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ZHANG Xiaotong:China-US Strategic Game and the European Debt Crisis

 

Like 9/11 and the US subprime mortgage crisis, the European sovereign debt crisis has a significant impact on the world’s politics and economics. The China-US strategic game and Sino-US relations are changing because of the developments in Euro debt.        
                                                                              
The US economic growth, affected by the decline in exports due to the recession in Europe, was down from 3% in 2010 to 1.7% in 2011. American banks are highly vulnerable to European banks defaulting on debt.
 
Man Group plc, dependent for over 200 years on American futures and financial derivatives businesses, declared bankruptcy in October 2011, because of excessive exposure to European debt and lack of timely rescue.
 
China is even more vulnerable to the European crisis. The growth of China’s exports to EU decreased from 31.8% in 2010 to 14.4% in 2011; the first three months of 2012 showed a negative growth of 1.8%. EU’s investment in China (calculated on a year-on-year basis) has been declining, dropping 3.65% in 2011 and 27.9% from January to April 2012.
 
Every country hopes to achieve economic growth through the expansion of exports, but because of the European debt crisis, global exports demand has become far greater than global domestic demand.
 
China’s export growth rate has been falling since 2010. From January to May 2012, its exports rose by only 8.7%, increasing pressure on stabilizing exports and maintaining growth rate.
 
Facing a Disadvantage of “One on Two”
 
US exports to the countries in the Pacific Rim increased by only 12.9% in 2011. Although the US increased its export rate to China by 13.1%, both figures did not meet the standard export growth rate of 14.4%. In contrast, US export growth rate to its partners in free trade areas is higher than the average growth in its exports. Therefore, the US has found it essential to expand trade in the Asia-Pacific market.
 
Both China and US compete in the global export market. The growth rate of China’s export market, however, is declining, while the US export market is rapidly growing in Latin America.
 
In the short term, the Euro debt crisis stalls the multi-polarization process and helps the US consolidate its unipolar hegemony. The US dollar is consolidating its status as a safe harbor because the Euro appears vulnerable. The recovery of the European economy in the short term remains uncertain. The Eurozone faces an increasing risk of disintegration, weakening confidence in Europe’s becoming “one polar power” of the world.
 
In the triangular relations among China, Europe, and the US, China appears to be at a disadvantageous situation of “one on two.”
 
US-Europe relations have generally maintained a momentum of stable growth. The US and Europe share similar values and social systems, as well as a common interest in economics and trade.
 
The eastward shift of the US diplomatic focus signifies that trans-Atlantic relations (which have been the center of the international political arena for half a century) are giving way to trans-Pacific relations.
 
Due to pressure from the industrial and commercial sectors, the US and Europe have started to discuss the possibility of establishing a Transatlantic Free Trade Area. Both sides have announced that they have strategic interest in the Asia-Pacific region and that they would enhance coordination of their activities in the area.
 
In 2011 the US announced that it would complete the deployment of its missile defense system in Europe, meant to ensure that NATO allies are not threatened by Iranian missiles. This shows that the US now faces economic constraints. It is difficult for the US to provide Europe with large scale liquidity injection, leaving trade and security as the two primary ways to support Europe. This move manifests the global vision of US leaders, aware of the strategic importance of the two oceans. This move will effectively ease Europe’s doubts and disappointment with the Asia-Pacific strategy that the US is carrying out.
 
At the same time that China-EU economic and trade relationships are being tightened, US-Europe collaboration is being enhanced. Although some European politicians believe that Europe will become the world’s largest economy, with the US only second and China third, Europe has started wondering if China is a threat.
 
Therefore, the tension between China and Europe has increased. Europe has enhanced its cooperation with the US in economic and trade matters, and related issues such as intellectual property rights, rare earths, and subsidies. More and more, the situation is “one on two.” On certain issues, the European factor tilts the balance of forces between China and the US in favor of the US.  
 
Three Major Countermeasures
 
With its intensified vulnerability to the European debt crisis, the slow recovery of its economy, and the damage to its economic strength, the US has taken the initiative to carry out strategies such as “returning” to Asia-Pacific and placing economics at the core of foreign policy. In the China-US-Europe trilateral game, the US and Europe have been trying to coordinate in resolving their economic difficulties by opening the market of third countries.
 
China could tackle the problem ifit understands the essence of the situation.
 
First, China must build a Chinese Asia-Pacific strategy. Comprehensive cooperation between East Asia countries should be the foundation of this strategy, to consolidate China’s traditional friendship and economic integration with ASEAN and promote economic integration in the Asia-Pacific region to achieve peace, development, and prosperity. China-Japan-ROK Free Trade Agreement (FTA) negotiations should be started as soon as possible, while accelerating a China-Australia FTA and promoting an Asia-Pacific FTA. China needs to invest more in diplomacy and the economy of its surrounding areas, to obtain mutual economic benefit and win-win results, to achieve cultural harmony, and to enhance its soft power in surrounding areas. At the same time, of course, China has to persist in advancing its marine power to defend its national interests effectively.
 
Second, China must play the China-US-Europe trilateral game well. China should try to keep its European ties, in order to avoid being isolated. China must create a balanced, reciprocal, and open trilateral pattern. The strategic triangle should gradually become scalene. Fundamental differences do not exist in the China-Europe relationship. The key is to keep balanced reciprocity in economic and trade interests. Holding a China-EU summit and dialogues among economic and trade officials would help to achieve win-win results in the economic relationship.
 
In dealing with the European debt crisis, China may take the initiative to rescue the Euro with the right timing and appropriate conditions. This will help Europe and ensure China’s own interests at the same time. China may consider expanding the trilateral relationship to four or five sides; multilateral relations will end “two on one” and promote China’s position within the game.
 
Third, China must open its eyes to the world and accelerate global deployment. Despite its own slow economic recovery and debt-ridden situation, the US is maintaining and even increasing political and military investment in the Asia-Pacific region. By joining this game, China will weaken the US influence in Africa, Latin America, and other developing regions. 
 
China’s overseas interest is already growing rapidly with the development of its economy and rapid growth of overseas investment. Going global provides China the opportunity to develop trade, business, and investments.
 
China urgentlyneeds a global vision to plan and allocate resources, to increase its political and economic input overseas in order to enhance personal connections and solidify its own economic foundation, and to shift from a regional power to a world power.
 
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