A New Type of Great Power Relationship: Redefining the “Group of Two”

By Emma Black (Portfolio Manager at Tier One Capital) 7 June 2013

At the start of his first term in 2009, US President Barack Obama stated that closer co-operation between the US and China was “as important as any bilateral relationship in the world” leading to the moniker of G2, or “Group of Two”, in reference to the G8 and G20 gatherings. By November 2009, Chinese Premier Wen Jiabao had rejected this potential relationship indicating in the state’s official mouthpiece China Daily that China was to “pursue (an) independent foreign policy of peace” under the view that “global issues should (be) decided by all nations in the world” such that there would be no alignment “with any country or country blocks”. Fast forward six-years later, and as new Chinese President Xi Jinping arrives in California today, Beijing has begun to publicise a “new type of great power relationship” set to establish a new era of co-operation between Washington and Beijing. So what does this mean for global politics and the world economy moving forward?

To comprehend this proposed shift of power, we must first look towards the past particularly given the divergence in the historical origins of China relative to the US. The US – typified as the embodiment of Western psyche – was born as a global economy following the Treaty of Paris in 1783 and the United States constitution was established in 1787, giving way to exceptional growth within the new sovereign state. Open borders coupled with institutional principles adopted from the British Empire saw a booming agricultural industry that developed into a powerful manufacturing core come the turn of the twentieth century. By the 1950s, the US had become a leading superpower as the richest nation in the world following World War II, with Gross National Product increasing by over 50% and unemployment at an all-time low of 1.2%. As Europe was crippled by two major world wars that resulted in excessive loss of life, destroyed infrastructure and extreme financial costs, US industry exploded and a close relationship between the government and the private sector was established, as the government directed much of the industrial sector towards the war effort. The profits were ploughed into extensive infrastructure projects that strengthened the so-called military-industrial complex to reflect the on-going co-operation between the government and the growing industrial sector. By the time the world entered the Cold War, the US was recognised as the world’s superpower, a fact reinforced following the collapse of the Soviet Union.

China, on the other hand, has not played as such a prominent role in world politics as the US. Economically, China has ascended to become a world superpower within a mere thirty years, during which time the state and society has evolved in a very different manner to that previously seen. A historically insular country, China has crept onto the global landscape particularly since the political and economic reforms of the seventies under the leadership of Deng Xiaoping. As the global markets suffered from the oil shock of 1973, China enacted reforms for agricultural production to increase the living standards within the rural community; reforms to increase productivity within urban settings with a dual-price system as well as implementing price flexibility; and a number of economic policies that finally led to the opening of the market to foreign investment within designated Special Economic Zones, hailed as a key contributor towards China’s accelerated growth rate thereafter. Add to this recent policies such as the 1999 Go Global initiative promoting the multinationalization of Chinese enterprises and it’s not difficult to see how China’s economy has reached nearly $8 trillion.

But this ascension has not been met with open-arms by the powers that be. Foreign acquisitions have exacerbated Western apprehension regarding the exchange of corporate control to the East, particularly given the mainstream identity of targeted major international Western brands, such as IBM and Volvo. Political radars have honed in on foreign acquisitions involving the People’s Republic of China, given that many involve the purchase of targets within the energy, industrials or technological sectors where growing demand and diminishing resources is heightening the implications of economic scarcity. As an example, the office of President Obama has previously openly criticized trade practices with China. Indeed, the New York Times reported that the Obama administration recommended that the Committee on Foreign Investment into the US should ‘block any mergers and acquisitions involving the Chinese companies and American businesses’ due to national security concerns. Moreover, as research from Goldman Sachs suggests, come 2050, only one developed nation will remain in the world’s largest ten economies – the US - and this has served only to further ignite Western fear. This predicted global shift of power is heralding a new era of economic progression.

And this shift is not something that is set to happen, it has in fact already begun. There has been a marked economic shift since 2009 that has already rebalanced the international axis of power. The sub-prime crisis of the US housing market led to the collapse of large financial institutions, which cascaded to cause massive repercussions worldwide, while Europe became weakened by the debt crises of the southern states. During this period, China has become an unavoidable strategic partner due to its vast capital reserves from its era as factory of the world that could bolster the West in its economic recovery. Previously, China has drawn criticism due to the level of state involvement in the market. This criticism has tapered off within the media, particularly given the intervention in the West via Quantitative Easing policies that have certainly nullified the notion of free markets. Political negotiations and the macroeconomic climate have provided Beijing with an opportunity to try to fast-forward its recognition internationally as a market economy, with access to capital as leverage. As it stands, the West has shown no desire to speed up this process, but this would most probably need to feature in some way within the “new type of great power relationship” promoted by Beijing.

Chinese growth rates have fallen lately, with the mouthpiece indicating weak global demand as the root cause, and it could be that Beijing now sees a vested interest in forging closer ties with the US. It is worth noting that the falling growth rate may be likely to become a persistent feature due to a number of influential factors. Firstly, the Chinese government has accelerated a program of urbanization, to move a large proportion of its population into an urban setting. The intention is to equip workers with industrial and service-based skillsets to promote growth in those related sectors. This transition is intended to see China evolve from an export-dependent market into a consumer-driven one instead. This will surely take time to implement given the need for the workforce to adapt their skillset to their new setting. Despite this shift, the agricultural industry accounts for some one-third of the country-level GDP growth, and this is not expected to change within the next thirty years. Secondly, the Chinese state is facing a problem of an aging demographic. This ageing process has happened at a much faster rate than has been seen elsewhere, rising some 3.8% in just 10 years from 2000-2010 (compared with the worldwide average of 3% in the 60 years between 1950 and 2010). The older the population, the stronger the burden on the young as well as the potential for the once-cheap labour force to become more expensive as supply begins to curtail. The debated 4-2-1 scenario of one child supporting two parents and four grandparents is a cold, hard reality that may cause a high burden on the current generation. Finally, the West would still like to halt China’s growth. Following the discovery of shale gas in the US and the UK, as well as the rising cost of wages in China, it is predicted that we will see manufacturing being moved either back into the US to lower unemployment or indeed towards Africa, Bangladesh and so forth as firms try to relocate trade to keep costs low. This could further weaken the Chinese economy if it’s unique selling point of high labour supply, low cost becomes usurped by other growth markets.

Tensions do still exist though, as evidenced by the EU-China investigations over anti-dumping practices where the EU has placed levies on Chinese solar panel exports that have led Beijing to retaliate via levies upon European wine imports - a classic example of China's 'divide and rule' mentality, hitting those that supported the decision of the EU commission, while leaving its allies virtually unaffected. It is vital in the negotiations today for the two superpowers to establish a closer working partnership to positively cascade worldwide, but the retaliations towards the EU leave us to question whether Beijing is ready to make concessions and begin to address its lack of transparency with the outside world. Obama must seek today to address China as an equal rather than attempting to deny its international emergence while at the same time, Xi must carefully enter this new era with the aim of truly working towards a mutually beneficial purpose. As Martin Jacques writes, “the outcome remains, at best, very much in the balance”.