The State of US-China Relations Heading into 2021

Prepared statement for the hearing on US-China Relations at the Chinese Communist Party’s Centennial held before the US-China Economic and Security Review Commission

Author's note: The author thanks Tianlei Huang and David Xu for assistance with data analysis. She acknowledges, without implication, useful conversations with Chad P. Bown, Martin Chorzempa, Tianlei Huang, Nicholas R. Lardy, and Jeffrey J. Schott.

January 28, 2021

1. Introduction

The convening of a new Congress provides an opportunity to forge a more effective American approach to China. The Chinese economy is no longer in transition from plan to market. Successive waves of economic reform have eliminated direct government control of resources and their uses. The plan has been replaced by a modern, decentralized, and integrated economy in which prices drive demand and supply decisions. Under General Secretary Xi Jinping, however, the party-state continues to direct its development. It maintains control of energy, telecommunications, transportation, banking, and heavy industry through the dominant position of state-owned enterprises in these sectors. Subsidies, taxes, and regulation are used to promote desired activities. The Chinese model, thus, is a hybrid in which both the market and the state influence economic activities and outcomes.

This hybrid economy has propelled China into the league of upper-middle-income countries while creating deep linkages to economies in both the East and the West. For US policy toward China to more successfully protect American interests, it must recognize these successes as well as the profound challenges facing Chinese leaders in the new century. For this hearing, I have been asked to comment on the Chinese government’s assessment of its progress in its goal to “catch up and surpass” the United States and achieve global economic leadership. I have also been asked to identify internal and external economic challenges that are likely drivers of Chinese behavior toward the United States. Lastly, I have been asked to describe new frictions that have emerged in the US-China economic relationship since the signing of the “Phase 1” deal in January 2020.

China has long benchmarked its performance against the United States, seeking to match and exceed it in size and strength. Viewing the US-China relationship through this lens, however, is unproductive. China “overtaking” the United States in terms of economic size is a given in all but the most extreme scenarios. If this is its goal, the COVID-19 pandemic has given China much to celebrate. The Chinese economy grew in 2020 while the US economy shrank. And because flows of foreign investment into the United States almost halved in 2020, China eclipsed the United States as the world’s largest recipient of inward investment for the first time (Hannon and Jeong, 2021).

The Chinese leadership, while aspiring to lead, has consistently recognized the importance of access to the world economy to its own success. A healthy world economy is beneficial to China not only as a growing market for its exports, but as a source of key inputs and advanced technology. New American approaches to engagement should be built on a clear understanding of these linkages and how they present both opportunities and challenges for China.