement with China on imbalances and currency is little appreciated on the U.S. side, however, because it has not been matched by a trend in the U.S. current account deficit. The deficit was reduced in the wake of the crash, but it is rising again, primarily because of the large tax cut implemented in 2018. China, however, is no longer a counterpart for the United States in terms of deficit. Rather, American counterparts include Germany, Japan, South Korea, Taiwan, and a few others.

Climate change: In the mid-2000s, any discussion over climate change and carbon reduction took on a predictable character in Beijing: Advanced economies had caused the problem and they had to solve it. Historically, the United States and other advanced countries were responsible for most of the carbon in the atmosphere. They would have to bear the cost of mitigation through their own carbon reduction and payments to developing countries to bribe them to join in. Ten years later, China was ready to make commitments to reduce carbon emissions. The change in the Chinese attitude that led to the Paris accord was remarkable, taking place in such a short period of time. This was a real triumph of U.S. diplomacy, enticing China with the prospect that there could be no commitment from the U.S. side unless China and other emerging markets participated as well.

China’s commitment to reach peak emissions by 2030, and thereafter reduce carbon emissions, was encouraged by the air pollution crisis that overtook the country. In the years surrounding the 2008 Beijing Olympics, it became clear that burning coal would have to be severely restricted, a policy that was implemented in major cities. That was a first step toward carbon reduction. China had become increasingly aware of the costs that climate change would impose on its own economy and society. Further, China became enamored of the idea of developing manufacturing leadership in areas such as solar and wind power, as well as electric vehicles.

As with our success on trade imbalances, the U.S. bilateral effort was complemented by multilateral efforts. Nesting the U.S.-China agreement on carbon reduction in the larger multilateral Paris accord was critical.

Nuclear non-proliferation (Iran, North Korea): China has a natural interest in nuclear-nonproliferation. However, it was always going to be difficult to get full cooperation from China on Iran and the DRPK. In the case of Iran, China is the largest global importer of petroleum, whereas the United States has moved toward near balance in its petroleum account. Thus, approaches that take Iranian oil and gas off the world market are going to hurt China but be neutral with respect to the U.S. economy. In the case of the DPRK, a neighbor and ally alongside of whom China has fought, China prefers not to see nuclear weapons, but even more strongly prefers not to see the regime collapse.

In the case of Iran, the Obama Administration’s skillful diplomacy brought China on board. The United States successfully lobbied China and other major oil importers to reduce but not eliminate purchases from Iran, while keeping an eye on global supply and prices. The fact that the United States was willing to work through the UN Security Council also was a plus for China, which abhors unilateral sanctions or actions and puts a lot of stock in upholding the UN system, where it has a lot of legitimacy and a veto. This is another case in which the U.S. bilateral diplomacy was nested in a multilateral effort.

The same can be said for the recent UN sanctions on the DPRK. By restricting exports and imports with North Korea, China has been willing to squeeze the DPRK enough to bring it to the negotiating table, without squeezing so hard that it collapsed. China’s actions were motivated in part by its fear that, absent a diplomatic solution, the United States would resort to unilateral military action against the North. DPRK’s nuclear tests were also close to the Chinese border and Chinese officials worried about potential accidents. But now that the DPRK has come to the negotiating table and halted—at least temporarily—testing nuclear weapons and missiles, China seems relatively happy with this status quo. The United States, on the other hand, has failed to follow up in a meaningful way on negotiating real denuclearization.

AS TO BE EXPECTED

IP rights protection: U.S. firms have long had complaints about poor IPR protection in China. Fake goods appropriate international brands; patented technologies are copied; in the most egregious cases, the People’s Liberation Army has used cyberwarfare to steal commercial secrets and pass them onto Chinese state enterprises. Foreign investors acknowledge that IPR protection has gradually improved. China has set up a system of IPR courts that are now adjudicating huge numbers of cases—mostly among Chinese enterprises. But foreign firms often feel that they are not treated fairly in these courts.

What we have observed in China is the common historical pattern in which developing countries have little incentive and ability to protect IPR. But, as their own inventive capacities improve, there begins to be a demand for better IPR protection. On international indices of IPR protection, China scores slightly better than Brazil, India, and other large emerging markets. The United States was citing South Korea and Taiwan as IPR violators up through 2008, at which point they were well ahead of China’s stage of development. By many measures, China is now the second most inventive economy after the United States. Hence why China is increasing its effort to protect IPR. I put developments in IPR in the category of “as to be expected.”

Development assistance: Be careful what you wish for. The United States has long exhorted China to be more active in giving development assistance. The United States’s idea was that China should contribute more to existing multilateral institutions, particularly the concessional window at the World Bank (which lends at zero interest to the poorest countries in the world) and the IMF. China has, in fact, emerged as one of the most important financiers for the IMF. It recently gave a $50 million grant to the IMF’s fund to support technical assistance for financial officials in developing countries. China’s contributions to the World Bank’s concessional fund have grown as well and reached $600 million at the most recent replenishment. But these sums are dwarfed by its funding of a new bank, the Asian Infrastructure Investment Bank (AIIB), and by the explosion of Chinese bilateral financing.

China opened the AIIB partly out of frustration at the slow pace of governance reform at the World Bank and IMF to reflect the growing weight of China and other emerging markets in the world economy; and partly out of frustration that the World Bank had turned away from infrastructure and growth to focus more on education, health, and microfinance. The United States opposed the launching of AIIB, but most allies ignored our protests. By the end of 2018, AIIB was off to a very good start: After initially funding power and transport projects in Asia, it is moving now into Africa and Latin America and will soon have about 100 members—more than any other regional development bank.

Most Chinese financing for development, however, is not coming through AIIB, but rather is provided via the China Development Bank and the Export-Import Bank of China. Much of this is branded as the Belt and Road Initiative, but China’s infrastructure financing is in fact global. The policy banks lack transparency, but they seem to be lending about $50 billion per year, primarily in energy and transport. Most of the lending is in dollars at commercial, variable interest rates. Some of their clients are already getting into trouble, with unsustainable debt, though, so far, this is a small number and the problem should not be exaggerated. My overall assessment of China’s role in development assistance is that it is also about as expected. China is becoming a major funder, which is natural given its size and the declining investment opportunities at home due to the buildup of overcapacity in many sectors. Some of this financing is going through multilateral vehicles (World Bank, IMF, AIIB) that are likely to ensure better outcomes. But it comes as no surprise that China wants to keep most of this under its direct control, via its policy banks, and that their activities would raise issues of debt sustainability, as well as environmental and social safeguards.

DISAPPOINTING FAILURES

Market access: When I moved to Beijing in 2004, I started attending workshops on economic reform. Among other things, I argued that China had received a lot of benefit from opening up sectors of its economy to imports and foreign investment (100 percent owned, not joint ventures), but that many sectors remained closed or partially closed. China would receive additional benefits from opening up these sectors, some of which were in advanced manufacturing such as vehicles, and many of which were in services like finance and telecom. When I left nine years later, it would have been hard to point to any area of success. I consider this a disappointing failure because such openings would have been clearly beneficial to the Chinese economy and would have defused trade tensions with the United States and other partners.

This issue was largely dealt with through bilateral talks. The United States did bring occasional WTO cases against Chinese practices. But some of China’s protection, as in autos, was allowed under its WTO agreement. In other cases, the WTO action did not eliminate the issue. For example, the United States brought a case on credit cards and electronic payments against China to the WTO. We won that case, but years later there are still no foreign firms providing payments in local currency. It is naturally an area in which there is strict regulation. Somehow these regulations have, so far, kept foreign investors out.

Militarization of the South China Seas: China has moved ahead steadily with the occupation and militarization of islands in the South China Seas (SCS). Under international law, most if not all of the features in the SCS are uninhabitable rocks and therefore not entitled to Economic Exclusion Zones. Still, countries can own the rocks, and China has as good a claim to some of them as do other countries in the region. The United States does not take a position on ownership of the rocks but has an interest in preserving freedom of navigation throughout the SCS and in seeing the territorial disputes resolved peacefully. I recall that the first meeting at the first S&ED in 2009 was a discussion of core interests between Hillary Clinton, Tim Geithner, Wang Qishan (Vice Premier responsible for the economic issues), and Dai Bingguo (State Councilor responsible for the security issues). The Chinese representatives defined their core interests as sovereignty over Taiwan, Tibet, and Xinjiang. They did not mention the SCS. President Xi Jinping promised President Obama, at one of their earliest meetings, not to militarize the Spratlys, a group of small islands and atolls that sit between Vietnam and the Philippines. Yet the Chinese military soon after proceeded to build up artificial islands and military capabilities. The U.S. Navy continues to send freedom of navigation operations through the area, and there have been a number of near misses between planes and ships of the two militaries. China’s actions have alarmed its neighbors, but the United States has not been able to persuade China to desist from the militarization of the islands. This has clearly been a failure of U.S. diplomacy.

Democracy and human rights: At the time that China joined the WTO in 2001, it was rated “unfree” by Freedom House. Specifically, it earned a 7 on political rights and a 6 on civil liberties, on a scale from 1-7, in which the higher the number, the less free the society. Some who advocated engagement with China argued that the country’s integration into the global system would lead to gradual political changes. However, 17 years later, China has exactly the same rankings. China experts were skeptical right from the start that there would be political change anytime soon. However, as the economy became more free, it seemed plausible to some that there would be more scope for debate among academics and in the press, and that minority groups such as Tibetans and Uighurs would be given some room to practice their religions and preserve their cultures. To the contrary, the repression of scholars, journalists, Tibetans, and Uighurs has only increased over the past decade. China has made great technological strides in AI-enabled digital surveillance. Not only is it using this technology to control its people at home, but there is a growing risk that it will export these methods to other authoritarian regimes.

Lessons for Engagement

In summary, the track record of diplomatic engagement with China is mixed, but it does not support the conclusion that engagement has failed. The successes all shared the characteristic that China came to see the global public good in question as clearly in its own interest. Also, intensive U.S. bilateral diplomacy was complemented by multilateral institutions. The United States cannot have much hope of changing Chinese behavior if the ask in question cannot be nested in a multilateral agreement.

Based on this logic, there is reason to expect that we could do better on the issues of development assistance, IPR protection, and market access. The best hope for the latter two economic issues is to include them in modern trade agreements that draw in a growing number of countries, including eventually China. The Trans-Pacific Partnership (TPP), in particular, was a good effort to address some of China’s abusive trade practices, and it was a big mistake for the United States to pull out of the agreement. The TPP could be a model for larger WTO modernization. On the issue of development assistance, China’s Belt and Road Initiative, and its other bilateral efforts are likely to run into various problems due to a lack of transparency and competition in implementation, and due to the commercial nature of lending, which is already causing debt sustainability problems. Multilateral efforts including AIIB are likely to be more successful. We should encourage China to learn from these experiences and to both shift more resources to the multilateral institutions and make its bilateral aid more transparent and norm conforming.

A key question in the U.S.-China relationship is whether we can cooperate on these various global public goods even as we continue to have some serious disagreements. In the South China Sea, there is a reasonable prospect of a multilateral effort to continue to reinforce freedom of navigation. But there is probably no prospect of reversing China’s militarization of the islands. On democracy and human rights, it is important for the United States to continue to speak out and to strive to be a better example for other countries. But it is not likely that we can do much about the human rights situation in China. Meanwhile, the UN human rights apparatus has largely become subservient to authoritarians so that, in this arena, a multilateral approach is not likely to generate progress. If we are to coexist peacefully with China, it will be important to be honest about our differences while working together on the large number of issues where we do indeed share common goals and interests and where real progress is possible.

By David Dollar
DemocracyJournal

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