[Lee Jong-woo's Economic Reading] The US-China Conflict Transformed into an Orderly Fight... A Test and Opportunity for the Korean Economy

President Biden's Trade Policy... Strengthening Alliances for Unified Response
China Signs RCEP with ASEAN Countries... Pursues Comprehensive Investment Agreement with Europe
South Korea, Security Close to US and Economy to China, Expands Position if Engaging Both US and China

Is it a free-for-all brawl or an orderly fight?

With President Joe Biden's inauguration, interest in U.S.-China relations has increased. The prevailing view is that unlike during President Donald Trump's administration, there will not be an all-out brawl across all fronts such as trade, technology, and finance. This is because President Biden has stated that he intends to pursue consistent and cooperative policies rather than the unilateral and unpredictable approach of the Trump administration. Therefore, experts expect that for the time being, American nationalism will recede, and the global trade order will be maintained through alliances and solidarity with allied countries.

Despite these changes, the essence of U.S.-China relations will not differ much from the Trump era. Conflict will continue in some form, and the intensity of the conflict may even increase. The nature of the competition will shift from a free-for-all brawl to an orderly fight.

The reason for this perspective is simple. During his campaign, President Biden proposed a "worker-based trade policy that benefits Americans." His detailed goals included "Made in America" and "Buy American." This means creating jobs through the revival of manufacturing, which is not different from President Trump's goal of providing jobs through the revival of the Rust Belt. Both intend to pursue a country-centered trade policy by strengthening competitiveness.

The U.S.-China conflict began with fear of China. In the 1870s, the United States overtook the United Kingdom to become the largest economy in the world. For 150 years, it never lost its absolute position, but this structure has been shaken by China's rise. The originally expected year for China to surpass the U.S., 2030, has been accelerated by COVID-19. This means that in a few years, the U.S. may face something it has never experienced before, so it is natural for the U.S. to feel fear.

It is not that no country has challenged the U.S. economy before. After World War II, the U.S. competed with the Soviet Union for 40 years, and in the 1970s, Japan entered the competition. Both countries' gross domestic product (GDP) rose to just over 50% of the U.S. level before falling out of the competition. As a result, the U.S. has enjoyed a unipolar position in the global economy for the past 30 years.

When China joined the World Trade Organization (WTO) in 2001, its GDP was about 17% of the U.S. It is estimated that this figure has risen to 71% after 19 years. Considering that the Chinese economy has grown large enough to enter a mature stage beyond the takeoff phase and that, unlike the Soviet Union or Japan, it has a huge domestic market, it is unlikely that the U.S. will suddenly lose in competition with China. A more realistic scenario is that the U.S. will become second to China in economic size, and the gap will widen over time. The only strategy the U.S. can pursue now to prepare for this situation is to delay the inevitable as much as possible.

It is also embarrassing for the U.S. that it does not have effective cards like when it subdued the Soviet Union or Japan. The Soviet Union had to introduce a market economy to grow its economic size but suffered severe turmoil in the process. Japan had a high economic dependence on the U.S. and could not refuse the appreciation of the yen. China has long implemented a market economy and does not comply with U.S. demands that go against its own interests in any economic policy, including exchange rates. As its economy grows further, it will become even harder to control China through external pressure.

The U.S. strategy of pressuring China together with allies may not work well either. In the first half of last year, China’s largest trading partner changed from the European Union (EU) to the Association of Southeast Asian Nations (ASEAN). Considering that half of global trade occurs within Asia, China's dependence on Asia will likely increase rather than decrease. In response to this trend, China signed the Regional Comprehensive Economic Partnership (RCEP) with existing ASEAN countries. China has exploited the gap created by the U.S. being unable to focus on the Asia-Pacific region due to its trade war with China. Through this agreement, China is trying to create an image of striving for free trade to counter the U.S. isolation strategy.

China approached Europe through a Comprehensive Investment Agreement. The Washington Post criticized it as a "diplomatic coup by the EU for China," which embarrassed the U.S. The agreement shows that China made significant concessions from its previous stance, guaranteeing EU access to the Chinese market in various industries such as automobiles, healthcare, cloud computing, air transport services, and financial services. To create fair competition conditions, the requirement for European companies to establish joint ventures when entering China was abolished, reducing the burden of forced technology transfer to foreign companies. Despite concessions, China’s determination to escape isolation caused by protectionism through negotiations with Europe has borne fruit.

Our position regarding China may become more difficult after the Biden administration took office. President Trump pursued an isolationist trade policy and did not care much about what trade relations other countries had as long as they did not significantly affect U.S. interests. He tolerated cooperative trade relations with China as long as they did not affect U.S. security. Thanks to this, we were able to respond separately to the U.S. and China in trade relations. From now on, we must be aware of the U.S. presence in all trade relations. Since President Biden said he would respond to trade disputes with China by strengthening solidarity with allies, the possibility that the U.S. will force us to choose sides cannot be ruled out.

We are in no position to belong to either side. While we have a traditional security relationship with the U.S., economically, China is closer. China became our top trading partner long ago, and its share in our economy is likely to grow. In this situation, choosing one side would come at a great cost. We experienced this during the deployment of the Terminal High Altitude Area Defense (THAAD) system in 2016. The Biden administration’s inauguration is a test but also an opportunity for our economy. Both the U.S. and China will try to draw us to their side, but the more they do so, the wider our room for maneuver becomes.