A strange dialogue of the deaf between the U.S. and China has reached a stage where the countries’ leaders have nothing new to say to each other, while the Pentagon cannot even talk to China’s sanctions stricken top military commander.

After decades of miscalculations since the late 1970s that trade, investments and economic development would change China’s socio-political system, the U.S. finally realized that it was nurturing a formidable challenge to the post-WWII Pax Americana. That led Washington to the “pivot to Asia” in 2010 to contain China’s regional and global power projections. A subsequent U.S. national intelligence assessment found that China and Russia were “strategic competitors” bent on changing the “rules based international order.”

Russia tested all that. Having unsuccessfully tried over the last thirty years to secure its western borders, Moscow took a short cut in 2021 by demanding, through diplomatic channels, security adjustments with the NATO military alliance. With those demands promptly and peremptorily dismissed, Russia undertook in February 2022 what it called “military technical measures” (aka “a special military operation”) to get security conditions refused by its Western adversaries.

China’s open and structurally changed economy

As a result, Russia has been sanctioned out from most of the world trade and financial transactions; its commerce and finance with the West are collapsing.

By contrast, the West has managed its trade and investment relations with China much more patiently. That was partly because China-based American and European companies were among the largest suppliers of Chinese exports. The other and perhaps more important reason was that Washington did not want to drive Russia and China into a closer military and political alliance.

China’s trade with the U.S. and the E.U. continued to grow rapidly despite various trade tariffs, quotas and selective foreign direct investment limitations.

Since 2011 and, including, the first quarter of this year, China pocketed $4.2 trillion on its merchandise trade with the U.S., along with massive – and free – technology transfers, which allowed the Middle Kingdom a swift transition from smokestack to IT-driven, state-of-the-art manufacturing industries.

With those huge trade surpluses China became a net creditor to the world. At the end of last year, China’s net international investment position came in at $2.5 trillion, while its foreign exchange reserves last April soared to an astounding $3.2 trillion.

All those numbers reflect the rising degree of China’s integration into the world economy. They also show the changing structure of the country’s aggregate demand. China’s external sector – exports plus imports – now represents 36% of the GDP, with exports and imports accounting for roughly identical shares (18%) of demand and output.

By that yardstick, China is part of world’s open economies – a global constituency vitally interested in a multilateral world order with free flows of trade and finance.

China, therefore, clings to its U.S. and E.U. trade transactions, because exports to those two large economic systems accounted last year for one-third of China’s total exports.

A long overdue diversification of Chinese trade

Unlike Russia, China still apparently hopes to avoid a major realignment of U.S. and E.U. trade and investment flows. Beijing seems to have misread or ignored those signals to the point where it is now exposed to outright threats: If China does not toe the Western policy line (e.g., toward Russia, Ukraine, … ) it will face sanctions and other hostile measures.

China’s constant invocations of “win-win cooperation” and “building a community of shared future for mankind” are falling on deaf ears in Washington and Brussels, where they want to do business with “friendly” and “reliable” trade partners – as will be clearly stated for the nth time during the G7 summit in Hiroshima, Japan later this week (May 19-21, 2023).

The West apparently believes that Beijing has been trapped in a trade honey pot.

That’s an overstatement, but China would still be well advised to diversify trade and investment transactions through its vast global political and economic networks. BRICS and the Shanghai Cooperation Organization (SCO) are perfect instruments to restructure, and expand, business along the lines of stable geostrategic alignments that will withstand challenges concerning the status of Taiwan and China’s contested maritime borders.

The U.S., for its part, may wish to think again how to peacefully accommodate the ongoing changes to world’s political, economic and security architecture. Claims of nuclear armed adversaries must be negotiated. Brinkmanship is unwise because military channels cannot be solely relied upon to avoid fatal errors, accidents and miscalculations.

In that game, alliances don’t matter. America is alone. The ultimate trigger is in its hands.

Looking to the brighter side, one must hope that Washington sees that a stagnating economy cannot uphold and enhance the country’s world standing. Getting America back on a path of brisk and steady economic growth is the best way of serving its national interests.