[NSP Research Report] US-China Economic Relations: GDP Reversal, Interdependence, and Institutional Competition

Abstract

Can the US-China hegemonic competition avoid the so-called Thucydides' Trap? According to transition theory, there is a possibility of peaceful hegemonic transition depending on the speed of uneven growth and the degree of gradual adaptation in structural dimensions. Complex interdependence theory argues that different developments can occur depending on the imbalance in sensitivity and vulnerability between the two countries. Constructivist theory posits that the degree of discrepancy between actual power and prestige determines the nature and intensity of hegemonic competition. Director Son Yeol (EAI Japan Center) observes that the projected timeline for China's GDP to surpass that of the US is being delayed due to China's slowing economic growth. Considering that the two countries are focusing on institutional competition rather than direct confrontation, thereby modulating the intensity and speed of their competition, he forecasts that regardless of which major international political theory is applied—hegemonic transition, complex interdependence, or constructivism—US-China competition will likely focus on soft power areas such as economics and institutions rather than military aspects for the time being. Furthermore, he advises that South Korea should seek a path forward through cooperation with Japan, drawing attention to Japan's role in bridging the gap between the actual capabilities and rhetoric displayed by both countries in their US-China hegemonic competition in the Asia-Pacific.

Main Text

"When, then, will the gross domestic product (GDP) of China surpass that of the United States? In 2010, The Economist projected that if China continued to grow at 7.5% and the US at 2.5%, with the Yuan appreciating by approximately 3% annually against the dollar, the US-China economic reversal would occur in 2019. In 2014, The Economist revised this projection to 2021, and Goldman Sachs predicted 2027. The US Department of Agriculture's 2015 forecast suggested that by 2030, the US would remain in first place with $24.8 trillion, while China would reach $22.2 trillion, narrowing the gap but not yet achieving reversal ([Figure 1]). In essence, the projected timeline for the US-China economic reversal has been pushed back over time, particularly in recent years. The optimism surrounding China's economy appears to have diminished since the 2010 projection by The Economist, which emerged in the aftermath of the 2008 global financial crisis originating in the US. This trend can be attributed to a decrease in optimistic forecasts for the Chinese economy, rather than a widespread increase in optimism about the US economy."

"Despite the slowdown in China's economic growth and the robust recovery of the US economy delaying the timeline for economic parity, the structural trend of a narrowing economic gap will undoubtedly serve as a background factor amplifying political tensions between the two nations. However, the intensity of the conflict can be mitigated by the degree of interdependence and complementarity in their economic relations. President Xi Jinping's advocacy of a 'new model of major power relations' emphasizes precisely this point. It serves as the starting premise that the current US-China relationship is qualitatively different from the hegemonic conflicts and wars resulting from past power transitions. Then-Secretary of State Hillary Clinton responded to the concept of new major power relations by stating, 'Interdependence means a relationship where you cannot succeed unless the other country does well. The United States must write a completely different future.'"

"The US and China are not only directly competing in each other's markets but have also engaged in a full-fledged competition for leadership in architecting the economic order in the Asia-Pacific region. The ability to secure this leadership, as mentioned in the introduction, is not limited to material capabilities such as economic power but is also linked to the capacity to design the rules, norms, and platforms of the regional economic network. In other words, it can be expressed as the ability to provide the content of a legitimate economic order within the region."

"The reason China employs various strategies is that it is not easy to counter the US's powerful weapon, the TPP. In other words, behind the diverse and elaborate visions and proposals lies an anxiety stemming from China's inability to present attractive content commensurate with its economic power. In fact, RCEP can be considered an old-generation FTA primarily focused on tariff liberalization, and its pursuit of liberalization is not at a high level. It is far from establishing new trade governance norms and rules that encompass the realities of 21st-century trade. FTAAP remains merely declarative, and the Belt and Road Initiative prioritizes infrastructure investment, with network formation through trade not yet materialized. With the conclusion of TPP negotiations in October 2015, China found itself on the defensive in terms of Asia-Pacific trade governance."

"The Trump administration argues that while neoliberal globalization has led to remarkable growth in advanced manufacturing and finance, deindustrialization has resulted in the contraction of good manufacturing jobs and the proliferation of low-wage, low-skill, low-income service sector jobs, thereby marginalizing these segments of the population. Consequently, it employs trade policy as a key means to revitalize them. The USTR's '2017 Presidential Trade Agenda,' released in March 2017, outlines four priorities under the core principle of 'America First': (1) protecting national sovereignty in trade policy, (2) strict enforcement of US trade laws, (3) opening foreign markets using all available leverage, and (4) concluding new and better trade agreements. This agenda emphasizes the use of managed trade based on economic nationalism rather than liberal multilateral norms."

"In the Asia-Pacific region, the Trump administration's trade policy is based on American exceptionalism and bilateralism. The intention is to maximize US leverage in bilateral negotiations to achieve trade agreements that prioritize American interests, which explains the withdrawal from the TPP. The US aims to pursue bilateral agreements with major countries, with Japan being a visible target, and the renegotiation of the ROK-US FTA is also being pursued in this context. However, this approach directly contradicts the trend towards mega-FTAs or multilateral FTAs aimed at facilitating the smooth functioning of value chains or production networks widely deployed across the Asia-Pacific. Both South Korea and Japan have expressed serious concerns about the Trump administration's series of actions. The withdrawal from the TPP, the demand for renegotiation of the ROK-US FTA, and President Trump's overt economic nationalist rhetoric undermine the legitimacy of the US-led architecture that both South Korea and Japan have supported, thereby inadvertently creating an opportunity for China to gain leadership."

"Despite President Xi Jinping's self-proclaimed role as the standard-bearer of globalization, the fact that China's level of openness remains low in various sectors such as services, goods, investment, and finance implies that China's capacity to lead regional open trade order and economic integration is limited unless it embarks on comprehensive openness and reform. Consequently, China is compelled to pursue low-level liberalization. In this regard, even if RCEP is successfully concluded, it is unlikely to serve as a mechanism to lead regional trade order and enhance integration. In practice, China frequently violates international multilateral norms rather than complying with them. This is exemplified by its continued economic retaliation against South Korea's THAAD deployment, which disregards the principle of separating politics from economics while outwardly professing globalization."

"As such, the Trump administration's hardline stance against China is unlikely to achieve its intended goals, and China's inability to present a legitimate regional economic order and exert leadership creates a vacuum in the Asia-Pacific order. What is noteworthy here is the rise in Japan's status. Japan is a pivotal player in the movement to promote TPP 11 (or TPP minus USA) as an alternative, centered around Australia and Singapore. If Japan, currently the largest economy among the 11 member states, actively pursues this initiative, it could gain momentum. However, it remains an interesting observation whether Japan can truly lead regional multilateral cooperation excluding the US and how actively it will engage in a US-Japan FTA."

"Therefore, South Korea must actively engage in economic diplomacy to rebuild the liberal trade order in the Asia-Pacific region. Given that both the US and China currently lack the capacity and willingness to undertake this role, an opportunity may indeed be opening for South Korea. For the post-TPP trade order architecture, South Korea should pursue RCEP, the ROK-China-Japan FTA, and FTAAP, while also considering the resumption of ROK-Japan FTA negotiations in this context."

Author

Professor at the Graduate School of International Studies, Yonsei University. He holds a Ph.D. in Political Science from the University of Chicago. He serves as the Director of the EAI Japan Center, Chairman of G-Net 21, and Director of the Institute for Sustainable Development and the Institute for International Studies at Yonsei University. His main research areas include international political economy, Japanese political economy, and the political economy of trade policy. His recent publications include "The Role of South Korea in the Making of a Regional Trade Architecture," "The Abe Effect on South Korea's Trade Policy," and "Regionalization, Regionalism and the Double-Edged Public Diplomacy in East Asia."