Henry Paulson emphasizes that the United States and China continue to have the most important bilateral relationship in the world. But structural dynamics of power will ensure that US-China relations are fraught for the foreseeable future. From now on, this relationship is going to be competitive in every domain – technological, economic, financial, military, and ideological. And our nations will also compete for influence in third countries, from the major OECD economies to the emerging economies of the Global South. And it comprises the new context of global geopolitics—and of international economics. We urgently need a new framework to reflect the major changes occurring in China, the US, and the world. When Henry Paulson looks at this emerging US-China competition, he reaches three conclusions:
First, to minimize the likelihood of debilitating conflict and to make progress on areas of mutual interest, the US and China must decide how and where to compete and how to avoid conflict. If we don’t, the world will be a very dangerous place. So it is in each of our interests that competition be as healthy aspossible, without unnecessary confrontation.
Second, our two nations will face increasing pressures to decouple, driven primarily by national security concerns. Take technology, for example—the area that he believes will be the core challenge in the US-China relationship moving forward. It is clear that each of our nations will, of necessity, sequester high technologies to protect our national security. But if this goes too far, it will create what's called an Economic Iron Curtain, one that decouples supply chains and erects incompatible rules and standards throughout the global economy, impeding innovation and economic growth.
Third, there are problems that we simply cannot mitigate and solve without at least some coordination, if not cooperation. Instead, we should focus on some of the easier issues to develop momentum and trust, which we can build on moving forward.
Talking about areas where the United States and China can cooperate immediately, Henry Paulson hopes we can agree to halt the proliferation of visa restrictions on student and scholarly exchanges that can promote innovation in the public interest.
Another obvious area for cooperation should be on stopping the pandemic. One clear first step is to coordinate – to the degree possible –on vaccination distribution. It is necessary to ensure that all countries receive approved andeffective vaccinations in adequate quantities – otherwise, it will slow down theglobal economic recovery.
the United States and China should also aim for progress on the environment and climate.
Henry Paulson is pleased the US has rejoined the Paris Agreement, and that China has targeted carbon neutrality by 2060—but neither country is on track tomeeting the global temperature goals needed to avert disaster. And changing the climate trajectory will be much easier if the US and China—the world’s largest emitters—are working in complementary ways.
For one, the United States and China should work together to rethink international climate governance. Aggressive voluntary climate targets are necessary but insufficient to drive meaningful change. We instead need a structure with penalties—one that deals squarely with the problem of free-riding and creates incentives to curb emissions.
Second, the United States and China should push toward lifting tariffs on environmental goods and services.
Third, the United States and China should work together to make progress on reducing the carbon emissions in emerging markets, including in the Belt and Road countries, and encourage best practices and high standards for green development. This is an area where his Institute, the Paulson Institute, has worked closely with the Chinese on developing voluntary green investment principles.
Fourth, the United States and China each need to provide incentives to channel private sector capital into innovative solutions that reduce carbon emissions, supportgreen development and value nature.
Fifth, the United States and China should make joint investments in game-changing technologies that have the potential to help us avoid the most adverse climate outcomes, even if they are not commercially viable.
Sixth, the United States and China should work together to deploy clean technologies in China, the United States, and around the world.
If the United States and China fail to make progress, some of the most important, fastest growing, and largest parts of the global economy will be cut off from trade and investment to the detriment of America, China, and the world. Henry Paulson suggests:
In the immediate term, the United States and China should fully implement the Phase I trade agreement, and begin comprehensive bilateral negotiations focused on addressing market distortions, with a strategy he calls “targeted reciprocity.” This is a focus on reciprocal rules, market access, and actions—not on a mechanical and reflexive basis, but in a way that makes sensefor American workers, farmers, and ranchers—and, from China’s standpoint, for Chinese.
Henry Paulson is also hopeful that the two countries can reestablish a Strategic Economic Dialogue to address major long term macroeconomic challenges, while making progress on the more immediate issues.
Over the longer term, the United States and China should work together to update and improve the global trading system, starting with fixing the WTO.
The US, working with its major economic allies and China, should strengthen and modernize rules for digital trade, technology, intellectual property, and environmental goods and services.