Will the Stars Favor China-US Ties in 2015?

Op-ed in Caixin Online

January 5, 2015

The year 2015 could smile on Sino-US relations, especially for economic issues but also for geopolitical questions. While President Xi Jinping and President Barack Obama are not about to become best buddies, circumstances favor closer cooperation. If achieved, Sino-US peace and prosperity will create a much-needed zone of stability in a world troubled by crisis in Russia, turmoil in the Middle East, and stagnation in Europe, Japan, and Latin America.

Economic Omens

On the margins of the APEC Summit held in Beijing in November, Xi and Obama struck a promising economic deal. China agreed to a robust list of some 200 products for tariff-free treatment in the updated Information Technology Agreement (ITA2). This represented a major concession, since many Chinese producers had insisted that they still needed infant industry protection. The ITA2 pact is being scrubbed in Geneva by all 80 members, and a final agreement should be signed in 2015. Experience will show that Chinese producers of high-tech information technology products, such as advanced semiconductors and mobile telephones, can thrive in a world of free trade.

The year 2015 seems likely to be a year of diminishing frictions in China-US relations.

Senior Chinese officials have signaled that the Bilateral Investment Treaty (BIT) between China and the United States will be concluded in 2015, after six years of hard negotiations. This major achievement will be cheered by both US and Chinese business firms. US firms will be able to invest in all Chinese sectors except for those designated on a short negative list. And they will enjoy the same opportunities as Chinese firms at all stages of permitted investment in China—the same concept of national treatment that now applies to Chinese firms seeking to do business in the United States.

Other economic pacts are on the horizon for 2015. Both the United States and China belong to the Environmental Goods (EGs) talks being held under WTO auspices in Geneva. The result should be the elimination of tariffs on numerous products that serve to conserve energy and improve the environment. China has sought admission to the Trade in Service Agreement talks (TiSA), another set of Geneva negotiations, and the welcome mat should be put out once the ITA2 pact is wrapped up. The scope is enormous for services trade and investment worldwide, once sky-high regulatory barriers come down. Everything from higher education to medical consultations to banking services will eventually be traded online, while service firms like Walmart and the Mayo Clinic will be able to open facilities in Shanghai as easily as in Seattle.

To cap off these specific achievements, Obama clearly stated that the Trans-Pacific Partnership (TPP) is not designed to contain or exclude China. Instead, he invited China to align its policies and standards with the TPP chapters over the next few years, with the implicit vision of Chinese membership before Xi leaves office in 2020.

Geopolitical Omens

More often than not, frictions characterize geopolitical relations between great powers, and Sino-US relations are no exception. However, there's a big difference between escalating frictions and diminishing them. The year 2015 seems likely to be a year of diminishing frictions.

To begin with, China and the United States are roughly aligned with respect to North Korea. No one benefits from the threat of nuclear missile attacks, and no one wants a sudden collapse of the regime. Gradual reform and opening up seems to be the mutually preferred course.

China and the United States are also roughly aligned with respect to Iran. China depends, much more than the United States, on oil shipments from the Middle East, and accordingly has every interest in avoiding a conflict between Iran, Saudi Arabia, and other regional powers. Iranian acquisition of nuclear weapons can only exacerbate seething tensions in the Middle East, which, if they erupt in war, will certainly spike the price of oil. So Beijing is prepared to cooperate in UN sanctions against Iran, in hopes of dissuading Tehran from its pursuit of nuclear weapons.

Unlike the United States and Europe, China is not strongly opposed to Russia's grab of Crimea and parts of eastern Ukraine. However, China seems unwilling to throw Russia a financial lifeline—the $25 billion central bank swap line is a modest amount, nowhere near what Russia needs to overcome the financial stress caused by sanctions and the fall in oil prices. A long-term gas deal, very much in China's interest, was the most that Xi was willing to give President Vladimir Putin. This had no measurable effect in alleviating the severe pain that Western financial sanctions have imposed on Russia.

There remains the question of the East China Sea, the South China Sea, and disputed islands. China is gradually backing its assertions of sovereignty with military force but on a very small scale. The United States defends its own maritime interest in these waters and sides with its regional allies in Asia, but in ways designed to diminish, not escalate, tensions. If neither side makes abrupt moves in 2015, these maritime and territorial issues should remain on the back burner.

Finally, Beijing's handling of protests in Hong Kong was as masterful as it was peaceful. An event that could have triggered angry reactions abroad, in the United States and Europe, has passed into history.

Optimistic Forecast

China's ascension as a great power is nowhere near its peak, economically or militarily. This reality challenges the United States, but it need not threaten it—if leaders in both countries pursue sensible and cooperative policies. For now, the stars seem favorable, and the handshake between Xi and Obama in Beijing give every indication that such policies will be the hallmark of 2015.

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Gary Clyde Hufbauer Senior Research Staff

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