Introduction: The United States, China, and the Global Economic Order in 2017

By Kevin Nealer

International polling and the politics of the past year both suggest a high level of anxiety among global populations about personal and economic security, as well as the impact of globalization. Participants in the U.S.-China Dialogue on the Global Economic Order have sought to put the U.S. and Chinese economies in proper perspective and to understand the responsibility of the world’s two largest economies in promoting stable global development, while expanding opportunities for their populations at a time of unparalleled technological change.

Despite real concerns about the impact of globalization on both countries, the United States and China benefit from generally consistent and successful policies, favorable economic fundamentals, and a shared commitment to managing both macroeconomic and security risk. American and Chinese policymakers and thought leaders are managing the consequences of success—not failure—in the opening decades of this century, because of the policy choices of the late twentieth century.

Yuval Noah Harari, author of the book Sapiens, notes that, “For the first time in history, more people die today from eating too much than from eating too little; more people die from old age than from infectious diseases; and more people commit suicide than are killed by soldiers, terrorists and criminals combined.”1 As Harari suggests, it is useful to remind ourselves of some positive underlying realities:

  • Both countries benefit from falling energy prices, expanding alternative energy production that could outpace carbon energy reliance within two decades, and stable supplies of hydrocarbons. And—at least prior to the 2016 U.S. election—both regarded mitigating carbon’s impact on the global environment as a high priority.
  • The United States has emerged from the financial crisis and subsequent deleveraging with respectable job creation and record-breaking equity market performance. Corporate earnings are credible, despite suboptimal growth and lower-than-expected wage and productivity gains. The corollary is low inflation.
  • Chinese policies avoided the global financial crisis and subsequent recession. China has seen the largest mass movement of people in human history in the past three decades, with over 500 million migrating from the countryside to urban areas and, concomitantly, into the country’s middle class. It has begun the challenging process of managing slower growth, thus far avoiding the worst impacts of the withdrawal of government stimulus.
  • While both nations face very different kinds of border migration challenges, in neither country are those risks overwhelming institutions and posing the economic threats that undermine politics and government capacity in Europe, the Middle East, and Africa.
  • Domestic terrorism has been a manageable risk in both countries. There have been fewer than 200 terror-related deaths in the United States since 2001, and nearly 800 in China since then, most concentrated in the Xinjiang region.2 While the public in both countries expresses understandable alarm at the terror threats, the Islamic State and al-Qaeda are very different from terrorist entities of the previous decades: first, neither is supported by nation states as part of a Cold War surrogate struggle; and second, both are targeted by every security service and military of every nation. The danger these groups pose is to public confidence, not to economic fundamentals.
  • Regional Asian security issues present genuine challenges to the U.S.-China relationship, but there are no current violent contests in the region that undermine essential regional stability. Border disputes present real risks to growth and development, as well as mutually beneficial exploitation of resources, but Washington takes no position on those contests while insisting on peaceful resolution and the maintenance of commercial traffic. Taiwan relations remain a policy difference, but all parties agree that the issue will be decided by Chinese on either side of the Strait. The Korean Peninsula is the most significant source of regional insecurity, but Chinese and U.S. interests and priorities on this issue—though not identical—have never been more closely aligned.

The global economic and political outlook

The global economic backdrop to the U.S.-China relationship is benign, reflecting modest growth but with several possible headwinds. Recent projections by the International Monetary Fund (IMF) are optimistic, with a projected rise in global growth of 3.5 percent and higher into 2018. Investment, manufacturing, and trade are all expected to recover.

The Eurozone is perhaps two years out of cycle with the United States but is now experiencing resilient job growth (with unemployment now at its lowest since 2009) and demand that has eluded Europe for several years. Weaker export demand from China and slowing credit demand may signal renewed softness later in the year, but EU growth in the first quarter of 2017 showed a marked improvement over recent trends, outperforming the United States by two to one. Political conditions in Europe—in a defensive position since the United Kingdom’s Brexit vote—benefit from centrist election victories in Holland and France in advance of a German general election in September.

Meanwhile in Japan, low unemployment (at a 22-year record low) and the fastest export growth in two years supports improving business sentiment. While overall growth remains modest, the third-largest economy is buoyed by a weak currency, accommodative monetary policy, and healthy global demand. Security on the Korean peninsula and maritime disputes will, however, continue to dominate political and economic concerns within the region.

The Middle East and North Africa continue to face lower—though recovering—oil prices. Despite a backdrop of regional instability and lagging tourism in Egypt and elsewhere, nonoil sectors are experiencing modest growth. Sub-Saharan Africa is expected to experience modest growth in 2017 as well but will remain vulnerable to global factors—such as China’s slowdown and policy uncertainty in the United States and Europe—as well as structural and governance issues.

Latin America emerged from a two-year recession in early 2017, though political risk in Brazil and the Venezuelan crisis have been negative for the region and may produce spillover effects.

Rising U.S. interest rates and the prospect of trade protectionism are significant risks for a modest global recovery. But despite the global populist and nationalist trend, major Asian and European economies have restated their commitment to free trade and to multilateral issues such as combating climate change.

Tensions in the U.S.-China relationship

The most notable headwinds in the U.S.-China relationship may relate to changes in the basic assumptions about trade and investment sentiments.

The U.S. Chamber of Commerce’s report “Made in China 2025: Global Ambitions Built on Local Protectionism” noted that Beijing’s ambitious initiative “aims to leverage the power of the state to alter competitive dynamics in global markets in industries core to economic competitiveness,” thus “skewing the decision-making process for companies that must decide where products are made and innovation takes place.”3

A report by the European Chamber of Commerce expressed similar concerns, noting that, “Despite the rhetoric of the Third Plenum’s Decision of 2013—which strongly advocates market forces—it seems that the Chinese Government is determined to maintain a prominent role in guiding the economy. This is highlighted by the large number of domestic and international market share targets that have been set, along with references to ‘indigenous innovation’ included in the multiple planning documents related to CM2025. The appearance of ‘indigenous innovation’—along with mentions of the need to realize ‘self-sufficiency’—is particularly concerning—suggests that Chinese policies will further skew the competitive landscape in favor of domestic companies. The European Chamber believes that all companies should receive equal treatment under Chinese law, regardless of their nationality.”4 These reports were issued as foreign investors have confronted rising wages in China, diminished profit margins, and greater domestic competition across a range of industry sectors.5

The 2016 U.S. election brought to Washington an administration that, for the first time in over a century of American politics, explicitly challenged the free trade orthodoxies that have been foundational to the modern American economy. China has its own politics, with the important 19th Party Plenum in the fall of 2017. Since normalization of relations in 1979, the American agenda with China—and U.S. regional interests—have been consistent and predictable. American policy goals, alliance relationships, and the focus on economic development and trade have characterized every U.S. administration’s agenda, regardless of political party.

In the months since the Trump administration’s arrival, neither the president nor any member of his cabinet has offered the customary statement outlining the fundamental goals and objectives of American foreign policy in general, or Asia policy in particular. This has raised questions about those policies, and the persistence of the American agenda and interests in the region. These questions take on an urgency, coming as they do following the Trump administration’s decision to abandon the foundational economic objectives in the Trans-Pacific Partnership.

Against this backdrop, participants in the U.S.-China Dialogue on the Global Economic Order will meet again this autumn to consider this landscape and suggest an affirmative agenda for economic relations between the world’s largest economies.

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[1] Yuval Noah Harari, Sapiens: A Brief History of Humankind (New York: Harper 2015), https://www.amazon.com/Sapiens-Humankind-Yuval-Noah-Harari/dp/0062316095.

[2] Global Terrorism Database, “United States: Incidents Over Time,” June 2017, https://www.start.umd.edu/gtd/search/Results.aspx?country=217; Global Terrorism Database, “China: Incidents Over Time,” June 2017, https://www.start.umd.edu/gtd/search/Results.aspx?country=44.

[3] U.S. Chamber of Commerce, Made in China 2025: Global Ambitions Built on Local Protectionism , 2017, 7–8, https://www.uschamber.com/sites/default/files/final_made_in_china_2025_report_full.pdf.

[4] European Union Chamber of Commerce in China, China Manufacturing 2025: Putting Industrial Policy Ahead of Market Forces , March 2017, 1, http://www.europeanchamber.com.cn/en/china-manufacturing-2025.

[5] Steve Johnson, “Chinese wages now higher than in Brazil, Argentina and Mexico,” Financial Times, February 26, 2017, https://www.ft.com/content/f4a260e6-f75a-11e6-bd4e-68d53499ed71.