[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 hegemonic transition theory, there is a possibility of peaceful hegemonic transition depending on the speed of uneven growth and gradual adaptation in the structural dimension. Complex interdependence theory argues that different developments can occur depending on the imbalance of 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 Research Center) predicts that considering the delay in the expected timing of US-China GDP reversal due to China's economic slowdown and the fact that the two countries are adjusting the intensity and speed of competition by focusing on institutional building rather than direct conflict, the competition between the US and China will focus on soft power areas such as economy and institutions, rather than military, regardless of which major international political theory is used for analysis, such as hegemonic transition, complex interdependence, or constructivism. Furthermore, he advises that Japan's role should be noted as a country that can bridge the gap between the actual capabilities and rhetoric displayed by the two countries in their US-China hegemonic competition in the Asia-Pacific, and that South Korea should find its way through cooperation with Japan.

Main Text

When, then, will the reversal of gross domestic product (GDP) between the US and China occur? In 2010, The Economist predicted that if China continued to grow at 7.5% and the US at 2.5%, with the yuan appreciating by about 3% annually against the dollar, the US-China reversal would occur in 2019. In 2014, The Economist projected it for 2021, and Goldman Sachs for 2027. In 2015, the US Department of Agriculture projected for 2030, with the US remaining in first place at $24.8 trillion, while China would narrow the gap with the US at $22.2 trillion, but the reversal would still not have occurred (see Figure 1). In short, as time passes, and more recently, the projected timing of the US-China economic reversal has been pushed back. The optimism about the Chinese economy, which emerged in the aftermath of the global financial crisis originating in the US in 2008, appears to have peaked with The Economist's 2010 forecast, and a trend of reduced optimism about the Chinese economy is evident. This can be attributed to a decrease in the optimistic trend regarding the Chinese economy, rather than a spread of optimism about the US economy.

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

The US and China are not only directly competing in each other's markets but are also actively competing for leadership in shaping the economic order of the Asia-Pacific region. Here, the ability to seize leadership, as mentioned in the introduction, is not limited to material capabilities such as economic power but is related to the ability 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 flashy visions and proposals lies anxiety stemming from its 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 the liberalization rate it pursues is not high. It is far from establishing new trade governance norms and rules that encompass the realities of 21st-century trade. FTAAP also remains merely a declaration, and in the case of the Belt and Road Initiative, infrastructure investment takes precedence, and network formation through trade has not yet materialized. With the conclusion of TPP negotiations in October 2015, China was put on the defensive in terms of Asia-Pacific trade governance.

The Trump administration argues that while neoliberal globalization has brought about remarkable growth in advanced manufacturing and finance, deindustrialization has led to a reduction in good manufacturing jobs and an increase in bad service sector jobs, disproportionately marginalizing low-wage, low-education, and low-income groups. It is using trade policy as a key means to revive these groups. The US Trade Representative's (USTR) "2017 Presidential Trade Agenda," released in March 2017, outlines four priorities under the basic principle of "America First": (1) safeguarding national sovereignty in trade policy, (2) strict enforcement of US trade laws, (3) opening overseas markets using all available means (leverage), and (4) concluding new and better trade agreements. This approach 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. This reflects the intention to maximize US leverage in bilateral negotiations to achieve trade agreements that prioritize American interests, which led to the withdrawal from the TPP. The US intends to pursue bilateral agreements with major countries, with Japan being a visible target, and the renegotiation of the Korea-US FTA is also being raised in this context. However, this directly contradicts the trend towards mega-FTAs or multilateral FTAs aimed at facilitating the smooth operation of value chains or production networks widely deployed in the Asia-Pacific region. 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 Korea-US FTA, and President Trump's overt economic nationalist rhetoric are undermining the legitimacy of the US-led architecture that both South Korea and Japan support, thereby 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 in various sectors such as services, goods, investment, and finance is low implies that China has limitations in its ability to lead regional open trade order and economic integration unless it embarks on comprehensive opening and reform. Therefore, China is inevitably bound to pursue low-level liberalization, and in this regard, even if RCEP is concluded, it is unlikely to serve as a mechanism to lead the regional trade order and enhance integration. In reality, 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, violating the principle of separating politics from economics while outwardly proclaiming globalization.

The fact that the Trump administration's hardline stance against China is unlikely to achieve its intended goals, and that China lacks the capacity to assert leadership by presenting a legitimate regional economic order, ultimately signifies a vacuum in the Asia-Pacific order. What is noteworthy here is Japan's rising status. Japan is the 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 countries, actively pursues this, 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 window is, in fact, opening for South Korea. For the post-TPP trade order, South Korea should pursue RCEP, the Korea-China-Japan FTA, and FTAAP, and also consider resuming negotiations for a Korea-Japan FTA 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, Director of the Institute for Sustainable Development, and Director of 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."