Tensions between the US and China have reached such a high level that the G7, led by the US, recently changed its objective in its relations with China from "decoupling" to "de-risking". But the reality is that de-risking, like decoupling, requires the participation of both sides and a common agenda.
The first step towards productive dialogue is to recognise that the interaction among three types of competition -- trade, technology, and geostrategy -- is driving the spike in US-China tensions. To stop this vicious cycle, these three types of competition must be decoupled, and, to the extent possible, the policy instruments applied to each segment must be kept distinct.
Weaponising trade policy to address national security matters, for example, has only reduced mutual benefits from the economic relationship without easing geostrategic tensions. China banned rare-earth exports to Japan in 2010 over a territorial dispute and restricted a range of imports from Australia in 2020 after the country called for an independent investigation into the origins of Covid-19. Yet such retaliation was ultimately ineffective.
Likewise, the US ban on exporting advanced microchips to China is unlikely to guarantee America's technological dominance in the long term unless all advanced economies commit to containing China permanently.
Efforts to gain strategic dominance over the other party only inflame bilateral tensions and bring about the lose-lose outcome of an arms race. Instead, each country should regard its national security as being adequately safeguarded when there is only a small chance that the other side could achieve victory after a first attack.
Segmenting technology competition boils down to installing guardrails against the negative spillovers of industrial policy. Every country enacts industrial policies; the US, for example, has its recent Inflation Reduction Act, the CHIPS and Science Act, tax credits for investment in research and development, National Science Foundation grants, and Defense Department procurement practices. The fact is that only a handful of countries have implemented industrial policies successfully, and even then, most of their industrial policies fail to produce the desired results.
The problem with industrial policy is that its effects can be felt beyond national borders. When a small country's industrial policy fails, it has only hurt itself. But the failed industrial policy of a large country hurts itself and its trade partners during the implementation period by lowering the price and volume of the targeted product traded in the world market.
One way to decrease the excessive risk-taking of large countries' industrial policies is to conclude a new World Trade Organization agreement banning "unfair industrial-policy practices," just as the organisation currently bans "unfair trade practices". A starting point for global negotiations would be the duration of industrial policy.
The most effective industrial policies focus on the supply side: a country will achieve better results by strengthening its capabilities than by trying to impede innovation elsewhere. The US, for example, would do better if it focused primarily on improving STEM (science, technology, engineering, and mathematics) education in high schools, incentivising domestic firms to pursue R&D, and attracting foreign talent, rather than on hindering trade, investment, and academic engagement with China.
The US and China need to rebuild mutual trust before they can forge new agreements on arms control and industrial policies. Even if both countries are ready to take a leap of faith, the first side to make a move faces the risk of rejection by the other, which would almost guarantee a serious domestic political backlash.
Asean could mitigate this risk of "unrequited love" by inviting China and the US to participate actively in the group's projects on economic development, environmental protection, and climate action. The US and China also committed to these objectives in 2015, so accepting Asean's invitation would align with their national interests and international obligations. US-China cooperation would be virtually certain to succeed because pooling the resources of China's Belt and Road Initiative and the G7's Partnership for Global Infrastructure and Investment would create huge economies of scale. Successful cooperation would lead to greater bilateral trust.
Economic interdependence does not undermine security; if anything, decoupling is far riskier. Rebuilding relations may test our creativity, but achieving greater security and prosperity for all is surely worth the effort. ©2023 Project Syndicate
Wing Thye Woo, Vice President for Asia at the UN Sustainable Development Solutions Network, is Distinguished Professor Emeritus of Economics at the University of California, Davis and a research professor at Sunway University in Kuala Lumpur and Fudan University in Shanghai.
