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POLICY PAPER

ON

U.S.A-CHINA RELATIONS

IS CHINA A FRIEND OR AN ENEMY? (Policy and Politics International Perspective)

Ergul HALISCELIK Senior Treasury Controller

Republic of Turkey Prime Ministry Undersecretariat of Treasury

Policy Paper, Spring 2006 H. John Heinz III College, Carnegie Mellon University

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Background: The relation between U.S.A and China has changed since 1980’s. Today the U.S is

the world’s most developed country, while China is the world’s largest developing country. There

is a cooperative partnership in many fields between USA and China which is beneficial for both

sides. During the last two decades China has practiced remarkable changes. These changes

compromise almost all aspects of Chinese society, as well as China’s relations with outside world.

1 Since starting to open up and reform its economy in 1978, China has averaged 9.4 percent annual

GDP growth, one of the highest growth rates in the world. China has also attracted hundreds of

billions of dollars of foreign investment and more than a trillion dollars of domestic nonpublic

investment. Foreign direct investment (FDI) in China has also increased dramatically, rotating

China into the 2nd most important recipient of FDI, after the US. 2

China’s Political Situation: State power within the China is exercised through three interlocking

organizations: the Communist Party of China, the Central People's Government, and the People's

Liberation Army. 3 The government's efforts to promote rule of law are significant and ongoing.

After the Cultural Revolution, China's leaders aimed to develop a legal system to restrain abuses of

official authority and revolutionary excesses. Legal reform became a government main concern in

the 1990s. The Constitution was amended in 2004 to include the protection of individual human

rights and legally-obtained private property, but it is unclear how those provisions will be

implemented. The State Department’s annual China human rights reports have noted China’s well-

documented abuses of human rights in violation of internationally recognized norms, stopping both

from the authorities’ intolerance of disagree and the inadequacy of legal safeguards for basic

freedoms. 4

The Nature of China’s Economic Transition: China’s economy during the last quarter century

has changed from a centrally planned system to a more market-oriented economy that has a rapidly

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growing private sector and is a major player in the global economy. 5 Prior to 1979, China

maintained a centrally planned, or command, economy. A great share of the country’s economic

production was directed and controlled by the state, which set production goals, controlled prices,

and allocated resources throughout most of the economy. Beginning in 1979, China started on

several economic reforms. Since the launch of economic reforms China has become one of the

world’s fastest-growing economies. From 1979 to 2004, China’s real GDP grew at an average rate

of 9.3%; China’s trade boom is largely the result of large flows of foreign direct investment (FDI)

into China (which hit $64 billion in 2004) 6 China selected to carry out economic transition in a

step by step way, rather than by radical reforms or even shock therapy as used in some other

economies. This route proved to the key to the success of transition, because it limited the negative

impact of reforms to an acceptable extent and avoided social unrest. 7

The Most Important Macroeconomic Effects of the Economic Transition: are continuously

increase in trade data, GDP, growth rate and the FDI.

Trade continues to play a major role in China’s booming economy. According to Chinese trade

data, its top five trading partners in 2004 were the European Union (EU), the United States, Japan,

Hong Kong, and the ASEAN. In 2004, exports rose by 35% to $593 billion, while imports grew by

36% to $561 billion — making China the world’s third-largest trading economy (after the United

States and Germany).

Country Total Trade Chinese Exports Chinese Imports China's Trade Balance

EU 177.3 95.9 63.4 32.5 USA 169.7 125.0 44.7 80.3 Japan 167.9 73.5 94.4 -20.9 Hong Kong 112.7 100.9 11.8 89.1 ASEAN 105.9 42.9 63.0 -20.1

Table 1: China’s Top Five Trading Partners, 2004 ($ Billions) (Source: Official Chinese Trade data) Note: Chinese data on its bilateral trade often differ substantially from the official trade data of other countries on their trade with China.

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On the other hand, Chinese statistics show real GDP from 1979 to 2004 growing at an average

annual rate of 9.3%, making China one of the world’s fastest-growing economies. 8

Total two-way trade between China and the

U.S. grew from $33 billion in 1992 to over

$285 billion in 2005. The United States is

China’s second-largest trading partner, and

China is now the third-largest trading partner for the United States (after Canada and Mexico).

U.S. exports to China have been growing more rapidly than to any other market (up 28.4% in

2003, 20% in 2004 and 20.4% in 2005). U.S. imports from China grew 24%, with the U.S. trade

deficit with China exceeding $ 201 billion in 2005. 9 The comparisons of U.S., Japanese, and

Chinese GDP and Per Capita GDP in Nominal U.S. Dollars and PPP, 2004 is given in table below.

Another important macroeconomic effect of this transmission can be seen on Foreign Direct

Investment (FDI) figures. China’s trade and investment reforms and incentives led to a surge in

foreign direct investment, which has been a major source of China’s capital growth. Annual

utilized FDI in China grew from $636 million in 1983 to an estimated $64.0 billion in 2004. The

TRADE IN GOODS WITH CHINA (Million $) YEARS EXPORTS IMPORTS BALANCE

2000 16,185.2 100,018.2 -83,833.0 2001 19,182.3 102,278.4 -83,096.1 2002 22,127.7 125,192.6 -103,064.9 2003 28,367.9 152,436.1 -124,068.2 2004 34,744.1 196,682.0 -161,937.9 2005 41,836.5 243,462.3 -201,625.8

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United States is the second-largest investor in China, accounting for 8.5% ($48.0 billion) of total

FDI.10

China’s Military Capabilities: The rapid grow of the China as a regional political and economic

power with global targets is one of the principal elements in the emergence of East Asia. China’s

emergence has important implications for the region and the world. Today, China is facing a

strategic turning point about the basic choices that China’s leaders will make as China’s power

and influence grow, particularly its military power. The Chinese People’s Liberation Army (PLA)

is modernizing its forces, emphasizing preparations to fight and win short-duration, high-intensity

conflicts along China’s border. PLA modernization has accelerated since the mid-to-late 1990s in

response to central leadership demands to develop military options for Taiwan scenarios.11

Establishment of a professional military force equipped with modern weapons and doctrine was the

last of the "Four Modernizations". In keeping with Deng's mandate to reform, the People's

Liberation Army (PLA), which includes the strategic nuclear forces, army, navy, and air force, has

demobilized millions of men and women since 1978 and introduced modern methods in such areas

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as recruitment and manpower, strategy, and education and training. The Chinese military is trying

to transform itself from a land-based power, centered on a vast ground force, to a smaller, mobile,

high-tech military capable of mounting defensive operations beyond its coastal borders. 12

Conclusion If China is a Friend or a Foe: History has already proved that the China is not

United States permanent enemy. Today there are many cooperative partnerships in many fields,

especially economic and political arena, between USA and China which will be favorable for

both. USA-China relations will base on long-term interests of the both sides. The improvement

of US-Chinese relations will be slow, tortuous, limited, and conditional. 13 U.S have to sustain

this cooperation not only for China’s economic-social progress and stability but also world

stability at large. This stability will also be benefical for U.S in the long run.

Policy Recommendations:

Today political relations between China and USA are stable and economic and trade links are

expanding. So any conflict, such as Taiwan, would be nightmare and both sides try to avoid

it.14

Cooperative partnership between USA and China will be beneficial for both sides. China needs

USA in development and stabilization of its economy, education, culture, technology and

science while USA needs China’s cooperation on security, counterterrorism, Iraq and Middle

east issues and trade-finance issues.

Chinese purchases of U.S. Treasury bonds and holding foreign exchange reserves (China holds

the world’s second largest stock of foreign exchange reserves) have helped finance US’s

budget deficits. Without those purchases US would either have to raise interest rates, slowing

growth, or run comparable trade deficits with other countries so they could buy our bonds.15

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Even if these figures are beneficial for the US economy today US should monitor and take

some control on this issue in the long run.

After the U.S., China is the world’s second largest primary energy consumer. It is also the third

largest energy producer. The continuously growing Chinese economy will need more energy

resources in the long run. So it is highly possible that there can be some conflicts on energy

resources between US and China.

The economic cooperation and trade activity with China is beneficial for both sides. So U.S

should strengthen this cooperation and protect the favorable environment for the future

development of the bilateral economic relations. The aid of the international organizations such

as United Nation, World Bank, World Trade Organizations, and International Monetary Fund

will be helpful to achieve this goal.

We have to cooperate with China to develop both economic progress and social progress,

democracy, freedom, and respect for human rights and the rule of law in China. This

cooperation will contribute not only China’s socio-economic life and human rights record, but

also world stability at large.

1 Kjeld Erik Brodsgaard and Bertel Heurlin, China’s Place in Global Geopolitics, pp 1 2Zheng Bijian, China's "Peaceful Rise" to Great-Power Status, Foreign Affairs, September/October 2005 3 http://en.wikipedia.org/wiki/Politics_of_the_People%27s_Republic_of_China#Political_conditions 4 http://www.state.gov/r/pa/ei/bgn/18902.htm#political 5 CIA, The World Factbook, China 6 Wayne M. Morrison, "China's Economic Conditions," CRS Issue Brief for Congress, IB98014 7 16th National Congress of the Communist Party of China, 2002, Economic Transition a Success 8 Wayne M. Morrison, "China's Economic Conditions," CRS Issue Brief for Congress, IB98014 9 http://www.state.gov/r/pa/ei/bgn/18902.htm 10 Wayne M. Morrison, "China's Economic Conditions," CRS Issue Brief for Congress, IB98014 11 Annual Report To Congress The Military Power of the People’s Republic of China, 2005 Office of the Secretary of Defense 12 http://www.state.gov/r/pa/ei/bgn/18902.htm#defense 13 Wang Jisi, “China's Search for Stability With America”, Foreign Affairs, September/October 2005 14 Wang Jisi, “China's Search for Stability With America”, Foreign Affairs, September/October 2005 15 William H. Overholt, New China, New Partner, http://www.gbcc.org.uk/33article3.htm