Argument

Reluctant Warriors

Assertive Chinese and job-hungry Americans are gearing up for a trade war across the Pacific. Fortunately, cooler heads will likely prevail.

The United States and China are deeply interdependent, with trade in goods between the two countries reaching a whopping $366 billion in 2009. But a growing number of influential people on both sides find that reality deeply alarming, albeit for different reasons.

In the United States, campaign ads this election season routinely blame trade with China for U.S. job losses. And in China, rising stars like Wang Yang, the Communist Party boss who governs China's booming southern province of Guangdong, fret that China's "traditional model is excessively dependent on international demand." In just the latest sign of this growing tension, the U.S. House of Representatives last month passed legislation seeking to raise the cost to China for its currency policies. All signs at the moment point toward increased trade and financial tension between the world's two economic giants.

A full-fledged trade war between the United States and China would be disastrous; thankfully, it's far from likely. Decision makers on both sides appear to have concluded that their trade disputes can be managed without undermining the entire U.S.-China relationship. Trade conflict is here to stay, but it is fast becoming a "new normal" in relations between Washington and Beijing.

What is fueling this growing tension on trade issues? Unemployment and flat growth in the United States are one part of the story. But four underlying factors are dramatically changing the U.S.-China economic relationship and will ensure that conflicts persist into the future.

First, U.S. and Chinese firms increasingly compete head-to-head because China is moving up the value chain far more quickly and across a wider array of sectors -- from electric vehicles to solar energy to high-speed rail -- than many in the United States once expected. As China seeks both to "indigenize" technology -- not simply rely on technology transfers -- and to compete globally, it is forcing U.S. firms to confront a fast-changing and vastly more competitive landscape.

Chinese firms already offer cutting-edge technology in high-speed rail and are in the hunt for contracts in developed markets such as Australia and California. And U.S. companies that once assumed a grand bargain -- providing U.S. technology in exchange for market access in China -- must now fight Chinese competitors for the same market share.

Many in China, not least Premier Wen Jiabao, argue that China came late to both the industrial and information revolutions, and they are determined to ride the next technological wave. So, China (like other states before it) is using government policy to support its ambitious goals -- for example, favoring domestic companies in government procurement and offering preferential financing to homegrown national champions such as the Commercial Aircraft Corporation of China, which might soon challenge Boeing in the narrow-body passenger jet market.

The bottom line is that U.S. firms face a more vigorous challenge from China. And they are working to meet that challenge in two ways: First, by seeking to move up the value chain faster -- companies like Apple, for example, have upped their game and succeeded, even in places like Japan, which is a wonderland of indigenously produced consumer electronics. And second, U.S.-based multinationals are teaming up with Western diplomats to push back against discriminatory market-access policies in an effort to level the playing field in China. Even though China's undervalued currency preoccupies Congress and smaller manufacturers, U.S. firms complain more often about the business climate in China -- a problem that will not go away even if the currency issue disappears. 

A second trend -- partly a result of intensifying competition -- is that old coalitions that once provided ballast to U.S.-China relations are breaking down.

In China, interest groups divide over nearly every economic issue: Chinese exporters, bankers, and political leaders -- who once coalesced around trade-related issues -- are increasingly at odds. Thus, China's central bank initiated a revaluation of its currency in June despite opposition from China's Ministry of Commerce and export lobbies. Chinese interest groups are split over anti-dumping and protectionist trade measures. And Chinese interest groups are divided, too, about access for foreigners to sensitive sectors, such as Shell's partnership with PetroChina to explore for shale gas in Sichuan province.

Meanwhile, despite the fact that many U.S. companies are deepening their engagement with China, the old political-business coalition that helped Beijing gain permanent normal trading status in the 1990s is fraying. It would likely be impossible to reassemble the alliance that worked to promote closer trade links in the Clinton and early Bush years. And new areas of trade conflict are emerging, such as in clean energy, which might produce new groups of skeptics. Just last week, the United States opened an investigation into Chinese support for clean-energy producers at the urging of the United Steelworkers, prompting a vigorous verbal challenge from China. 

A third trend is the growing tolerance for trade tensions in both Washington and Beijing. This confidence has made both governments less restrained in pursuing trade disputes. But it also means the United States and China have largely separated security issues, such as North Korea and Iran, from the minutiae of Section 301 and 421 filings and market-access disputes. The relationship will not collapse, even in the face of an avalanche of anti-dumping suits, as both governments work to delink the various issues on an increasingly complex bilateral menu.

Beijing, having grown more comfortable with the World Trade Organization's dispute-resolution procedures (and having learned to leverage the system to its own advantage), is now prepared to vigorously fight U.S. suits in many of these areas. It has investigated numerous anti-dumping cases brought by Chinese producers, lent its ear to a proliferation of Chinese business lobbies, and is investigating a countervailing duties case into U.S. subsidies for the Big Three automakers.

Finally, U.S. demands for access to China's 1.3 billion consumers are growing in both scope and intensity, particularly as China's indigenous innovation policies threaten the proprietary technologies of U.S. companies. And demands for market access now flow both ways. A China already resistant to U.S. pressure will become even more so the more Chinese investments in the United States are blocked.

Taken together, these four factors guarantee that U.S.-China trade relations are certain to become more fraught in the months and years ahead.

But U.S.-China relations can probably weather a proliferation of such acrimonious trade disputes, especially if they are channeled through the WTO and other rules-based mechanisms. The bilateral relationship is extremely diverse; both sides have strong incentives not to let trade friction undermine every other form of cooperation. And it's worth noting that virtually no U.S. company plans to flee China -- not even those that stand to lose the most from China's indigenous innovation policies.

Meanwhile, Beijing has two good reasons to keep the overall relationship with Washington on track. For one, China's economy is not yet "decoupled" from America's; China continues to run large trade surpluses with the United States and, because of its own stabilized exchange rate, is bound to U.S. monetary policy as its dollar reserves accumulate. For another, Beijing has more trade and investment options with more countries than ever before; China can now weather conflict with the United States more easily -- thus Beijing need not treat trade conflict with Washington as a strategic threat.

Still, to keep frictions from escalating, both sides must make sure they stick as much as possible to WTO and rules-based mechanisms for resolving their differences, avoiding purely punitive actions not linked to specific commercial grievances.

The likely course for the United States probably involves pursuing a mix of anti-dumping and countervailing duties cases -- and continuing to search for a more systemic remedy to press, persuade, and sometimes coerce China to level its playing field.

That will produce very real tensions. But rules-based spats, though contentious, will not likely result in underlying strategic conflict. Indeed, the essential strategic reality of Asia today is this: China is fast becoming the central player in a new economic regionalism, but Asian countries are deepening defense and political coordination with the United States as a hedge against Beijing's growing strategic weight.

For that reason, military and political disputes (think standoffs in the South China Sea, or over Taiwan) are more likely to decisively destabilize U.S.-China relations. The business of both China and the United States is business. And both plan to keep doing a lot more of it with one another.

FREDERIC J. BROWN/AFP/Getty Images

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