The frenetic flurry of diplomatic activity between America and China signals that far from decoupling, the world’s two largest economies are actively figuring out ways to reset their troubled economic relationship.
Let’s call this process recoupling, which will cheer the business community in both countries and disappoint hard-liners advocating for tougher measures. The latest manifestation of the renewed U.S.-China diplomatic push came in Zurich last week when Treasury Secretary Janet Yellen sat down with Liu He, the soon-to-be-departing Vice Minister who has been the point person on economic relations. Diplomacy is all about atmospherics as much as it is about substance. Compared with the acrimonious atmospherics of the March 2021 Alaska meeting, which descended into a shouting match between the two delegations, the Zurich meeting was a love-fest.
China's back
The official readout from the Treasury was that the meeting was “candid, substantive, and constructive,” with both sides agreeing that it was important for the “functioning of the global economy” to further enhance communication around macroeconomic and financial issues. In good measure, Liu He was also eager to convey the message that “China was back,” which he also declared at Davos during the same week. Any improvement in China’s economic performance, from the low-base of 2021 and 2022, due to suffocating Covid restrictions is a positive. The Yellen-Liu He meeting was preceded by the Biden-Xi summit at Bali last November and a telephone conversation in the new year between U.S. Secretary of State Anthony Blinken and China’s new foreign minister Qin Gang, before he departed from his previous role in D.C. as ambassador.
Reset
The substantive question is what does the reset in economic relations actually translate into? Does it imply that the negative rhetoric and the tariffs imposed by America of the last few years are about to be reversed. It would be naive to hope or believe that this would be the case. Instead, what we are likely to see is a narrower path of reconciliation, where America and China will continue to be fierce competitors in most areas (with America depriving the latter of sensitive technology in areas like semiconductors) while both sides will also recognize that the $640 billion trading relationship is too big to fail.
American business, which has vast and growing interests in China, played a major role in the diplomatic overdrive as companies were loath to concede the opportunity to sell products and services to over 1.4 billion consumers. This is very much the hard-headed calculation made by Germany and France, two of China’s other major trading partners.
Recoupling doesn't mean the full restoration of economic ties
In this context, talk of a “new” Cold War has always been nonsense. Singapore’s former top diplomat Bilahari Kausikan cogently said in a recent speech in New Delhi that “whatever their differences,” the U.S. and China are “vital, irreplaceable” part of “a single global system, intimately unmeshed with each other and the rest of us by a web of supply chains of a scope and density that is historically unprecedented.” The cost will be too high for both countries and to the global economy if the worst fears about decoupling materialized.
To the fervently anti-China lobby in D.C. which wants to pursue an even tougher line against China, former Treasury Secretary Larry Summers had this to say at Davos last week: “It would be an enormous and staggering error for the United States to decide that it was its policy to suppress Chinese economic growth in the name of our national security.” It must be said that unofficial Chinese perspectives on this contentious topic are unavailable because, well, the country’s leader, Xi Jinping, has clamped down hard on the private sector and academic community. It is likely that China’s Big Tech firms like Alibaba and Tencent, who were significant players on the world stage prior to the 2020 crackdown, will also welcome the normalization.
To be precise, recoupling will not mean the full restoration of economic ties. A vital plank of U.S. national security policy - depriving China the ability to access advanced technologies—will remain firmly in place. What recoupling means in practice is that outside of these contentious and sensitive areas, businesses will be able to operate and transact in the two markets on a more predictable basis. This alone should bring some cheer to the global economy in 2023.
