The Current Crisis in Sino-US relations: How Deep Can It Be?

Sino-US relations appear to have entered a prolonged period of acute rivalry and growing hostility. The current crisis is the result of a long process of tensions building up. The showdown had been widely expected by both sides for quite a long time, in spite of numerous attempts to avoid or postpone it. For example, available information about Chinese military planning shows that the security establishment has been looking at the United States as the primary source of military threats since the Chinese Belgrade embassy bombing and that this event led to the launching of the ambitious 995 Program—a large and costly national project of fast development of certain key defense-related technologies supervised directly by the top leadership. Still there were expectations that the conflict could be averted for a long time, possibly even avoided, if stability in the bilateral relationship were maintained for long enough for the internal changes within China or the US to make the conflict unlikely.

The year 2018 proved to be a turning point. The two economic superpowers started a trade war, which is called by some the “biggest trade war in economic history.”¹ The escalatory dynamics in the Sino-US relationship are not limited to economics. Three important strategic documents of the Trump administration published at the end of 2017 and early 2018, the National Security Strategy, National Defense Strategy, and Nuclear Posture Review, have identified China as an adversary and source of threat to the United States on a par with Russia. The United States has recently taken a much more assertive approach to the Taiwan issue, passing bills facilitating political and military contacts with the island. The Americans also speeded up their military buildup in the Pacific and increased criticism of the Chinese human rights record. Chinese espionage and Chinese covert political influence are becoming hot topics in the US media and the statements by US politicians much as was happening with Russia several years ago.

Such conflict was considered extremely unlikely for a long time in spite of the mounting differences and tensions. The huge economic interdependence, well-developed human ties and very strong American influence in China in such spheres as culture, education, and science provided solid grounds for optimism. Both countries had very significant influence groups which were strongly interested in keeping the relationship stable. In spite of Donald Trump’s fiery criticism of Chinese trade policies during the campaign, the trade war failed to materialize during the first year of the Trump administration. That fueled hopes that Trump would follow the path of his predecessors, who strongly criticized China before being elected and preferred to cooperate with China after the election.

However, several factors converging together changed the situation completely. There was a shift in the US perception of Chinese internal politics and economic and industrial strategies, which happened by the mid-2010s and led to greater pessimism in views of the trends in China’s development. Chinese industrial development strategies and massive technological initiatives such as the Made in China 2025 plan and the national plan for development of artificial intelligence were watched with growing suspicion. Major Chinese companies, usually state run, identified by the Chinese leadership as national champions and having special access to cheap loans from the state-run banks, have been buying technological companies and strong international brands for years. At a point the Americans as well as some other developed countries started to see potential danger in the Chinese developing international high-tech companies on their own with strong state support. Made in China 2025 was directly mentioned by Trump on a number of occasions and likely was one of the triggers for the trade war. 

At the same time, the United States also reevaluated Chinese military capabilities and the potential for the development of advanced military technology. Some technological advances, such as the beginning of flight testing of the 5th generation fighter in 2011 and the domestically produced heavy transport aircraft in 2013, and regular tests of anti-satellite technology and hypersonic vehicles, have proven that China could potentially catch up with the United States in the field of defense technology in the foreseeable future. After facing considerable weakening in US influence in East Asia, especially due to the failure to react adequately to the Chinese activities in the South China Sea, there was growing support within the US military establishment for more decisive measures to contain the Chinese. Another problem which affected the US ability to deal with the issue of China rise in the past was the American inability to reduce the security commitments in the other parts of the world and concentrate military assets in the Western Pacific.

By the end of the 1990s some signs of growing and irreconcilable differences were already appearing as China started to boost its military power with defense budgets growing at an average speed of 16.2% between 1999 and 2008 and extensive modernization and overhaul of the military industrial base and procurement system starting at the same time.²  On the other hand China was labelled as strategic competitor by George W. Bush even before his election as US president and the presidency started with a serious security crisis over the incident with the EP-3 reconnaissance plane collision with a Chinese fighter in April 2001. However, after the 9/11 war on terror and disastrous invasion of Iraq consumed a considerable part of US resources, deterioration of Sino-US relations was put on hold. As the former Chinese defense attaché to Moscow General Wang Haiyun put it, 9/11 gave China a period of “strategic respite,” which lasted more than a decade used by the Chinese for both economic development and military development. China at the time was considered an important partner in the war on terror. The Chinese themselves used the situation to increase pressure on suspected separatist elements in Xinjiang.

Another important factor which contributed to the stability of relations in the face of serious differences was the American ideological belief that eventual evolution of the Chinese political regime was unavoidable, a necessary consequence of market-based economic development. For example, Bush’s National Security Strategy published in 2002 stated that “China has begun to take the road to political openness, permitting many personal freedoms and conducting village-level elections, yet remains strongly committed to national one-party rule by the Communist Party. […] Only by allowing the Chinese people to think, assemble, and worship freely can China reach its full potential.”³

The idea that China was on the path to deep political transition simply because of the economic reforms already underway had been popular since the 1980s. President Reagan after his visit to China in 1984 stated that he was heartened by the “injection of a free market spirit” into China’ economy and named the People’s Republic “this so-called Communist China.”⁴ Bill Clinton in his speech on the China Trade Bill in 2000 stated that economic development and the spread of new technology made the democratization of China unavoidable. “In the new century, liberty will spread by cell phone and cable modem.  […] Now there’s no question China has been trying to crack down on the Internet. Good luck! That’s sort of like trying to nail jello to the wall. […] In the knowledge economy, economic innovation and political empowerment, whether anyone likes it or not, will inevitably go hand in hand.”⁵

Of course, such expectations turned out to be naïve. Modern technology did not bring freedom and democracy to China but rather allowed the Chinese government to establish more effective control over the population. China has become one of the world leaders in surveillance technologies, face recognition, and cyber warfare and created a powerful intelligence apparatus capable of operating in cyberspace. The introduction since 2014 of a social credit system shows that China is gradually bringing the level of control over the personal lives and political expression of its citizens to an unprecedented degree. Before 2020 China hopes to build a high-tech system controlling all aspects of the lives of ordinary citizens and automatically punishing them even for the smallest of misdeeds such as smoking in non-smoking areas.⁶  

Economic development did lead to the emergence of the Chinese urban middle class but not to democratization. The Chinese Communist Party managed to strengthen control over the population and has been increasingly reliant on resurgent Chinese nationalism to prove the legitimacy of the regime. Throughout the last decades China has been separating propaganda for internal and external use. While on the surface in outwardly directed information, it appeared that China did have influential forces moving the country towards a more liberal political system, their actual influence on internal decision making was actually quite limited. It seems, that the very existence of these groups was, to a degree, just tolerated to provide additional fuel to the US theories on the future inevitable evolution of the Chinese political system.

However, slowly but surely, the dominant US narrative about the direction of evolution of the Chinese political regime started to change. By the mid-2010s the idea of inevitable change of the Chinese political regime under the influence of free markets and modern technology still had a lot of followers but lost its former appeal. In March 2015 David Shambaugh published an article in The Wall Street Journal on the “coming Chinese crackup,” arguing that the development of the PRC was moving in the wrong direction, which will result not in evolution, but in eventual collapse of the system.⁷ That was followed by a book on the same subject provoking lively discussion and prompting angry responses from the Chinese side. In general, it appeared that the dominant view within the US political elite now was that China was moving in the wrong direction and the United States will have to more actively contain Beijing, with some even suggesting that the current Chinese regime would inevitably collapse, Soviet-style.

 Still, even in the earlier period, when romantic views of the future evolution of the Chinese regime caused by technology and market reforms were dominant, the United States tended to be increasingly worried by the gradual expansion of Chinese economic interests in Asia and other parts of the world and especially by its military buildup. In the 1990s and 2000s in spite of well- known evidence about Chinese efforts to obtain access to modern defense technology in the former Soviet republics and other parts of the world, a tendency to underestimate the Chinese potential for defense innovation clearly dominated both in the United States and in the West in general. The common subject in writings about Chinese defense modernization at the time was examining the roots of its failure.⁸ The situation started to change closer to the end of 2000s and one of the major turning points was the grand parade for the 60th anniversary of the Communist Party of China, which clearly demonstrated that the PLA has indeed made a leap forward over 1-2 generations of defense technology in most areas.

Certain measures started to be taken in the mid-2000s, e.g., a Guam military buildup was first announced in 2005. Although the initial cause for the buildup was the relocation of Marine bases from Okinawa, the project quickly developed beyond that with plans to construct a major and very expensive naval base. In 2009, as the situation in Iraq entered a short-lived stabilization phase, the United States started to develop a specific strategic and operational concept to counter China militarily. The Air-Sea Battle operational concept was born although later the name was dropped in favor of the Joint Concept for Access and Maneuver in the Global Commons (JAM-GC) as the concept remained concentrated on China.⁹ In the field of defense technology the Air-Sea Battle/JAM-GC was followed by the Pentagon’s Third Offset Strategy, a major technological initiative openly designed to address the strengths and weaknesses of the Chinese military and defense industrial base.

In Obama’s first term, the United States moved to normalize relations with Russia, which were badly damaged by the Russian-Georgian military conflict of 2008, starting the “reset” policy in 2009. This too could be seen as a necessary preparatory step to deal with the China problem. In case of success the reset could prevent closer China-Russia partnership in the face of American pressure on China. It could also allow the United States to make deeper cuts in the American military presence in Europe, which was gradually turning into a strategic periphery. The Obama administration clearly hurried with fast troop withdrawals from the Middle East—partly for internal policy reasons and partly to start the much-needed rebalancing towards Asia.

By 2011 it appeared that everything was on track for much needed rebalancing and dealing with the Chinese problem with high probability of success. China potentially could be pressed to accept the new rules of the game proposed by the US in both politics and trade. During the last years of the Hu Jintao/Wen Jiabao administration China was showing growing signs of political weakness caused by several competing power centers within the leadership, endemic corruption, and inability to implement some of the vitally important economic reforms. The Libyan civil war of 2011, where the Chinese have lost significant investments and had to evacuate some 35 thousand nationals as a result of the uprising supported by Western intervention, had shown that China was simply incapable of decisive and independent actions on the international arena without Russian support. However, by 2012, it became clear that the Chinese had another “strategic respite.” The security situation in Iraq started to spiral down to chaos. Simultaneously, the Arab spring had destabilized the Middle East and Russian unwillingness to abandon the Assad regime in Syria sent Russian-US relations into crisis. In 2014 the Ukrainian crisis and the massive ISIS offensive in Iraq basically killed the US rebalancing strategy since the United States had to increase its military presence in both Europe and the Middle East.  

As the rivalry between China and United States started to deepen, the United States suffered a major defeat which was not widely noticed at the time, but the extent of that defeat has become clear by now. In the early 2010s, for reasons which are not precisely known, much of the US intelligence network in China was destroyed by Chinese counterintelligence with dozens of American intelligence assets arrested.¹⁰ Americans were left with inadequate information-gathering capabilities at the moment when Chinese intelligence clearly expanded its operations especially in cyberspace. In a situation of increasing Sino-US rivalry across Asia that put the Americans at an additional disadvantage.

The US military moves to counter the growing Chinese influence in the region were usually too little, too late. They failed to stop the Chinese from expensive reclamation works on the PRC-controlled maritime features in the South China Sea, and the subsequent freedom of navigation patrols could be seen as desperate measures to stop the Chinese from imposing their territorial waters and exclusive economic zone regimes around them. The United States could not prevent the Chinese from the development of important military infrastructure on these features, which changed the balance of power in the South China Sea. The United States did move forward in strengthening its missile defense capabilities in the Pacific, including an increase in the number of anti-ballistic missile defense capable ships, the deployment of additional ground-based interceptors in Alaska and the THAAD system on Guam, and, in 2016, reaching agreement with the South Koreans to deploy another THAAD battery in South Korea. The last action provoked a very aggressive response from the Chinese, who imposed a number of unofficial economic sanctions on the country. This pressure, which lasted for more than a year, inflicted serious economic hardship on the South Koreans, who did not get meaningful support from the United States and decided to compromise in October 2017, which, for the first time, has effectively limited South Korean sovereignty on matters of Chinese interest. Seoul agreed to make a statement ruling out additional deployments of THAAD, participation in any possible trilateral alliance with the United States and Japan, and participation in the US global missile defense network.¹¹ Although the statement was oral and legally non-binding it created an important precedent in which a major East Asian country and an important US military ally agreed to consider special Chinese security interests outside Chinese borders.

American relations with two other important Asian allies, Thailand and the Philippines, were considerably weakened because of internal changes in these countries. Thailand after a 2014 military coup and the Philippines after Rodrigo Duterte’s election as president in June 2016 moved to establish closer cooperation with China. Having achieved a significant victory in the UN arbitration on the South China Sea, the Philippines chose not to use the court decision to pressure China. Instead, Duterte started to seek greater Chinese investment and repeatedly hinted at the possibility of a deal to exchange Chinese economic commitments for softening his country’s position on the South China Sea.

Changes in US internal politics and the rise of anti-trade sentiments led to abandonment of the most successful element of the Obama administration Asian policy—the Trans-Pacific Partnership (TPP)—immediately after Trump was elected. Contacts with Chinese officials throughout 2015- 2017 show that during that period they experienced a double shock—first from the quick and successful conclusion of the TPP talks by the end of 2015 and later by US abandonment of the project. Sharp deterioration of the situation on the Korean Peninsula by the end of 2016 gave China another period of “strategic respite,” however short. By the end of Obama’s second term it was obvious that the “strategic patience” policy towards North Korea adopted by the United States in the 1990s had failed completely. The North Korean regime has survived several waves of sanctions. Its economy had stabilized and was growing quite quickly by 2016, reaching that year, as estimated by the South Korean central bank, 3.9% growth. The situation was only reversed in 2017 when extreme sanctions were imposed, and China agreed to fully cooperate with the United States in pressuring the DPRK.¹² The Chinese cooperation was necessary: North Korea by 2017 was believed to have mastered the technology of nuclear warheads for intermediate range ballistic missiles and was starting to test prototypes of intercontinental ballistic missiles capable of hitting the continental United States.

The serial production and deployment of such a missile system could lead to a dangerous situation for the whole region. If one day the US technical intelligence and reconnaissance systems provided enough data to conclude that the North Koreans were preparing a missile attack against the United States, the Americans would most likely launch a preemptive strike. That in turn would lead to massive retaliation by the North Korean military against South Korea and Japan. Lack of information about the scale and technical level of the North Korean missile program meant that the only way to avert crisis was to make the DPRK stop testing the potential intercontinental ballistic missiles before they are ready for deployment. Chinese cooperation was necessary, and this need was mentioned by Trump as a reason to postpone the trade war.¹³ For much of 2017 the United States have also scaled down the freedom of navigation patrols in the South China Sea. However, the new wave of sanctions also served the Chinese goals. Sharing a long border with North Korea, being a major economy and UN Security Council member, China could in fact decide to what degree it wanted to implement the sanctions, while the rest of the world was simply scaling down any economic relations with the DPRK. As result, the DPRK was becoming more and more dependent on China economically, which basically suited the Chinese policy goal of returning Pyongyang to be under Chinese influence.

By the beginning of 2018 the policy brought mixed results. In the first half of 2018 Kim Jong-un conducted three meetings with Xi Jinping both before and after the Singapore summit between Kim and Trump. There are numerous signs that China has relaxed economic pressure on North Korea in return for the North Korean agreement to follow, to a certain degree, Chinese guidance on security affairs. The DPRK-US summit brought limited results with North Korea suspending nuclear tests and long-range missiles launches and dismantling some test facilities (yet the production base was not dismantled and the production of new missile continued). At the same time, the establishment of high-level dialogue between the US and North Korea and the freezing of North Korean ICBM testing made it possible to avoid war.  

It appears that the two sides are pursuing ambitious and long-standing goals which make compromise unlikely. The mutual disbalance in the trade in goods is a relatively minor problem in the Sino-American relationship, which could be addressed by China increasing procurement of American commodities and services. That was the main idea behind the failed agreement reached by the Vice-prime minister Liu He and the Treasury Secretary Steven Mnuchin.¹⁴

In reality, in this trade war the United States is not really trying to address the imbalance, but rather is trying to dismantle some vital elements of Chinese economic policy, which are supposed to deliver China from the middle-income trap. The Chinese policy is currently centered around a number of huge technological initiatives, which are managed at a very high political level, especially after the Central Commission for Integrated Civilian and Military Development was established in 2017. The commission, which at the moment of formation included 4 of the 7 CCP Politburo Standing Committee members, is supposed to manage key projects much in the way the famous “two bombs and one satellite” program was managed in the Mao era. The government is concentrating on the infusion of vast resources into a limited number of very high-profile projects such as the development of artificial intelligence or 5G technology.

The companies involved in such projects with state support are at the same time enjoying the benefits of globalization. These include access to foreign technology, foreign personnel, and high-tech components for domestic production. The best examples of such an approach are the two Chinese leading telecom equipment producers, ZTE and Huawei, which managed to create highly innovative businesses competing globally with the established leaders. These were the very companies which came under US pressure for supposed violation of the anti-Iranian sanctions and involvement in espionage activities. As result, the normal business of ZTE outside of China was destroyed and Huawei was facing increased limitations on the US market.

While China could potentially compromise on trade, China cannot abandon these industrial policies which the United States and some other Western countries accuse of violating trade rules and intellectual property rights. China is currently lacking a business climate which could make it possible for the country to compete relying on market-driven, private sector innovation as the main source of progress. And moving up the production chain becomes vital now with an aging population and significant wage inflation.

The American moves to levy high tariffs on Chinese indigenous high tech and limit access to Western technology are making massive retaliation from the Chinese side inevitable. China will need to rely more on its domestic market, protecting it from certain high-tech goods from the established producers to save the “national champions.” This would completely undermine the existing model of economic relations between China and the developed countries. China is also engaging in very active multilateral diplomacy to prevent the United States from coordinating anti-Chinese measures with its allies. At the same time, China is strengthening relations with BRICS countries especially Russia. In August 2018 Chinese troops for the first time took part in the Russian strategic exercise Vostok-2018. Russia can be expected to benefit from Chinese counter-tariffs against US LNG and agricultural products. With Russia already largely isolated from the West and suffering from the financial sanctions, the relations of the two could potentially lead to the emergence of a trade bloc with development of parallel financial infrastructure to service their trade. The two sides are already trying to increase the share of national currencies in their trade.

Conclusion

The current crisis in Sino-US relations is not limited to economics and is not caused by some specific imbalances in the bilateral trade although the White House is currently trying to portray the main problem as such. The key issue is rather that the current Chinese political-economical model is not compatible with the US-led global liberal capitalist system. Current Chinese industrial policies and innovation initiatives, if successful, will create major disruption in that system, which could result in severe crisis. China cannot give up these initiatives, which are seen as key to avoiding the middle-income trap, economic stagnation which could potentially destabilize China politically. Not just Chinese economic practices are seen as unacceptable. The Chinese political system is seen in the United States as moving in the wrong direction, towards greater Communist Party control over social life and further away from the liberal model. At the same time, the United States takes the Chinese military power much more seriously than before. The growing Chinese influence on smaller developing countries in Asia and beyond is also causing concern.

At this point, the United States is trying to bring the policy of containment to a new level, increasing the pressure on China on several fronts simultaneously. Although currently the trade war is the main venue, the growing US engagement in Taiwan can make the situation even tenser. The relationship has entered a period of irreversible and relatively fast deterioration. Going down to the level of the current Russian-American relations may take time, because of the magnitude of economic and cultural ties between the countries, but the relationship could get there within several years, especially if there will be a security crisis around Taiwan or in the South China Sea on top of the existing differences.