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Is America’s China strategy failing?

When U.S. officials meet their Chinese counterparts in Beijing Wednesday for their biannual Strategic and Economic Dialogue, they’ll be carrying out a China strategy of opening the world’s second largest economy to U.S.-style capitalism and pacifying its foreign and security policies supported for decades by most of America’s “best and brightest” – eight presidents, bipartisan Congressional majorities, the nation’s business establishment, and its top foreign policy experts and Sinologists. It’s also a strategy that is lagging badly today behind the pace of events in China and throughout East Asia, and that could backfire disastrously.

Since the Nixon administration’s opening of China in the early 1970s, the U.S. government has sought to help turn the country from an isolated, Cultural Revolution-wracked pariah into a conventional state fully integrated into international political institutions and the world economy. Washington raise this bar in 2005 by urging China to become a “responsible stakeholder” that would actively help preserve the international peace and prosperity so crucial to its success.

In the 1990s, a more explicitly self-interested goal was added to this China agenda — greater U.S.-China economic integration.  U.S. leaders at the time thought China’s enormous scale and phenomenal growth would benefit all Americans, and China’s widening free market reforms would make closer ties safe strategically. Even better, ever thicker U.S.-China commercial ties would strengthen Chinese capitalism and democracy. And since the financial crisis erupted, Chinese purchases of U.S. government debt have been welcomed as valuable lifelines for a floundering American economy.

These objectives and expectations look increasingly fanciful nowadays. Most conspicuously, far from helping to enhance global security, Beijing has been undermining the East Asia status quo by pressing territorial claims it had long tacitly downplayed. Rising East Asian tensions are not China’s fault alone. But no Asian government is embroiled in more disputes with its neighbors, and none has launched such an immense and secretive military buildup.

Worries about Chinese threats to vital U.S. security interests have been voiced since the mid-1990s, due largely to official evidence of Beijing’s transfers of nuclear weapons and missile technology to Pakistan, North Korea and Iran. Yet although China has always been challenging even for the multinational businesses that have monopolized so many of expanded commerce’s benefits, actual and potential China profits has trumped all in their view, and their vigorous lobbying has kept the U.S.-China integration on course.

Recently, however, the case for U.S. policy focusing almost single-mindedly on a China economic payoff has weakened, too. Despite its overall growth slowdown, the China market’s overall size is impossible to ignore, as is the continued potential of still greatly under-developed sectors like healthcare and other personal services. At the same time, China’s actual economic performance could well be even more sluggish than suggested by its dubious official statistics, and its prospects are clouded by ever more dangerous pollution, a government drive to curb reckless lending in sectors like housing, and the possibility that these new restraints won’t suffice to prevent damaging bubble bursting and a broader hard economic landing.

Just as important, American business is now showing signs of souring on China itself.  More and more complain openly about stolen business secrets and Chinese policies that blatantly favor local competitors. Largely as a result, the shares of foreign businesses reporting growing revenues, profits, and operating margins in China last year were still high in absolute terms, but well below recent (2010) peaks, especially for the latter two indicators.  Some companies are even leaving or scaling back, as made clear by the 9.3% drop in U.S. investment in China so far this year. And the bilateral tussle over cybersecurity is bound to create further troubles for big U.S. tech firms like Cisco (CSCO), IBM (IBM), and Microsoft (MSFT).

Also undermining the economic rationale for further economic integration has been marked backsliding in Chinese reform. As observed in a recent report from the U.S. Trade Representative’s office, China made noteworthy liberalization progress while campaigning for World Trade Organization membership. Since admission has been secured, the state’s intervention in the economy has rebounded strongly

In addition to complicating life for U.S. companies in China, this resurgent economic role casts considerable doubt on the newest plank in the integration platform – Washington’s campaign to attract more Chinese capital into non-strategic industries. Encouraging more U.S. investment from enterprises largely free of Beijing’s interference arguably makes sense, especially given the U.S. recovery’s lagging business spending. Encouraging a bigger U.S. economic footprint for actors still deeply embedded in a state capitalist system – and one notorious for corruption – looks like playing with fire.

Because U.S.-China interdependence is already so extensive, Washington can’t afford to reverse course suddenly. But prudence requires at least slowing further integration and starting to de-link America’s fate from China’s in priority areas. More limits on U.S. technology investments in and transfers to China, on U.S. military purchases of Chinese parts and components, and on Chinese takeovers of U.S. businesses, for example, deserve immediate attention.

Even experiments with the worthiest goals can fail – and with disastrous results.  Washington urgently needs to ask itself whether its half century old experiment in China strategy is falling into this category.

Alan Tonelson is the founder of RealityChek, a public policy blog. Previously, he was a research fellow at the U.S. Business and Industry Council and an associate editor of Foreign Policy. He is the author of The Race to the Bottom (2002).