In an interview with CNBC in January, Myron Brilliant of the U.S. Chamber of Commerce described the American-Chinese relationship as “too big to fail.” In recent years, a number of commentators and public figures have used that same phrase. The thinking goes that because the U.S. and China are such large powers, a failure of the bilateral relationship would have catastrophic consequences for both the economy and global security.
This logic encouraged the American establishment to assume that economic interdependence between the two powers would promote stability. Both parties, they reasoned, would fear the consequences of discord and thus moderate their behavior. For many years, this assumption held up. But given China’s increasingly unrestrained and threatening behavior since Xi Jinping assumed power, American leaders have grown uncertain as to whether economic interdependence with China is beneficial for the U.S.
But even if deep economic ties with China are a net positive for the U.S., should they ever really grow “too big to fail”? That phrase is a curious one, given the nasty reputation it’s developed since the 2008 financial meltdown. It is most commonly used to describe the problem of moral hazard risk during financial crises, which provides a surprisingly useful analogy for the U.S.-China political-economic relationship. Economists have argued that the 2008 crisis was worsened by the fact that financial institutions, well aware of their systemic importance to the American economy, engaged in risky behavior because they knew they would likely be bailed out in the event of a crisis. Most importantly, those institutions believed that American lawmakers understood that it was not in their political interest to allow the banks to collapse.
An analogous problem arises from China’s extensive economic ties with the U.S. (and other countries). If the Chinese government is aware that the relationship is perceived in Washington as “too big to fail,” it might reason that it can get away with all sorts of egregious acts without suffering serious consequences. Deep economic ties with China increase the likelihood that American politicians will be unable or unwilling to let the relationship fail. In fact, this logic led China to incorrectly assume that President Donald Trump’s trade war threats were merely bluffs. Beijing understood, for example, that a collapse in Chinese soybean purchases would directly harm the pocketbooks of Trump’s base. It also knew that Fortune 500 companies would be extremely displeased. It therefore believed that it wasn’t in Trump’s political interest to risk the economic relationship.
In this way, economic engagement with China can be destabilizing, not to mention threatening to a variety of American interests, when it emboldens the worst tendencies of China’s “president for life.” Of course, there have been times when Chinese and American actions have been restrained. For instance, China’s military hawks have advocated, unsuccessfully, for Beijing to dump massive quantities of U.S. treasuries in response to American naval actions in China’s backyard. Because the two nations are so economically interdependent, such a move would have caused too much damage to the Chinese economy.
Nonetheless, differences in domestic institutions have made this logic untenable under many circumstances. As an autocracy, the Chinese Communist Party is never beholden to domestic interest groups in the way that U.S. politicians typically are. For example, when China halted exports of rare earth minerals to Japan in 2010 following a dispute over the East China Sea, the Chinese Communist Party did not risk being voted out of office by its mining industry. But for the Japanese government, allowing the tech sector to come to a grinding halt as a result of losing that mineral supply would have been political suicide. Because economic independence constrained the Japanese government and not the Chinese government, Beijing prevailed. As China’s economic relations with other nations grow, this problem will only get worse.
While Trump’s trade war may help course-correct the economic relationship, it will not eliminate this inherent vulnerability if it doesn’t reduce economic ties between the two countries. If China’s domestic institutions remain unchanged, the U.S. will be far more constrained by the relationship than China will ever be. Therefore, allowing “too big to fail” is unsafe for American interests.
To be sure, just because the U.S. should be concerned about a “too big to fail” problem doesn’t mean it should let the relationship with China fail entirely or sever economic ties. That would be disastrous for all parties. But making it clear to China that the U.S. can reduce ties if necessary is a critical part of developing a healthier bilateral relationship. And given the nature of democratic institutions, the only way to reduce this vulnerability is to pursue more limited economic engagement with China.
New Zealand provides a disturbing example. As China’s economic ties with New Zealand have expanded, Chinese behavior has grown more menacing. A 2018 report from the Canadian Security Intelligence Service details China’s elaborate strategy in New Zealand to “influence political decision-making, pursue unfair advantages in trade and business, suppress criticism of China, facilitate espionage opportunities, and influence overseas Chinese communities.”
These programs have a long history in China. But President Xi Jinping, presiding over an era of unprecedented national economic prowess, has taken them to new extremes. For example, Anne-Marie Brady, a Chinese politics professor at the University of Canterbury in New Zealand, was subjected to a year-long intimidation campaign that she said was orchestrated by the Chinese government. After publishing her research on Chinese influence operations abroad, her house was burglarized, her office was broken into twice, and her family car was sabotaged. She also received threatening letters and numerous phone calls in the middle of the night on her unlisted number. New Zealand has done little to counter these threats, likely due to fear of economic retaliation from the Chinese government. New Zealand Prime Minister Jacinda Ardern recently called her country’s relationship with China “robust and mature.”
China’s response to other nations’ restrictions on Huawei, the Chinese telecommunications giant, may foreshadow this. Beijing recently banned Australian coal imports, a move that was likely retaliation for Australia banning Huawei from its 5G networks. Similarly, after New Zealand restricted the use of Huawei equipment in its national 5G network, Beijing rescinded its invitation for Ardern to visit Beijing and called off the China-New Zealand Year of Tourism program.
The predatory nature of China’s global economic ambitions should necessitate that the U.S. stop considering its relationship “too big to fail” and encourage its allies to pursue more limited economic engagement. The Trump administration’s inclination to insult our allies while showing bitter contempt for multilateralism will likely make this task more difficult, if not impossible for the foreseeable future. But if the U.S. fails, China’s behavior is certain to get only worse in the future.
Nick Taber is an analyst of Chinese public policy. He has written for the Weekly Standard, The Diplomat, and Quillette.