U.S.-- CHINA RELATIONS : HEAD TO HEAD / THE FINANCIAL TIMES COMMENT & ANALYSIS

July 11, 2014 5:29 pm

US-China relations: Head to head

By Geoff Dyer and Charles Clover

Tensions over hacking and territorial claims are threatening to undermine the goodwill forged by financial links

If a get-together of bureaucrats could solve the world’s thorniest political problems, then the US and China would be on a strong footing. Several hundred officials from both countries held a two-day meeting in Beijing this week that brought together almost every branch of their governments. The US Department of Transport alone was involved in five workshops. The sun even managed to shine, breaking through Beijing’s heavily polluted skies.

Yet the flowery rhetoric and ex­changes of business cards could not hide the sullen rivalry that is slowly defining relations between the world’s two biggest economies.

Until recently, it was assumed that the vast economic and financial links between the two countries would act as a buffer against political and military tensions: globalisation trumping geopolitics. The annual meeting between the two bureaucracies, the Strategic and Economic Dialogue, is an effort to cement that sense of common interests.

But such goodwill risks being overwhelmed by the rising tide of tense disagreements, from naval rivalry in the western Pacific to cyber hacking to complaints about market access, which are undermining the already limited trust between them.

Shi Yinhong, director of the American Centre at Renmin University in Beijing, said that “almost nowhere else do you see such a strategic rivalry” that now exists between China and the US.

Ian Bremmer, chairman of the Eurasia Group consultancy, says: “We are not yet at a tipping point where competition outweighs co-operation. But the zero-sum aspects of the relationship are growing.” He adds that chief executives of US companies “systematically under-appreciate the long-term risks in China”.

Just as the meetings were kicking off in Beijing, China was confronted with new accusations about its extensive cyber hacking in the US. The New York Times reported that hackers based in China had gained access to the federal government office that handles personnel management, including applications for security clearance.

Asked to respond to the report, John Kerry, the secretary of state who was leading the US delegation, said the incident was still being investigated. “It does not appear to have compromised any sensitive material,” he said. “But we’ve been very clear for some time with our counterparts here that this is in larger terms an issue of concern.”

The efforts by the Obama administration to push China to limit its cyber espionage activities were curtailed last year by the Edward Snowden revelations about the extent of surveillance by the National Security Agency. However, the US revived its campaign in May when the Department of Justice announced charges against five members of the Chinese military, accusing them of stealing trade secrets from US companies.

The Chinese view US complaints as hypocrisy, especially after the Snowden documents were published. But the US considers the Chinese theft of technological knowhow from American companies incompatible with an open, global economy and says it will apply greater pressure on China, including potentially more prosecutions. “We have had to think of new ways of getting their attention on this because so far they have not backed off at all,” says a former administration official.

The geopolitical tensions have also been fanned by China’s more aggressive approach over the past year towards its territorial claims in the western Pacific, including the announcement of an air defence zone across the East China Sea and placing an oil rig in a section of the South China Sea also claimed by Vietnam.

The Chinese insist that their behaviour has merely been a response to provocations by their neighbours. “If you look at all of these cases, I think it is fair to say that China is only reacting to the actions of others,” says a Chinese official. “We want to restore a status quo that others have broken.”

Chinese officials suggest that the Obama administration’s so-called pivot to Asia has emboldened countries such as the Philippines and Japan to push their own claims.

Washington, however, views the growing tensions in precisely the opposite manner. US officials describe a deliberate, calculated and long-term Chinese strategy to slowly establish control over large parts of the western Pacific through low-level incidents that do not generate an American response but which convince US allies that they cannot rely on Washington to come to their defence.

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There are still some US officials who question whether Chinese control of many of the islets and reefs in the South China Sea really represents a challenge to core US interests. Others, including US allies, take comfort in the fact that China is driving many Asian countries closer to the US. “It really is extraordinary to see the Vietnamese being pushed closer and closer to the United States in strategic terms,” says Malcolm Turnbull, Australia’s communications minister. “That is quite an achievement for viewers of history.”

However, there is a view in Washington that its efforts to deter Chinese aggression in the South China Sea have not been working and that the US needs to find new military tactics to push back against such incursions.

Mike Rogers, the Republican chairman of the House intelligence committee, accused China on Thursday of “gluttonous, naked aggression” in the South China Sea. It was in the US national interest to “push back on aggressive Chinese efforts in the region”, he said. “We are fooling ourselves if we don’t think that the stew is about ready to boil on what’s happening in the South China Sea.”

The Pentagon is considering more aggressive use of surveillance of Chinese naval activity with more US aerial and naval operations in disputed areas. “We have never really tested whether we can raise the costs for China in a way that will alter their decision-making,” says Ely Ratner at the Center for a New American Security. “We need to see if there are tools in the Pentagon’s toolkit that can change their decisions.”

The result is that both countries are being slowly pulled into what scholars call a “security dilemma”, where each military move generates a countermove by the other – raising the risks of conflict.

These geopolitical tensions are balanced by the reality of the deep economic dependence between the two countries, ranging from trade to bond markets. Some observers believe these links are only getting stronger. Mr Shi at Renmin University says that the economic relationship is improving just as security tensions are growing. “Half of the picture is brighter, and half of the picture is darker than ever before,” he says.

Although there were no decisive breakthroughs at this week’s summit, the countries are negotiating a bilateral investment treaty and appear close to an agreement on liberalising trade in high-tech goods.

The Chinese believe that the economic reforms that Xi Jinping has pledged to introduce address many of the criticisms that Washington has levelled about Beijing’s manipulation of its currency and financial markets.

One new area of booming economic links is the recent surge in Chinese investment into the US. According to the Rhodium group, a New York consultancy, there were 82 deals in 2013 totalling $14bn, double the previous year.

Yet the US business community, which has traditionally been a strong supporter of closer ties with China, is growing disenchanted with the reality of operating in the country.

Many multinationals in China grumble about industrial policies that favour local competitors and try to get them to hand over trade secrets as a condition of straying in the market.

Those complaints are strongest in the tech industry, particularly since the Snowden-inspired accusations that multinationals might have been complicit in US spying. This month, Qualcomm , the US chipmaker, announced that it would work with SMIC, a Chinese group, in a tie-up some analysts interpreted as a way of settling its dispute with Chinese antitrust authorities.

China, in turn, has its own complaints about what it sees as politically motivated protectionism in the US against its most successful companies – especially Huawei. The telecoms equipment company has been locked out of many business opportunities in the US, in part because of opposition from Congress.

He Maochun, director of the economic diplomacy centre at Tsinghua University in Beijing, acknowledges that some of Chinese industrial policies do not “correspond with the free trade spirit”. However, he adds that “China is not alone. The US, Australia and other English-speaking countries refuse to buy Huawei and Lenovo information technology products. Each nation has their own trade protection policies.”

Mr Bremmer says the fate of the ambitious economic reforms that Mr Xi has promised will have a huge impact on the way China and the US ultimately deal with each other.

If the Chinese leader is successful and the economy retains a relatively high rate of growth, foreign companies will continue to prosper in China. However, if the reforms fail and the political climate becomes more anti-western, multinationals will suffer badly. 

“In the medium term, China has more uncertainty than any other major country,” Mr Bremmer says. “If Xi Jinping starts to have serious political problems at home, his approach towards the US could change fundamentally.”


Additional reporting by Ma Fangjing

Copyright The Financial Times Limited 2014