America Has Dictated Its Economic Peace Terms to China

How far will mounting tension with China be translated into the economic policy of the United States? After a rash of sanctions and overtly discriminatory legislation, with action on U.S. investment in China pending, and with talk of war increasingly commonplace in the United States, the Biden administration knows that it needs to clarify its economic relations with the country that is the largest U.S. trading partner outside North America.

In the wake of this month’s International Monetary Fund and World Bank spring meetings, Treasury Secretary Janet Yellen has made her first major statement on economic relations with China since 2021. Judged by the tone, her message is intended to clarify and calm the waters of speculation and debate about motives and intentions. In the current situation, however, it is far from clear whether clarity actually contributes to calm.

The scenario that Yellen rejects is that of the Thucydides trap, but her reasons for doing so are telling. The idea that “conflict between the United States and China” is “increasingly inevitable” is, she insists, based on a false premise. That outlook was “driven by fears, shared by some Americans, that the United States was in decline. And that China would imminently leapfrog us as the world’s top economic power, leading to a clash between nations.” America would seek military confrontation to forestall the unfavorable shift in the power balance attendant on China’s phenomenal economic growth. This makes no sense, Yellen reassures us, because the American economy, thanks to its foundational institutions of freedom, its culture of innovation, and the wise governance of the Biden administration, is in rude health.

“The United States remains the most dynamic and prosperous economy in the world.” So, Yellen insists, America has no reason to seek to “stifle China’s economic and technological modernization” or to pursue a deep decoupling. America’s economic power, the treasury secretary goes on, “is amplified” by its relationships with “close friends and partners in every region of the world, including the Indo-Pacific.” America thus has “no reason to fear healthy economic competition with any country.” And then Yellen delivers the punchline: “China’s economic growth need not be incompatible with U.S. economic leadership.”

It is worth lingering over the implication here. Conflict is not inevitable because America is doing well. That in turn means that China can grow without threatening American economic leadership. But what if that were not the case? Yellen does not spell out the implication. Yet in that eventuality, where Yellen leaves little room for doubt, all bets would be off. Even now, even when the Biden administration professes to be confident about America’s economic prospects, Yellen insists: “As in all of our foreign relations, national security is of paramount importance in our relationship with China.”

At one level, this is obvious. No public official will ever say anything else. Security is the basic function of states. But everything depends on the scope of your vision of national security and the level of trust. And if you have to state the priority of national security in foreign relations out loud, you know you have a problem.

For Yellen, it is obvious that America is entitled to define its national security at a planetary level. She claims, for instance, that among America’s “most pressing national security concerns” is the defense of Ukraine against Russian aggression. Anyone who chooses to ignore America’s sanctions against Russia and falls within its jurisdiction will face serious consequences. Likewise, since America has decided that it wishes to deny certain technologies to the Chinese military, it will impose sanctions and trade limits accordingly.

So a strong and self-confident America has no reason to stand in the way of China’s economic and technological modernization except in every area that America’s national security establishment, the most gigantic in the world, defines as being of essential national interest. For this to be anything other than hypocrisy, you have to imagine that we live in a Goldilocks world in which the technology, industrial capacity, and trade that are relevant to national security are incidental to economic and technological modernization more broadly speaking.

Yellen pays lip service to that Goldilocks vision, by insisting that U.S. measures against China will be tightly targeted. But, as everyone knows, those targeted measures have so far included massive efforts to hobble the world leader in 5G technology, Huawei, sanctions against the entire chip supply chain, and the inclusion of most major research universities in China on America’s entities list that strictly limits trade.

Meanwhile, to add to the perplexity, while Yellen insists that national security sanctions tell us nothing about America’s intentions toward Chinese growth, she trumpets legislation passed on the Biden administration’s watch, notably the Chips Act and the Inflation Reduction Act, which feature strong anti-Chinese elements, as contributing significantly to America’s own future prosperity.

The upshot is that America welcomes China’s economic modernization and will refuse the lure of the Thucydides Trap so long as China’s development proceeds along lines that do not infringe on American leadership and national security. And America’s attitude will be all the more benign the more successful it is in pursuing its own national prosperity and preeminence precisely in those areas.

It is telling that what seems to be intended as a reasonable and accommodating statement is, in fact, so jarring. China must accept America’s demarcation of the status quo. If it does not respect the boundaries drawn for it by Washington between harmless prosperity and historically consequential technological development, then it should expect to face massive sanctions.

One must be grateful to Yellen for stating the point so clearly. But how on earth does Washington expect Beijing to respond? China is not Japan or Germany after 1945. In relation to the United States, if the question of “leadership” is posed, parity is the least that Beijing must aim for. The status quo that Yellen takes for granted clearly cannot be legitimate in the long run. As Beijing has said, it aspires to a fundamental reordering of world affairs such that American talk of leadership is retired forever. Nor is China the only major Asian power to share this view. India’s understanding is no different.

In Washington, this meets with blank incomprehension or even a sense of wounded pride. Does China not understand that it owes its growth to an American-led order? To rebel against that order, Yellen says quite openly, is not in China’s interest. Yellen is right that conflict between China and the United States is not inevitable. It does depend on the moves that both sides make.

But it is hard to see how her vision, in which the United States arrogates to itself the right to define which trajectory of Chinese economic growth is and is not acceptable, can possibly be a basis for peace. If the United States is still interested in global economic and political order, and it surely should be, it must be open to negotiate peaceful change. Otherwise, it is simply asking for a fight.