Three Opportunities for Better U.S.-China Cooperation

U.S. Treasury Secretary Janet Yellen’s Beijing visit last month made progress on several fronts. She engaged top Chinese officials on sensitive economic policy issues, including trade, electric vehicles (EVs), and chips, thereby strengthening important communication linkages and, one might hope, tempering antagonisms. She also reportedly impressed her hosts with her keen ability to use chopsticks while dining.

Perhaps the most globally experienced Biden administration cabinet member, with a winsome personality, Yellen knows how to operate in high places and seems to have held her own. The visit was crucial for several reasons, but foremost because the United States and China, despite their differences (as displayed by President Biden’s recent announcement of new tariffs on Chinese electric vehicles), still need each other.

There are large and pending potential gains from better cooperation. But to get those gains, we must be able to divide the differences between the two countries into those that are primarily political and transitory and those that reflect long-term and more fundamental disagreements—economic and otherwise. While headlines may figuratively shout about a national leader’s latest rant, there can still be productive communication between officials who seek to keep the two massive economies working together.

Concerns about China’s next move with respect to Taiwan and its treatment of foreign investors’ intellectual and other property rights likely aren’t going anywhere for a while. But, in Yellen’s words, “I believe that, over the past year, we have put our bilateral relationship on more stable footing. This has not meant ignoring our differences or avoiding tough conversations. It has meant understanding that we can only make progress if we directly and openly communicate with one another.”

There are at least three opportunities for meaningful gains from healthy U.S.-China cooperation:

First, since the first quarter of 2023, and with yawning federal deficits and a low private savings rate, Americans have been consuming more than they produce. China’s people produce far more than they consume each year; they need to sell the excess production to people elsewhere. And since we have a large appetite for more consumer goods, our shores appear to be the logical destination.

After all, one thing we can agree on is that China has been a reliable source of high-volume consumer goods for decades. They know how to produce what we like. If not for these products—given American consumption habits—the flow of goods would have to come from some other foreign source. Those who think we can eliminate our trade deficit entirely by imposing higher tariffs paid by U.S. consumers on Chinese goods should take note.

Second, given our deficits, foreign ownership of U.S. government debt is now at an all-time high. China, the second-largest buyer of U.S. bonds, held $816 billion in December 2023. Japan is the top lender; the UK is number three. In a real sense, we borrow from China to buy their goods. If they were to stop lending, we would have to borrow more from a more costly lender and change some consumption habits. In effect, we would be a bit poorer. Under these circumstances, cooperation rather than across-the-board confrontation makes sense.

Third, the United States and China have adopted similar industrial policy directives. Both countries are investing their people’s money in subsidizing the production of EVs, chips, solar cells, and high-tech machinery. It would seem that cooler tensions and more cool-headed conversation could lead both countries to cut down on competitive cronyism. It could be that China has an inherent EV advantage, and the United States is better at chip engineering and production. If so, cooperation can lead to lower-cost EVs and fewer emissions for both countries.

It’s easy to forget that China is facing a more challenging future than the United States. The Chinese are struggling with a sputtering, high-unemployment economy, a continuing low birth rate, and a sharply decreasing population. They expect to lose 20 percent of their workforce by 2050. Along with this, due to past errors in choosing economic goals, the nation is dealing with serious real estate bankruptcies. By comparison, the U.S. economy looks like the fabled Yellow Brick Road. Not in an absolute sense, mind you, but certainly in a relative way.

That being said, our sitting and aspiring national leaders constantly speak of imposing higher tariffs on Chinese and other foreign goods—costs ultimately shouldered by our own people and firms. And, because of the U.S. decision to build a future on subsidized EVs and chips, American leaders seemingly tremble at the prospect of hordes of inexpensive Chinese-made EVs and other products arriving to satisfy the buying habits of our citizens.

Yellen urged China’s leadership to take actions that would lift their domestic consumer spending and shift away from flooding world markets with the export of EVs and other high-tech goods. Her hosts seemed to listen but also pushed back. They indicated that China was simply responding to market forces, while the United States itself had chosen to restrain those forces with tariffs and subsidies. This is the time to clear the air and determine what is real and how to adjust to the realities of gains through cooperation.

The disagreements go on, but let’s hope the two-way conversation continues.

Bruce Yandle is a distinguished adjunct fellow with the Mercatus Center at George Mason University, dean emeritus of the Clemson University College of Business & Behavioral Science, and a former executive director of the Federal Trade Commission.

Image: Cyo Bo / Shutterstock.com.