US-China: New rules of engagement

Experts weigh in on economic and financial co-operation

As China’s economic strength has grown, so has the tension in its relationship with the US. Washington has serious irritants with China, inter alia, with regard to trade, technology, forced technology transfers, widespread subsidisation and industrial policy. China has major issues with the US on technology, trade and tariffs, among others.

But the US and China share an interest in a healthy global economy and financial system. The Treasury, Federal Reserve and US regulators have long worked with the Chinese financial authorities, bilaterally and multilaterally in the G20 and International Monetary Fund. In the past, they organised bilateral talks around the Strategic Economic Dialogue, later renamed the Strategic and Economic Dialogue, as well as active behind-the-scenes talks. The Trump administration’s Comprehensive Economic Dialogue was quickly disbanded.

Is there still a good case for economic and financial engagement? And if so, how?

I posed this question to leading experts, both ex-insiders and outsiders. They underscore the value of re-engagement, on balance at the technical level, but with less fanfare and more modesty. The US needs to show greater understanding for the perspectives and political realities China faces in coming to the table.

Here are their responses.

Christopher Adams

The lesson of recent US administrations in their interactions with China is that structured bilateral engagement on economic issues is a useful – perhaps essential – tool but is no substitute for effective strategy or policy. Dialogue facilitated greater understanding of the thinking of each side, opportunities for coordination on global issues of common concern, and relationships of trust between individual officials. These benefits were particularly evident during the 2008 financial crisis and are sorely missed during the pandemic.

However, dialogue has come up short in resolving problems arising in the economic relationship. The formal economic dialogues of the Bush and Obama administrations were justifiably criticised for consuming massive effort while producing modest results. Even the Trump administration’s more ambitious trade negotiations with China, incentivised by a costly tariff war, achieved little beyond actions China intended to undertake itself.

Any decision to reinstate structured economic engagement between the US and China should be taken with a realistic view of the value, limitations and proper role of dialogue. President-elect Biden is right to prioritise strengthening America’s own competitive capacities and coordination with likeminded allies, but reopening lines of communication across our governments would benefit both the US and China, as well as the global economy. Finally, more thought should be directed towards how to engage with China not just bilaterally, but also multilaterally.

Christopher Adams is Senior Adviser at Covington & Burling LLP. He was Senior Coordinator for China affairs at the US Treasury.

Yam Ki Chan

Critics of past US-China dialogues argue that they have failed to change policies or that their costs do not outweigh their benefits. These are fair concerns, but they underestimate the strategic benefits of engagement. Over the last four years, surprise unilateral actions have reinforced suspicions and heightened tensions.

Dialogue allows policy-makers to avoid miscommunication. It helps navigate the channels within and across economic and security policies. An adverse security action should not lead to reflexive economic escalation and vice versa. During the S&ED, the economic track stayed constructive when the diplomatic relationship halted. There are areas of co-operation (such as sustainable global growth) and areas of competition (like bilateral trade) in the relationship.

As such, the US Treasury secretary and Chinese vice-premier overseeing macroeconomic policy should convene the dialogue. The policy-makers should meet twice a year. Each gathering should emphasise different pillars of the relationship such as macroeconomic growth or trade and investment, though not exclusively. Joint fact sheets are ideal, but need not be the expectation. While dialogues don’t guarantee better outcomes, the risk of not engaging is too great.

Yam Ki Chan was International Economist, US-China in the Strategic Economic Dialogue office at the US Treasury.

David Dollar

The US has an interest in a regular economic and financial dialogue with China to keep up with major policy reforms and to provide a platform for each side to voice concerns about major irritants. But the dialogue should have less pomp than during the Obama administration and more preparation and coordination than during the Trump administration.

It is best to keep the regular meetings at the sub-cabinet level, chaired by Treasury. Treasury has the broadest economic view, compared to the Department of Commerce, US Trade Representative, or Department of Agriculture. The National Security Council will naturally play a role in mediating among US departments but it does not have a deep China team to staff the effort. Treasury used to have such a team and can rebuild it.

The original logic of having the regular dialogue at the cabinet level was to get the Chinese side to appoint a deputy premier as the counterpart. Throughout the Bush and Obama administrations, however, this did not produce impressive results. Instead, the formal events became outcomes themselves that substituted for real change. They led to exaggerated expectations and a tendency to overstate what was actually accomplished.

The US should recognise that it will have little effect on China’s economic policy and that a more modest goal is to stay informed and raise major issues. A good example is the indigenous innovation policy where coordinated pressure from the US and allies led to substantive changes in a proposed policy.

David Dollar is a Senior Fellow at the Brookings Institution. He was the US Treasury’s Representative in Beijing, and before that the World Bank’s China Country Director.

David Loevinger

China is the world’s largest economy and most countries’ largest trading partner. President-elect Joe Biden is right that the best way to deal with China from a position of strength is to use alliances and multilateral institutions as force multipliers. However, that is not enough and cannot replace direct engagement.

Given the myriad challenges and limited leverage, it is essential to set priorities and communicate them clearly. It matters less which cabinet members have this mandate, and more that a few do. Effective engagement should recognise that, just as in the US, change in China will be driven domestically.

Don’t overestimate the impact of external pressure. In seeking interlocutors, recognise that the two governments are organised differently, and in China party rank reigns supreme. Be equally savvy in navigating Chinese and US politics. Engage through a range of ministries, non-government thought leaders and public diplomacy. In a culture where ‘face’ is important, follow President Roosevelt’s advice to ‘speak softly and carry a big stick.’ Understand that standing up to perceived foreign bullies makes irresistible politics in most countries and plays into the Communist party’s long-standing narrative as the historic defender against foreign aggression. Spend less political capital making China safer for offshoring by multinational corporations and more political capital making the US an attractive investment destination, including for non-sensitive Chinese companies. And when it comes to sanctions, use a marksman’s rifle rather than a sawn-off shotgun. Identify the villains first, and make sure you’re hurting them more than yourself.

David Loevinger is a Managing Director at Trust Company of the West. He was formerly a US Treasury Deputy Assistant Secretary, Senior Coordinator for China and Representative in Beijing.

Damien Ma

To prevent US-China competition from becoming a debilitating rivalry, economic engagement is not a choice but a necessity.

The nature of that engagement will have to change, however, for several reasons. First, Chinese companies are more competitive at home and in third countries where the US has not traditionally competed. Second, Asian economic regionalism is likely to intensify in response to perceived US blunders since 1997 (from the Asian financial crisis to pandemic handling). Third, few countries have an interest in siding with either in a fight.

At a minimum, new ‘rules of engagement’ that account for this new reality are required. These rules should emphasise equality as much as reciprocal fairness. They should establish explicit redlines whereby each country will not incur unnecessary and deliberate economic harm on the other. Finally, the rules should have both sides agree to put disputes aside and jointly anchor the global economy in the event of future crises.

These rules should not be exclusive to trade, but also govern key areas of contention such as investment, financial capital and human capital flows, technology supply chains, and business environment.

To enforce and adjudicate these rules, consideration could be given to the creation of a multilateral ‘supreme court’ that goes beyond simply mediating disputes like the World Trade Organisation. Ideally, its main purpose would be to ‘manage the competition’ and ensure that ‘guard rails’ exist and are fortified. In practice, it could handle problems beyond trade in an efficient, judicious, and impartial manner that cannot be exploited by either China or the US.

Damien Ma is Director and co-Founder of MacroPolo, the Paulson Institute’s think tank. Previously, he was a Senior Analyst at Eurasia Group, focused on the China and East Asian markets.

Andy Rothman

Putting US-China relations back on a constructive path will be one of the top foreign policy challenges facing the Biden administration in 2021. I expect an almost immediate, modest improvement in the relationship, because Biden is likely to abandon the current administration’s approach of treating the Chinese government as an enemy. Converting that into a systemic improvement in the relationship between the world’s two largest economies will be a far greater challenge, and will depend on how President Xi Jinping views his country’s long-term role in the world.

Restoring the US’ leadership role in Asian trade negotiations would contribute greatly to American prosperity and security. The recent absence of the US from the region was highlighted by the signing of the Regional Comprehensive Economic Partnership trade agreement, which includes many American allies and partners, as well as China, but not the US.

There are two reasons why structured economic and financial engagement is important, even though participants are almost certain to find these exercises frustrating. First, scheduled talks create deadlines for policy decisions on both sides, and this is valuable. Second, although the formal sessions are often stultifying, the preparatory discussions, chats over tea in the hallways, and follow-up meetings are more productive, at a minimum creating relationships which will be valuable when the next global crisis arrives. How these talks are organised is likely to be a matter of personal preference by the principals.

Andy Rothman is an Investment Strategist at Matthews International Capital Management, responsible for developing research on China’s economic and political developments. He previously served as a China analyst for other firms and was a US diplomat focused on China.

Stephanie Segal

Disengaging from China will not serve US interests given China’s economic size, centrality in global trade (and increasingly financial) flows, and innovation capacity in areas that will be key to future economic growth. But engagement cannot return to business-as-usual and prioritise high-level dialogue over concrete results. Rather, we need regular technical exchanges, coordinated at the under secretary and vice-ministerial level, to understand the other side’s priorities and concerns.

These exchanges are all the more critical for the US considering the closed nature of China’s decision-making apparatus and the information asymmetries that can result. Gaining insights into Chinese priorities and vulnerabilities will be critical to deciding on the ‘right’ agenda items with and about China. These technical discussions can lead to common understanding and identification of shared priorities, such as protecting global financial stability, prioritising global health and pandemic preparedness, and facilitating the transition to a low carbon economy. On this short list of issues, cabinet and leader level engagement is appropriate as part of a strategy to achieve results.

Critically, any structure for engaging with China must take into equal account our approach with allies and partners. For example, economic dialogues with Europe and Japan should inform, and be informed by, the technical level dialogue with China. Making use of technical expertise will require coordination within and across government agencies, suggesting a more formal role at the White House for coordinating China policy.

Stephanie Segal is a Senior Fellow with the Center for Strategic and International Studies Economics Programme. She was co-Director of the US Treasury’s Asia office.

Christopher Smart

There is certainly a case for structured engagement on economic and financial issues. But the engagement must be both narrower and less visible than previous efforts which often carried the hopes and dreams of both sides only to find them dashed on the rocks of domestic political considerations.

For all the recent deterioration in the bilateral relationship on trade, technology transfer and industrial policy, Chinese authorities have actually taken meaningful steps to open their financial system. Foreign firms may now own domestic insurance and asset management businesses. China’s stocks and bonds are now included in key global benchmarks. The renminbi exchange rate regime has been liberalised with market forces playing a much more important role.

As the world’s second largest economy grows more integrated into global financial markets, American (and other G20) officials have a keen interest in understanding these trends. All too often, developments in China leave outsiders guessing. Is the currency moving because of events in Hong Kong? Is a license stuck in retaliation for US talk of technology sanctions?

A reliable forum to illuminate these increasingly important issues can prove invaluable. Yet the model should not be a splashy event for top leaders to convene, but rather a regular schedule of senior civil servants who can thrash out differences on regulations, review processes and institutions. Instead of reviving the Strategic and Economic Dialogue, the new administration should copy the US-EU Financial Markets Regulatory Dialogue (now the Financial Regulatory Forum) that has successfully shed light (with much less heat) on key financial matters that require trans-Atlantic management.

Christopher Smart is Head of the Barings Investment Institute. He was Special Assistant to President Obama for International Economics and Deputy Assistant Secretary, Europe and Eurasia at the US Treasury.

Join Today

Connect with our membership team

Scroll to Top