Shyamal Banerjee/Mint
Shyamal Banerjee/Mint

A troubled time for the US-China relationship

From Chinese overcapacity to the South China Sea, there are many hurdles

Much has been written and said about Prime Minister Narendra Modi’s recent US visit, and understandably so. But the week also saw the US engaging with the other Asian giant in Beijing. The eighth annual US-China Strategic and Economic Dialogue (SED) is the single most crucial bilateral engagement in the world today, revealing the contours of the relationship between the international order’s pre-eminent power and its possible rival and successor.

This is more for signalling reasons than specific diplomatic outcomes. The SED, started in 2009, in fact has no real history of significant deliverables. What it does is serve as a pressure-relieving valve—particularly important now when they must deal with multiple contentious issues on both the strategic and economic fronts.

As far as the former goes, the South China Sea dispute has gained outsize importance. Just two weeks before the dialogue, US President Barack Obama had announced that the US would lift its decades-old arms embargo on Vietnam. This upgrading of the defence relationship must be seen in the context of Vietnam being one of the nations contesting China’s South China Sea claim.

Following Obama, US defence secretary Ashton Carter made Washington’s red lines explicit at the Shangri-La Dialogue in Singapore, two days before the SED over Beijing’s establishing an Air Defence Identification Zone over the region and seeking to reclaim the contested Scarborough Shoal. Beijing, naturally, has shown no inclination of backing down on either count and has made it clear it won’t accept an international tribunal’s arbitration. Factor in the sabre-rattling on both sides—Carter announced that the Pentagon would send its latest military assets to the region and Beijing said it knows how to respond—and the SED had little chance of making any headway.

Matters are as complicated on the economic front. Chinese overcapacity in steel—it has faced a glut since 2014 and accounts for half of global output now—has flooded markets, pushed down prices and hit domestic industries globally. The US saw a 12% decline in steel production last year and 12,000 industry lay-offs. The high anti-dumping rates it consequently imposed on Chinese steel imports last month made for an inauspicious lead-up to the SED.

There are no easy solutions here. US treasury secretary Jack Lew’s blunt assessment at the SED that Beijing’s implementing “policies to substantially reduce production in a range of sectors suffering from overcapacity, including steel and aluminium, is critical to the function and stability of international markets" is easier said than done. Chinese President Xi Jinping might have promised action, but he announced no specific measures.

And if Beijing follows through on an earlier promise to cut 100 to 150 million tonnes of steel capacity via slashing state-owned industries, it will mean the loss of a great many jobs. Can Beijing take that hit when it is trying to shift to a domestic consumption-driven economy?

This is not to say that the SED was without positive takeaways. For one, Beijing included the US in a government scheme—the Renminbi Qualified Foreign Institutional Investment—that will allow American financial institutions to buy securities in mainland China. In turn, it was able to extract a promise that the US will consider how changes in its monetary policy might affect global financial markets—although exactly how much weightage the US Federal Reserve will give to this is debatable.

But the relationship is facing a clash of core interests that isn’t going anywhere. There is a very real possibility that Washington will retaliate for Chinese overcapacity as well as protectionism and its looming corporate debt crisis—other issues that were prominent at the SED—by refusing to grant it market economy status in December. That is when the provisions under which China joined the World Trade Organization expire. Beijing has always considered this a done deal, but Washington is unlikely to give up this leverage in the current climate. And as far as the South China Sea goes, the grand narrative of geopolitics is bending towards increased conflict there, not less—a natural struggle for pre-eminence between a global power in the wings and the Asia-Pacific’s leading power that must maintain credibility with regional allies.

Obama and then-Chinese president Hu Jintao’s decision to engage was crucial back in 2009 amidst the financial crisis. But Obama is on his way out and his successor is likely to be more constrained by domestic political compulsions and the shrill anti-China rhetoric of the campaign trail. The SED has not quite outlived its usefulness—but it has shown that talking for the sake of talking has its limits.

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