China’s President Xi Jinping has spoken to his Ukrainian counterpart, Volodymyr Zelenskiy, for the first time since the war in Ukraine began. According to the Chinese statement, the conversation produced two tangible results, as reported by Fabian Peltsch: On the one hand, the Chinese government will send a special envoy for Eurasian affairs to Ukraine to hold talks for a political solution to the crisis. Additionally, Beijing will send humanitarian aid to Kyiv.
Several European representatives had appealed to Xi in recent weeks to speak with Zelenskiy. In Brussels, rumors suggested that the remarkable appearance of the Chinese ambassador to France, Lu Shaye, could have set the last stone in motion. Last week, Lu denied the sovereignty of former Soviet Union states. The Foreign Ministry in Beijing has already made a remarkably clear retreat from that statement. After the phone call, state agencies reported that Xi had emphasized “respect for sovereignty and territorial integrity”.
On Tuesday, it was revealed that pro-independence activist Yang Chih-yuan will face trial in China after being arrested in August. The charge is secession. Marcel Grzanna writes that this is the first time a Taiwanese citizen will be tried in a Chinese court for political activity. The accusation shows that Beijing wants to protect its interests abroad through its domestic laws.
The news came out of the blue on Wednesday evening, Beijing local time: China’s President Xi Jinping spoke on the phone with Volodymyr Zelenskiy, the president of Ukraine, as state media reported. As Zelenskiy shared on Twitter shortly after, the conversation was “long and meaningful.” The phone call had been expected, especially by the Ukrainian side, for months. There had been radio silence between the two leaders since the invasion of Ukraine by Russian troops. Instead of talking to Zelenskiy, Xi met his “good old friend” Vladimir Putin in Moscow at the end of March. The focus was on expressions of friendship and economic cooperation with Russia. When Zelenskiy extended an invitation to Xi a few days later and told the AP news agency “we are ready to see him here,” it was impossible not to hear the desperation between the lines.
Zelenskiy knows that China is the only country that can exert substantial pressure on Russia to cooperate with Ukraine toward peace. To this end, Beijing presented a 12-point plan for a “political solution to the Ukraine crisis” in February. This includes, among other things, a call for de-escalation and an eventual ceasefire. On closer inspection, however, the plan turned out to be woolly, unspecific and tending to follow the narrative and claims of the Russian partner. This was also Zelenskiy’s view. He would consider a peace settlement only after Russian troops had left Ukrainian territory.
It is not known whether such plans were now part of the phone call with Xi. “I believe that this call, as well as the appointment of Ukraine’s ambassador to China, will give a powerful impetus to the development of our bilateral relations,” Zelenskiy wrote on Twitter after the phone call. Zelenskiy’s spokesman Sergii Nikiforov said in a Facebook post that the discussion lasted nearly an hour. The new ambassador to China being talked about is Pavel Ryabikin. He previously headed the Ministry of Strategic Industries. The ambassador’s post had been vacant since February 2021.
According to a readout published by state media, the tone of the phone call was friendly to cooperative. Xi thanked Zelenskiy for Ukraine’s help in evacuating Chinese citizens. Zelenskiy, in turn, reiterated that he would stick to the one-China policy. He said he hopes to establish comprehensive cooperation with China to “open a new chapter in Ukrainian-Chinese relations and work together to maintain peace and stability in the world”.
The statement from the Foreign Ministry also supported Ukraine’s demand that its territory not be divided by Russian annexations. At the same time, it was emphasized that Beijing values its longstanding relationship with Ukraine. “No matter how the international situation develops, China will work with Ukraine to promote mutually beneficial cooperation,” the statement said.
What will happen after the phone call? Chinese Foreign Ministry spokeswoman Hua Chunying announced that Beijing will now send the Chinese government’s special representative for Eurasian affairs to Ukraine and other countries “to hold in-depth talks with all parties on a political solution to the Ukraine crisis.” China’s current special envoy for the Eurasian region has been Li Hui since 2019. The 70-year-old is an expert on Eastern Europe and Russia. He joined the USSR and Europe Department of the Chinese Foreign Ministry back in the mid-1970s. From there, he climbed the career ladder as Secretary of the Chinese Embassy in the USSR and later as Secretary of the Chinese Embassy in the Russian Federation. He eventually served as Ambassador of the People’s Republic of China to Russia from 2009 to 2019 until he announced his retirement in July 2019.
In his new post as special representative for Eurasia, Li has so far mainly propagated the implementation of the Belt and Road Initiative in the region, always emphasizing the important role of Russia. “Strong mutual political trust is the most important feature of Sino-Russian relations and the foundation of bilateral ties,” he said, for example, ahead of the second Belt and Road Forum for International Cooperation (BRF) in April 2019, which Putin also attended in Beijing.
Whether Li’s mission can contribute to peace negotiations that are satisfactory to both sides is questionable. China’s ministry did not give any details about when Li will start his trip and which countries he will visit. China’s state media also remain habitually vague. President Xi reportedly told Zelenskiy by phone that “talks and negotiations are the only way out” of the war. All parties involved must remain “calm and exercise restraint,” he said. China, he said, is “neither a party to the conflict nor does it want to stand on the sidelines, pour oil on the fire or profit from the situation” (我们既不会隔岸观火，也不会拱火浇油，更不干趁机牟利的事).
Zelenskiy obviously cannot and will not give up hope in Beijing. With its peace plan, China has at least shown that it wants to talk about Ukraine, and that is “not bad,” he had declared during a speech on the anniversary of the invasion at the end of February. That Xi did not comment positively on Russia’s role in the Ukraine war during his Moscow trip was even interpreted by Zelenskiy as a defeat for Putin. “He has no allies,” he declared in an interview at the time.
The White House stated that it was not informed in advance about the phone call but described it as a positive development. The conversation allows Xi to hear Ukraine’s view of the illegal, unprovoked invasion. “We think that’s a good thing,” said White House National Security Council spokesperson John Kirby.
The German government also viewed the phone call between Xi and Zelenskiy positively. As a permanent member of the UN Security Council, China has a “special responsibility to end the illegal Russian war of aggression against Ukraine,” a government spokesperson said on Wednesday. “The fact that there is now a dialogue between Ukraine and China at the highest level is a good sign.” The German stance on the war remains unchanged, the spokesperson emphasized: “The basis for the development of a fair peace in Ukraine is a withdrawal of Russian troops.”
News of two arrests is troubling Taiwan. For several months now, a Taiwanese publisher and an activist have been in Chinese custody. Only now have details of the cases become public, which superficially have nothing to do with each other. In fact, they are an expression of the Chinese judiciary’s self-image of being able to dispense justice to Taiwanese citizens as it does to its own citizens.
On Tuesday, it was announced that independence activist Yang Chih-yuan will stand trial in China after his arrest in August. The charge is secession. It is the first time that a Taiwanese citizen will be tried in a Chinese court for political activity.
A few days earlier, the family of the publisher Li Yanhe had also informed that the mainland Chinese, who was naturalized in Taiwan, had also been detained in China for months. Li, who is also known as Fu Cha, has published books on topics that are censored in China: on the fate of the Uyghurs in Xinjiang, on Chinese propaganda or on the bloody end of the democracy movement of 1989.
Civil society in Taiwan is startled. The two cases raise questions. How safe is travel to the People’s Republic for citizens of the island nation? And on what legal basis does Chinese law enforcement charge Taiwanese who are merely exercising their own country’s civil rights?
Activist Lee Ming-che, who himself served five years in Chinese detention until last April and is now back in his homeland, warns his fellow citizens of Chinese government overreach: “China’s suppression of Taiwanese self-confidence will not stop, and Editor-in-Chief Fu Cha is just the beginning. In the past it was implicit pressure, but now it’s blatant arrest,” he had commented on social media over the weekend. At that time, he did not yet know about the detention of activist Yang.
As things stand, neither man has committed a crime in the People’s Republic. The arrests indicate that China considers its own jurisdiction beyond its own national borders to be legitimate. “As an emerging world power, it is in China’s interest to establish a legal system of extraterritoriality to safeguard its own national interests that extend globally,” authors Huo Zhengxin and Yip Man sum up in a paper for Oxford University’s Chinese Journal of Comparative Law.
In Hong Kong, whose autonomy the Chinese government has stifled despite promises to the contrary, the National Security Law has made such an extraterritorial claim since mid-2020. Accordingly, not only Hong Kong citizens living in exile may be liable to prosecution, but also foreign citizens abroad whose actions run counter to Hong Kong state interests.
One of the first foreigners to be put on international wanted list under the Security Act was former Danish Culture Minister Uffe Elbaek. The parliamentarian had helped a Hong Kong politician escape from Hong Kong with an invitation to a fake conference in Copenhagen, thus saving him from a court case.
The cases of Li Yanhe and Yang Chih-yuan are a strong warning signal for all Taiwanese who intend to travel to the People’s Republic. Both detainees had entered China in the safe belief that nothing would happen to them despite their activities. Li had reportedly already been to the People’s Republic in 2020 and was still able to return to Taiwan effortlessly at the time. This time he had wanted to visit family members, Chinese poet Bei Ling wrote in social media. Bei had made Li’s arrest public after consulting Li’s family.
It is unclear why his renewed visit led to his arrest. The only fact is that geopolitical tensions around Taiwan have increased massively in recent years. Every Taiwanese citizen in the hands of the Chinese judiciary is a trump card in possible negotiations between the two governments.
This now includes activist Yang. The 33-year-old was arrested shortly after the visit of Nancy Pelosi, then Speaker of the US House of Representatives, to Taiwan and initially held for six months without charge. Under Chinese criminal law, as a member of a party that supports Taiwan’s independence, he faces a long prison sentence of between ten years and life.
Five years into a once-unthinkable trade war with China, US Treasury Secretary Janet Yellen chose her words carefully on April 20. In a wide-ranging speech, she reversed the terms of US engagement with China, prioritizing national-security concerns over economic considerations. That formally ended a 40-year emphasis on economics and trade as the anchor to the world’s most important bilateral relationship. Yellen’s stance on security was almost confrontational: “We will not compromise on these concerns, even when they force trade-offs with our economic interests.”
Yellen’s view is very much in line with the strident anti-China sentiment that has now gripped the United States. The “new Washington consensus,” as Financial Times columnist Edward Luce calls it, maintains that engagement was the original sin of the US-China relationship, because it gave China free rein to take advantage of America’s deal-focused naiveté. China’s accession to the World Trade Organization in 2001 gets top billing in this respect: the US opened its markets, but China purportedly broke its promise to become more like America. Engagement, according to this convoluted but widely accepted argument, opened the door to security risks and human-rights abuses. American officials are now determined to slam that door shut.
There is more to come. President Joe Biden is about to issue an executive order that will place restrictions on foreign direct investment (FDI) by US firms in certain “sensitive technologies” in China, such as artificial intelligence and quantum computing. The US rejects the Chinese allegation that these measures are aimed at stifling Chinese development. Like sanctions against the Chinese telecoms giant Huawei and those being considered against the social-media app TikTok, this one, too, is being justified under the amorphous guise of national security.
The US case rests not on hard evidence but on the presumption of nefarious intent tied to China’s dual-purpose military-civilian fusion. Yet the US struggles with its own security fusion – namely, the fuzzy distinction between America’s under-investment in innovation and the real and imagined threats of Chinese technology.
Significantly, Yellen’s speech put both superpowers on the same page. At the Communist Party’s 20th National Congress last October, Chinese President Xi Jinping’s opening message also stressed national security. With both countries equally fearful of the security threat that each poses to the other, the shift from engagement to confrontation is mutual.
Yellen is entirely correct in framing this shift as a tradeoff. But she only hinted at the economic consequences of conflict. Quantifying these consequences is not simple. But the American public deserves to know what is at stake when its leaders rethink a vitally important economic relationship. Some fascinating new research goes a long way toward addressing this issue.
A just-published study by the International Monetary Fund (summarized in the April 2023 World Economic Outlook) takes a first stab at identifying the costs. IMF economists view the problem through the lens of “slowbalization”: the reduction of cross-border flows of goods and capital, reflected in geostrategic strategies of “reshoring” (bringing offshore production back home) and what Yellen herself has called “friend-shoring” (shifting offshore production from adversaries to like-minded members of alliances).
Such actions result in “dual bloc” FDI fragmentation. The IMF estimates that the formation of a US bloc and a China bloc could reduce global output by as much as 2 percent over the longer term. As the world’s largest economy, America will account for a significant share of foregone output.
European Central Bank President Christine Lagarde recently stressed a different channel through which an escalating US-China conflict could adversely affect economic performance. Drawing on research by ECB staff, she focuses on the higher costs and inflation resulting from supply-chain disruptions implied by conflict-driven FDI fragmentation. The ECB study concludes that geostrategic conflict could boost inflation by as much as 5 percent in the short run and around 1 percent over the longer term. Collateral effects on monetary policy and financial stability would follow.
Collectively, these model-based calculations of the costs of conflict imply a stagflationary combination of lower output and higher inflation – hardly a trivial consideration in today’s fragile economic climate. And they dovetail with economic theory. Countries trade with others to reap the benefits of comparative advantage. Both inward and outward flows of foreign investment seek to achieve similar benefits, offering offshore efficiencies for multinational corporations that face higher costs in their home markets and attracting foreign capital to support domestic capacity expansion and job creation. Regardless of their different political systems and economic structures, this is true for both America and China. It follows that conflict will reduce these benefits.
Yet there is an important twist for the US: a chronic shortfall of domestic saving casts the economic consequences of conflict with China in a very different light. In 2022, net US saving – the depreciation-adjusted saving of households, businesses, and the government sector – fell to just 1.6 percent of national income, far below the longer-term 5.8 percent average from 1960 to 2020. Lacking in saving and wanting to invest and grow, the US takes full advantage of the dollar’s “exorbitant privilege” as the world’s dominant reserve currency and freely imports surplus saving from abroad, running a massive current-account and multilateral trade deficit to attract foreign capital.
As such, the economic interests of saving-short America are tightly aligned with its outsize imbalances of trade and capital flows. Barring a highly unlikely resurgence of domestic US saving, compromising those flows for any reason – say, security concerns over China – is not without meaningful economic and financial consequences. The research cited above suggests those consequences will take the form of slower economic growth, higher inflation, and possibly a weaker dollar.
This is hardly an ideal outcome for a US economy that is already at a precarious point in the business cycle. The tradeoff for national security should not be taken lightly. Nor should the US penchant to over-hype the security threat be accepted on blind faith.
Stephen S. Roach, a former chairman of Morgan Stanley Asia, is a faculty member at Yale University and the author, most recently, of Accidental Conflict: America, China, and the Clash of False Narratives (Yale University Press, 2022).
Copyright: Project Syndicate, 2023.
www.project-syndicate.org
What appears so idyllic with the rock and the pagoda jutting out of the water in the Jiujiang district of Jiangxi province is, unfortunately, a medium-scale environmental catastrophe. Persistent rainfall in recent days has caused the water level of Poyang Lake to dangerously rise and flood its banks.
China’s President Xi Jinping has spoken to his Ukrainian counterpart, Volodymyr Zelenskiy, for the first time since the war in Ukraine began. According to the Chinese statement, the conversation produced two tangible results, as reported by Fabian Peltsch: On the one hand, the Chinese government will send a special envoy for Eurasian affairs to Ukraine to hold talks for a political solution to the crisis. Additionally, Beijing will send humanitarian aid to Kyiv.
Several European representatives had appealed to Xi in recent weeks to speak with Zelenskiy. In Brussels, rumors suggested that the remarkable appearance of the Chinese ambassador to France, Lu Shaye, could have set the last stone in motion. Last week, Lu denied the sovereignty of former Soviet Union states. The Foreign Ministry in Beijing has already made a remarkably clear retreat from that statement. After the phone call, state agencies reported that Xi had emphasized “respect for sovereignty and territorial integrity”.
On Tuesday, it was revealed that pro-independence activist Yang Chih-yuan will face trial in China after being arrested in August. The charge is secession. Marcel Grzanna writes that this is the first time a Taiwanese citizen will be tried in a Chinese court for political activity. The accusation shows that Beijing wants to protect its interests abroad through its domestic laws.
The news came out of the blue on Wednesday evening, Beijing local time: China’s President Xi Jinping spoke on the phone with Volodymyr Zelenskiy, the president of Ukraine, as state media reported. As Zelenskiy shared on Twitter shortly after, the conversation was “long and meaningful.” The phone call had been expected, especially by the Ukrainian side, for months. There had been radio silence between the two leaders since the invasion of Ukraine by Russian troops. Instead of talking to Zelenskiy, Xi met his “good old friend” Vladimir Putin in Moscow at the end of March. The focus was on expressions of friendship and economic cooperation with Russia. When Zelenskiy extended an invitation to Xi a few days later and told the AP news agency “we are ready to see him here,” it was impossible not to hear the desperation between the lines.
Zelenskiy knows that China is the only country that can exert substantial pressure on Russia to cooperate with Ukraine toward peace. To this end, Beijing presented a 12-point plan for a “political solution to the Ukraine crisis” in February. This includes, among other things, a call for de-escalation and an eventual ceasefire. On closer inspection, however, the plan turned out to be woolly, unspecific and tending to follow the narrative and claims of the Russian partner. This was also Zelenskiy’s view. He would consider a peace settlement only after Russian troops had left Ukrainian territory.
It is not known whether such plans were now part of the phone call with Xi. “I believe that this call, as well as the appointment of Ukraine’s ambassador to China, will give a powerful impetus to the development of our bilateral relations,” Zelenskiy wrote on Twitter after the phone call. Zelenskiy’s spokesman Sergii Nikiforov said in a Facebook post that the discussion lasted nearly an hour. The new ambassador to China being talked about is Pavel Ryabikin. He previously headed the Ministry of Strategic Industries. The ambassador’s post had been vacant since February 2021.
According to a readout published by state media, the tone of the phone call was friendly to cooperative. Xi thanked Zelenskiy for Ukraine’s help in evacuating Chinese citizens. Zelenskiy, in turn, reiterated that he would stick to the one-China policy. He said he hopes to establish comprehensive cooperation with China to “open a new chapter in Ukrainian-Chinese relations and work together to maintain peace and stability in the world”.
The statement from the Foreign Ministry also supported Ukraine’s demand that its territory not be divided by Russian annexations. At the same time, it was emphasized that Beijing values its longstanding relationship with Ukraine. “No matter how the international situation develops, China will work with Ukraine to promote mutually beneficial cooperation,” the statement said.
What will happen after the phone call? Chinese Foreign Ministry spokeswoman Hua Chunying announced that Beijing will now send the Chinese government’s special representative for Eurasian affairs to Ukraine and other countries “to hold in-depth talks with all parties on a political solution to the Ukraine crisis.” China’s current special envoy for the Eurasian region has been Li Hui since 2019. The 70-year-old is an expert on Eastern Europe and Russia. He joined the USSR and Europe Department of the Chinese Foreign Ministry back in the mid-1970s. From there, he climbed the career ladder as Secretary of the Chinese Embassy in the USSR and later as Secretary of the Chinese Embassy in the Russian Federation. He eventually served as Ambassador of the People’s Republic of China to Russia from 2009 to 2019 until he announced his retirement in July 2019.
In his new post as special representative for Eurasia, Li has so far mainly propagated the implementation of the Belt and Road Initiative in the region, always emphasizing the important role of Russia. “Strong mutual political trust is the most important feature of Sino-Russian relations and the foundation of bilateral ties,” he said, for example, ahead of the second Belt and Road Forum for International Cooperation (BRF) in April 2019, which Putin also attended in Beijing.
Whether Li’s mission can contribute to peace negotiations that are satisfactory to both sides is questionable. China’s ministry did not give any details about when Li will start his trip and which countries he will visit. China’s state media also remain habitually vague. President Xi reportedly told Zelenskiy by phone that “talks and negotiations are the only way out” of the war. All parties involved must remain “calm and exercise restraint,” he said. China, he said, is “neither a party to the conflict nor does it want to stand on the sidelines, pour oil on the fire or profit from the situation” (我们既不会隔岸观火，也不会拱火浇油，更不干趁机牟利的事).
Zelenskiy obviously cannot and will not give up hope in Beijing. With its peace plan, China has at least shown that it wants to talk about Ukraine, and that is “not bad,” he had declared during a speech on the anniversary of the invasion at the end of February. That Xi did not comment positively on Russia’s role in the Ukraine war during his Moscow trip was even interpreted by Zelenskiy as a defeat for Putin. “He has no allies,” he declared in an interview at the time.
The White House stated that it was not informed in advance about the phone call but described it as a positive development. The conversation allows Xi to hear Ukraine’s view of the illegal, unprovoked invasion. “We think that’s a good thing,” said White House National Security Council spokesperson John Kirby.
The German government also viewed the phone call between Xi and Zelenskiy positively. As a permanent member of the UN Security Council, China has a “special responsibility to end the illegal Russian war of aggression against Ukraine,” a government spokesperson said on Wednesday. “The fact that there is now a dialogue between Ukraine and China at the highest level is a good sign.” The German stance on the war remains unchanged, the spokesperson emphasized: “The basis for the development of a fair peace in Ukraine is a withdrawal of Russian troops.”
News of two arrests is troubling Taiwan. For several months now, a Taiwanese publisher and an activist have been in Chinese custody. Only now have details of the cases become public, which superficially have nothing to do with each other. In fact, they are an expression of the Chinese judiciary’s self-image of being able to dispense justice to Taiwanese citizens as it does to its own citizens.
On Tuesday, it was announced that independence activist Yang Chih-yuan will stand trial in China after his arrest in August. The charge is secession. It is the first time that a Taiwanese citizen will be tried in a Chinese court for political activity.
A few days earlier, the family of the publisher Li Yanhe had also informed that the mainland Chinese, who was naturalized in Taiwan, had also been detained in China for months. Li, who is also known as Fu Cha, has published books on topics that are censored in China: on the fate of the Uyghurs in Xinjiang, on Chinese propaganda or on the bloody end of the democracy movement of 1989.
Civil society in Taiwan is startled. The two cases raise questions. How safe is travel to the People’s Republic for citizens of the island nation? And on what legal basis does Chinese law enforcement charge Taiwanese who are merely exercising their own country’s civil rights?
Activist Lee Ming-che, who himself served five years in Chinese detention until last April and is now back in his homeland, warns his fellow citizens of Chinese government overreach: “China’s suppression of Taiwanese self-confidence will not stop, and Editor-in-Chief Fu Cha is just the beginning. In the past it was implicit pressure, but now it’s blatant arrest,” he had commented on social media over the weekend. At that time, he did not yet know about the detention of activist Yang.
As things stand, neither man has committed a crime in the People’s Republic. The arrests indicate that China considers its own jurisdiction beyond its own national borders to be legitimate. “As an emerging world power, it is in China’s interest to establish a legal system of extraterritoriality to safeguard its own national interests that extend globally,” authors Huo Zhengxin and Yip Man sum up in a paper for Oxford University’s Chinese Journal of Comparative Law.
In Hong Kong, whose autonomy the Chinese government has stifled despite promises to the contrary, the National Security Law has made such an extraterritorial claim since mid-2020. Accordingly, not only Hong Kong citizens living in exile may be liable to prosecution, but also foreign citizens abroad whose actions run counter to Hong Kong state interests.
One of the first foreigners to be put on international wanted list under the Security Act was former Danish Culture Minister Uffe Elbaek. The parliamentarian had helped a Hong Kong politician escape from Hong Kong with an invitation to a fake conference in Copenhagen, thus saving him from a court case.
The cases of Li Yanhe and Yang Chih-yuan are a strong warning signal for all Taiwanese who intend to travel to the People’s Republic. Both detainees had entered China in the safe belief that nothing would happen to them despite their activities. Li had reportedly already been to the People’s Republic in 2020 and was still able to return to Taiwan effortlessly at the time. This time he had wanted to visit family members, Chinese poet Bei Ling wrote in social media. Bei had made Li’s arrest public after consulting Li’s family.
It is unclear why his renewed visit led to his arrest. The only fact is that geopolitical tensions around Taiwan have increased massively in recent years. Every Taiwanese citizen in the hands of the Chinese judiciary is a trump card in possible negotiations between the two governments.
This now includes activist Yang. The 33-year-old was arrested shortly after the visit of Nancy Pelosi, then Speaker of the US House of Representatives, to Taiwan and initially held for six months without charge. Under Chinese criminal law, as a member of a party that supports Taiwan’s independence, he faces a long prison sentence of between ten years and life.
Five years into a once-unthinkable trade war with China, US Treasury Secretary Janet Yellen chose her words carefully on April 20. In a wide-ranging speech, she reversed the terms of US engagement with China, prioritizing national-security concerns over economic considerations. That formally ended a 40-year emphasis on economics and trade as the anchor to the world’s most important bilateral relationship. Yellen’s stance on security was almost confrontational: “We will not compromise on these concerns, even when they force trade-offs with our economic interests.”
Yellen’s view is very much in line with the strident anti-China sentiment that has now gripped the United States. The “new Washington consensus,” as Financial Times columnist Edward Luce calls it, maintains that engagement was the original sin of the US-China relationship, because it gave China free rein to take advantage of America’s deal-focused naiveté. China’s accession to the World Trade Organization in 2001 gets top billing in this respect: the US opened its markets, but China purportedly broke its promise to become more like America. Engagement, according to this convoluted but widely accepted argument, opened the door to security risks and human-rights abuses. American officials are now determined to slam that door shut.
There is more to come. President Joe Biden is about to issue an executive order that will place restrictions on foreign direct investment (FDI) by US firms in certain “sensitive technologies” in China, such as artificial intelligence and quantum computing. The US rejects the Chinese allegation that these measures are aimed at stifling Chinese development. Like sanctions against the Chinese telecoms giant Huawei and those being considered against the social-media app TikTok, this one, too, is being justified under the amorphous guise of national security.
The US case rests not on hard evidence but on the presumption of nefarious intent tied to China’s dual-purpose military-civilian fusion. Yet the US struggles with its own security fusion – namely, the fuzzy distinction between America’s under-investment in innovation and the real and imagined threats of Chinese technology.
Significantly, Yellen’s speech put both superpowers on the same page. At the Communist Party’s 20th National Congress last October, Chinese President Xi Jinping’s opening message also stressed national security. With both countries equally fearful of the security threat that each poses to the other, the shift from engagement to confrontation is mutual.
Yellen is entirely correct in framing this shift as a tradeoff. But she only hinted at the economic consequences of conflict. Quantifying these consequences is not simple. But the American public deserves to know what is at stake when its leaders rethink a vitally important economic relationship. Some fascinating new research goes a long way toward addressing this issue.
A just-published study by the International Monetary Fund (summarized in the April 2023 World Economic Outlook) takes a first stab at identifying the costs. IMF economists view the problem through the lens of “slowbalization”: the reduction of cross-border flows of goods and capital, reflected in geostrategic strategies of “reshoring” (bringing offshore production back home) and what Yellen herself has called “friend-shoring” (shifting offshore production from adversaries to like-minded members of alliances).
Such actions result in “dual bloc” FDI fragmentation. The IMF estimates that the formation of a US bloc and a China bloc could reduce global output by as much as 2 percent over the longer term. As the world’s largest economy, America will account for a significant share of foregone output.
European Central Bank President Christine Lagarde recently stressed a different channel through which an escalating US-China conflict could adversely affect economic performance. Drawing on research by ECB staff, she focuses on the higher costs and inflation resulting from supply-chain disruptions implied by conflict-driven FDI fragmentation. The ECB study concludes that geostrategic conflict could boost inflation by as much as 5 percent in the short run and around 1 percent over the longer term. Collateral effects on monetary policy and financial stability would follow.
Collectively, these model-based calculations of the costs of conflict imply a stagflationary combination of lower output and higher inflation – hardly a trivial consideration in today’s fragile economic climate. And they dovetail with economic theory. Countries trade with others to reap the benefits of comparative advantage. Both inward and outward flows of foreign investment seek to achieve similar benefits, offering offshore efficiencies for multinational corporations that face higher costs in their home markets and attracting foreign capital to support domestic capacity expansion and job creation. Regardless of their different political systems and economic structures, this is true for both America and China. It follows that conflict will reduce these benefits.
Yet there is an important twist for the US: a chronic shortfall of domestic saving casts the economic consequences of conflict with China in a very different light. In 2022, net US saving – the depreciation-adjusted saving of households, businesses, and the government sector – fell to just 1.6 percent of national income, far below the longer-term 5.8 percent average from 1960 to 2020. Lacking in saving and wanting to invest and grow, the US takes full advantage of the dollar’s “exorbitant privilege” as the world’s dominant reserve currency and freely imports surplus saving from abroad, running a massive current-account and multilateral trade deficit to attract foreign capital.
As such, the economic interests of saving-short America are tightly aligned with its outsize imbalances of trade and capital flows. Barring a highly unlikely resurgence of domestic US saving, compromising those flows for any reason – say, security concerns over China – is not without meaningful economic and financial consequences. The research cited above suggests those consequences will take the form of slower economic growth, higher inflation, and possibly a weaker dollar.
This is hardly an ideal outcome for a US economy that is already at a precarious point in the business cycle. The tradeoff for national security should not be taken lightly. Nor should the US penchant to over-hype the security threat be accepted on blind faith.
Stephen S. Roach, a former chairman of Morgan Stanley Asia, is a faculty member at Yale University and the author, most recently, of Accidental Conflict: America, China, and the Clash of False Narratives (Yale University Press, 2022).
Copyright: Project Syndicate, 2023.
www.project-syndicate.org
What appears so idyllic with the rock and the pagoda jutting out of the water in the Jiujiang district of Jiangxi province is, unfortunately, a medium-scale environmental catastrophe. Persistent rainfall in recent days has caused the water level of Poyang Lake to dangerously rise and flood its banks.
