DECEMBER
2018

Managing the US-China
Strategic Rivalry
Hitoshi Tanaka, Senior Fellow, JCIEO

ver the past year, the US-China strategic
rivalry has intensified. The US government istaking a significantly harder line in its approach to
China policy. In December 2017, the US National
Security Strategy labelled China a revisionist power
seeking to change the international order. The
Trump administration, in an attempt to reduce the
US trade deficit, subsequently imposed tariffs on
hundreds of billions of dollars of Chinese goods,
leading to a spiraling trade war. Furthermore, in an
October 2018 speech at the Hudson Institute, Vice
President Mike Pence severely criticized China for
unfair trade practices, predatory investment rules,
and military aggression.
The meeting between President Donald Trump
and President Xi Jinping on the sidelines of theG20 in Argentina in late November saw a temporary truce in the trade war. Yet, short of a substantial
breakthrough in the negotiations, there is a risk that
the US-China trade war will drag on indefinitely.
The arrest of Huawei’s chief financial officer, Meng
Wanzhou, further complicates the fragile foundationsof the temporary truce. While the US-China relationship has seen many ups and downs in recent years, if
measures to mitigate tensions are not taken soon, theUnited States and China risk stumbling into a newand entrenched form of severe strategic rivalry thatwould fundamentally undermine regional stability in
Asia Pacific.
So, what can be done to mitigate the US-China
strategic rivalry? Four key points need to be kept inmind. First, history has shown that the managementof US-China-Japan trilateral relations is the key torealizing regional stability and shared prosperity.
Second, US-China tensions go beyond the current
trade war and are rooted in competition for global
technological supremacy and between their stateled and free market-led systems. Third, a number of­military-strategic issues require careful management
to avoid further inflaming tensions. And fourth, Japan
should position itself to help mitigate US-China tensions and return to a more balanced policy focusing
on engagement backed by deterrence.

The History of US-China-Japan Relations

Over the last 150 years, the US-China-Japan triangle
has been the key to regional stability in East Asia.
When all three countries have prioritized stability,
the region has experienced shared peace and enhanced prosperity. However, when conflict has arisen
between a rising and an established power, the consequences have been dire.
When US Navy Commodore Matthew Perry arrived in Japan in 1853 to open up Japan to trade andDECEMBER 2018 | 2
establish a supply base for the United States to conduct trade with China, Japan realized that 250 years of
isolation had left it well behind the West in terms oftechnological developments. Subsequently, Japan embarked on a wholesale program of national modernization through the Meiji Restoration and adopted themantra of “rich nation, strong army” (­fukoku kyohei).
Japan’s rapid rise saw it go to war with China in thefirst Sino-Japanese War of 1894–1895, which erupted
after only 40 years of industrialization. Japan’s victoryin that war demonstrated an astonishing change in theregional balance of power. Previously, China’s Qing
dynasty had been the overwhelming power in the region and the center of an extensive tributary system.
As Japan continued to rise, it intruded into
Mainland China, beginning with the Mukden
Incident in Manchuria in 1931 and the Marco Polo
Bridge Incident in 1937. This sparked the Second SinoJapanese War (1937–1945). Ultimately, Japan was defeated by the United States, China came under thecontrol of the Chinese Communist Party (CCP), andthe Second World War ended, only to be followed by
the Cold War.
In the postwar era, Japan was transformed into
an ally of the United States and US support enabled
Japan to quickly recover from the devastation of thewar. Japan grew to become the second largest economy in the world in less than a quarter of a century,
overtaking West Germany in 1967. Although Japan’s
rapid growth meant that it was, for a fleeting moment,
considered a challenge to US economic supremacy, it
was clear to both Americans and Japanese that their
alliance continued not just to benefit their countries
but also to underpin regional security and stability.
In the early part of the Cold War, China, as a communist country, was considered a rival. However,Sino-Soviet rivalry within the communist bloc in thelatter part of the Cold War opened the door for theUnited States and Japan to pursue détente with China.
US President Richard Nixon started the process
when he visited China in 1972 and the two countries
subsequently normalized their diplomatic relations.
Japan followed suit, normalizing relations with China
and concluding the Japan-China Treaty of Peace andFriendship in 1978.
These developments ushered in an era of relative
stability between all three countries, which served topromote regional peace and prosperity and set thefoundation for China’s rise. This included the Japaneseprovision to China of large-scale official development

assistance that was critical in assisting the development of the Chinese economy. China embarked on
economic opening and reforms in the 1980s and entered the World Trade Organization (WTO) in 2001,
which enabled it to achieve rapid economic growth
and to overtake Japan in 2010 as the second largest
economy in the world. The rise of China as both an
economic and military power and the US response
to it, however, has now brought East Asia to a criticaljuncture where the long-term future of regional stability is at stake.

Mitigating Security Tensions

The need to mitigate strategic rivalry and promote
regional stability and prosperity demands the carefulmanagement of a number of key strategic security issues. This includes issues such as North Korea denuclearization, relations with Taiwan, maritime security
in the South and East China Seas, and the Belt andRoad Initiative (BRI).
Progress on achieving the denuclearization of
North Korea requires US-China cooperation, butthat has been undermined by tensions surrounding the trade war. Mainland China’s relations with
Taiwan have taken a confrontational turn since thechange of government in Taiwan from Ma Ying-jeou
to Tsai Ing-wen and China’s success in convincing
Panama, the Dominican Republic, and El Salvador
to switch their diplomatic relations from Taipei to
Beijing. China’s increasingly assertive maritime activities—especially its island-building and the installation of military assets in the South China Sea,
its construction of aircraft carriers, and its anti-access and area denial (A2AD) strategy—appear tobe geared toward pushing the US Navy’s freedom ofnavigation operations out of the Western Pacific. In
addition, China’s BRI has raised concerns that China
seeks to use infrastructure funding as a means of expanding its strategic influence.
These issues will increasingly be a source of tensions unless the international community can persuade China to soften its attitude. The question,
though, is how to manage these strategic differences.
In contrast to the US-USSR rivalry during the Cold
War, disengagement and decoupling between the
United States and China is not a realistic option. A
return to a more balanced approach that includes
strong engagement and deterrence must be found. Asa starting point, greater and more constructive USChina strategic dialogue is needed, both bilaterally as

DECEMBER 2018 | 3
well as multilaterally through forums such as the East
Asia Summit.

Resolving the Trade War

The most visible manifestation of US-China tensions
in 2018 has been the trade war. The Trump administration, which is focused on revitalizing American
manufacturing, perceives the trade deficit as being
the result solely of China’s unfair trade practices.
Ignoring the role of US economic behavior as a factor
in trade balances, the US has imposed tariffs intended
to punish China and restore balanced and reciprocal
trade patterns.
This is not the first time the United States has
wielded Section 301 as a mechanism to impose discriminatory tariffs. It was used against Japan in the
1980s and 1990s, when 40 percent of the total US
trade deficit came from US trade with Japan. As aresult, Japan agreed to a currency realignment under the 1985 Plaza Accord, market opening measures, and voluntary export restraints in areas suchas automobiles and steel. However, this came notsolely from US pressure and a Japanese desire to
avoid undermining the security alliance, but also
out of a Japanese recognition of the importance ofeconomic liberalization.
A prolonged Sino-American trade war benefits
no one. US tariffs and China’s retaliatory measures
are bound to raise domestic prices in China and decrease its exports. Even though domestic consumption has significantly increased over the last decade,exports still make up a large percentage of China’sGDP. A lengthy trade war has the potential to seriously depress China’s economic growth, which inturn will hurt the global economy given the fact that
the Chinese economy is currently the biggest driverof global growth.
At the same time, the most likely path to avoid a
trade war—namely, symbolic purchases of US goodsby China—may give President Trump a short-term
win but would do little to reduce the trade deficit overthe long term because it does not address the fundamentals of the US-China economic relationship, including American savings and investment behavior.
Ultimately, discriminatory tariffs will not only fail toreduce the deficit but they will also undermine therules-based global trading system. The only lasting
way to resolve such trade disputes would be to enhance the rules-based global trading system, for example by strengthening the WTO.

The Deeper Roots of the US-China­Rivalry

The roots of US-China tensions beyond the trade
war are to be found in systemic competition between
China as a rising power under “communist, state-led
capitalism” and the United States as the establishedglobal power under “democratic, market-led capitalism.” In particular, innovation and technologicalsupremacy are shaping up as a key battlefield in thiscompetition for global influence.
US frustrations center on China’s means of acquiring new technology and the rules surrounding how
technological innovation is advanced. The UnitedStates and other advanced economies bemoan China’s
lax intellectual property rights and its investment
laws, which require joint ventures and forced technology transfer. This Chinese behavior is often seen
as a threat to America’s position as the global leader
in technological innovation. China, by contrast, emphasizes that its investment rules are normal for developing countries and are necessary to overcome themiddle-income trap.
Chinese innovation tends to be led from the top
down. Resources for innovation are concentrated in
cutting-edge and future-oriented industries throughgenerous state subsidies to favored companies, which
many argue is done in a way that is a violation of
WTO rules. The “Made in China 2025” state-led industrial policy seeks to transform China into a global
leader in high-tech manufacturing. This entails reducing China’s dependence on the import of strategic
high-tech goods, such as semiconductors, as well as
developing cutting-edge industries that will form thebasis for future economic growth, such as robotics
and artificial intelligence.
Moreover, demographic trends dictate that China
is set to get old before it gets rich, so technologicalinnovation will be key in order for the country tomaintain productivity and economic growth. As the
CCP looks toward its 100th anniversary in 2049 andseeks to guide China toward national revitalization
as espoused in the “Chinese dream,” maintaining
high economic growth will be critical for the party’s domestic political legitimacy. But while China is
on course to overtake the United States as the largest economy in the world within the next 30 years,
it will still lag behind the United States in terms of
GDP per capita and overall standard of living. At thesame time, there is a distrust of Chinese intentions
to challenge the United States as the global leader inDECEMBER 2018 | 4
technological innovation and concerns regarding theramifications such a development could have for theinternational order.
US innovation, by contrast, tends to be led fromthe bottom up thanks to its democratic and free-­market principles that unleash individual freedom,
creative power, and unbridled competition. The prolific innovation that has come out of Silicon Valley isa testament to this. The danger now for the UnitedStates is the growing monopoly power of a small
number of leading technology giants and a politicalsystem that seems to incentivize short-term political
gains at the expense of long-term statesmanship andpolicy vision.
As such, the battle between US “democratic,
market-led capitalism” and Chinese “communist,­state-led capitalism” has far-reaching political, social, and economic implications. In this contest, theUnited States needs to remain confident that thecreative dynamism of its system gives it a long-term
advantage and, thus, that its traditional approach ofchampioning an open, rules-based order still serves
American interests best. Seen in this light, it is clearthat the United States would do well to try to mitigate
tensions and engineer a soft landing in its trade war
with China. Deep engagement with China is critical inorder to persuade it to embark on wholesale systemicchanges around the way it absorbs and innovates newtechnology while still maintaining its strong economic growth. And it will require the United States tostay true to its liberal democratic principles.

Japan’s Response

Japan, with the United States as its security guarantor and China as its biggest trading partner, must also
support the United States in mitigating tensions, eschewing a decoupling from China and finding theright balance of engagement backed by deterrence.
For most of Abe’s term as prime minister, there
has appeared to be too much focus on deterrence
and not enough focus on engagement with China.
The Abe government concluded the April 2015
revision of the US-Japan Defense Cooperation
Guidelines, passed the September 2015 security-­
related bills to enable the Japan Self-Defense Forces(SDF) to engage in limited forms of collective
self-defense, and has gradually expanded security
cooperation with other partners beyond the UnitedStates, such as Australia, India, ASEAN, and EU
countries. Japan should continue to build on thissecurity foundation, continue to incrementally expand its defense capabilities, and continue to bolster
its security cooperation with the United States andwith other friends and partners around the region
and the world. This should not be viewed as a policyof containment against China, which would be both
unrealistic and undesirable, but as a necessary hedge
while also pursuing engagement measures.
More recently, Japan and China have put to theside the territorial and history issues that had been allowed to spoil cooperation in areas of shared interest
and are deepening cooperation in a number of key areas. In May 2018, Chinese Premier Li Keqiang visited
Japan for a Japan-China-ROK trilateral summit aswell as a bilateral summit with Prime Minister Shinzo
Abe. Abe and Li concluded an agreement on theJapan-China Maritime and Aerial Communication
Mechanism, which provides communication channels between China’s People’s Liberation Army andJapan’s SDF in order to prevent accidental clashes between vessels or aircraft at sea. In October 2018, Prime
Minister Abe met with Chinese President Xi Jinping
in China for a leaders’ summit, where the two governments agreed to cooperate on 52 joint infrastructure
projects in third countries. This includes the flagshipproject of upgrading an industrial park in Thailand’s
Chonburi Province into a smart city. This infrastructure cooperation is a key example of positive engagement that is aimed not only at forging connectivity
between infrastructure investment projects across theregion but also at ensuring that Chinese investment ininfrastructure is of high quality based on international
best practices and standards.
In addition to striking a better balance between
engagement and deterrence, Japan must work proactively with like-minded countries in order to reformthe WTO and to urge the United States to recommit
itself to rules-based economic institutions. The recent
G20 Summit resulted in a joint statement calling for
WTO reform, and as the chair nation of next year’s
summit in Osaka, Japan should play a leading role inshaping and implementing this reform agenda. Japan
can also play a meaningful role by expanding themembership of the Comprehensive and Progressive
Agreement for Trans-Pacific Partnership (CPTPP)
while also promoting the early conclusion of theRegional Comprehensive Economic Partnership(RCEP) so that the region may demonstrate to therest of the world that its trade is governed by a shared
set of rules.

DECEMBER 2018 | 5■■■
The intensification of US-China tensions risks undermining the shared stability, peace, and prosperity thathas been forged since the normalization of US andJapan diplomatic relations with China in the 1970s.
This is not just an issue for the United States andChina, but also for Japan and the rest of Asia. Sensitive
security issues such as North Korea, Taiwan, maritime security, and the BRI must be carefully managed
in order to avoid exacerbating tensions. If we are to
avoid stumbling into a severe and entrenched form ofstrategic rivalry, we must be clear about the current
nature of US-China relations, which are shaping up as
a battle for global influence between China as a rising
power and the United States as the established global

power. Given these roots of the US-China strategic
rivalry, it is clearly a long-term issue that will impact
the future shape of the global order, and it cannot be
resolved simply by ending the current trade war. Yetdisengagement and decoupling is not a realistic option given the high level of interdependence between
China and the world. The United States and Japan
must work together to mitigate tensions with China
and must return to a more balanced hedging policy
focused on engagement backed by deterrence.
Hitoshi Tanaka is a senior fellow at JCIE and chairmanof the Institute for International Strategy at the Japan
Research Institute, Ltd. He previously served as Japan’s
deputy minister for foreign affairs.

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