Talking Points

  • The U.S. can maintain a China policy that is simultaneously committed to free markets and protective of American political and security interests.
  • The American and Chinese economies are mutually dependent, but the American economy depends far less on China than the Chinese economy depends on the U.S.
  • The People’s Republic of China has limited options beyond purchase of American government bonds for investing its massive reserves of dollars.
  • Although China has permitted more individual economic freedom over the past three decades, it is still a one-party authoritarian regime governed by the Communist Party.
  • China has become more intent on challenging American leadership in the Western Pacific and has assumed an increasingly hard-line stance in its territorial disputes with American friends and allies. This has direct implication for American national security interests, such as the freedom of the seas.

The Issue

The relationship between the United States and the People’s Republic of China (PRC) is one of necessary cooperation but increasingly intense competition. The U.S. must maximize the benefits of its economic relationship with China even as it maintains the alliances, partnerships, and forward-deployed military to balance China’s increasingly strident bid to displace it as the Asia–Pacific’s preeminent power. Only through applying the principles of free trade can the U.S. maintain its economic leadership and effectively manage the China challenge. It can do this and help to preserve peace, security, and freedom in Asia.

China and the United States, as the rising power and currently dominant power, respectively, are constantly competing with each other throughout East Asia even as the two economies continue to intertwine. As China’s strategic center of gravity has shifted to the coast, Beijing’s views of its “core interests” and fundamental national concerns mandate dominance, if not outright control, of the region lying within its “first island chain” stretching from Japan through Taiwan and the Philippines to the Malacca Strait. That the various East Asian states along that line are U.S. allies as well as major Chinese trading partners only highlights the complicated situation confronting U.S. decision-makers in East Asia.

The American economy depends far less on China than the Chinese economy depends on the United States. To function efficiently, China’s investment-driven economy relies on the open global system created by the U.S. The relationship is highlighted by trade and investment. The U.S. buys more goods from China than any other nation and is by far China’s largest national trade partner. China’s total balance of payments surplus has continued to grow, although its economy has slowed. However, without such a willing export outlet as the United States, China’s economic situation would be much worse, with far fewer buyers for its goods.

Complementing our large trade imbalance with China is an investment imbalance. China’s huge reserves leave many American leaders wary of China’s influence on the United States as a creditor, especially when our nation’s debt poses an increasing threat to our financial security and solvency. China has business contracts and financial investments across the globe, but the bulk of its money is held in U.S. dollar assets because the American market is the only one large enough to absorb China’s giant foreign currency reserves. The lack of investment choices and China’s overriding interest in security and return on investment severely limit any influence China’s debt holdings have on the U.S.—a situation exacerbated by the structural problems of the eurozone.

The PRC gains considerably from the American consumer but relies utterly on the American-led global financial and economic system. It has used this system to become the world’s largest trader (as of 2013) as well as to invest tens of billions of dollars in Australia, South America, and sub-Saharan Africa. Without the U.S. dollar as the world’s reserve currency and the American bond market as a safe haven, China’s exchange rate and balance of payments regime could not function.

China remains a growing economic powerhouse, but serious structural, economic, and even political issues hamper its further development and potential for economic leadership. These weaknesses have been exacerbated in important ways by renewed state intervention in the economy beginning around 2004. For example, reliance on state-directed investment has led to a profound economic imbalance and could threaten future growth. Frantic spending in response to the global recession has led to huge amounts of waste and corruption and distorted resource allocation. This is manifested in inflation, debt pressures, and even a slowdown in growth. China’s own numbers indicate that its economic growth has slowed, and that trend is likely to continue. It remains to be seen whether the new Chinese leadership is prepared to revive economic reform to reignite real, long-term growth or whether it will continue to rely on spending and state champions.

Critics claim that the cost of increasingly close economic ties between the U.S. and China has been the loss of American jobs. China’s exchange rate policies in particular are said to be harmful. China’s exchange rate has been appreciating, and its currency policy is not to blame for lost American jobs. The U.S. should not abandon its free-market approach to China and retreat into protectionism. For the government to interfere with purchases, sales, and other economic decisions made voluntarily by American consumers and American companies can only hurt our economy. It would also be a clear abandonment of America’s global leadership.

Although China has permitted more individual economic freedom over the past three decades, it is still a one-party authoritarian regime governed by the Communist Party. The party continues ruthlessly to suppress any group, and even lone individuals, who might threaten its monopoly on power. The government is struggling to manage environmental degradation and demographic instability, including the world’s largest migration from rural to urban areas, all of which contributes to social unrest. The one-party bureaucratic system, which answers to no outside authority, breeds corruption and leads to much administrative waste within the political system.

In addition to its internal conflicts and abuses of human rights, there are concerns that China’s rise is aimed at displacing American preeminence in the Western Pacific. China’s military has modernized steadily at a pace that often defies foreign expectations, aided by economic growth that has allowed the Chinese leadership to acquire both guns and butter. Official Chinese defense spending figures indicate annual double-digit growth for most of the past two decades. The People’s Liberation Army (PLA) has introduced new fighters, anti-ship ballistic missiles, space systems, and now an aircraft carrier faster than predicted. The Chinese military is also believed to be engaged in computer network attacks worldwide. These efforts are supported by reforms in Chinese military doctrine and training to allow the PLA to get the most from its new acquisitions.

Meanwhile, China has assumed an increasingly hard-line stance in its territorial disputes with American friends and allies: in the East China Sea with Japan, in the South China Sea with the Philippines and Vietnam, and even on its southern border with India. The Taiwan issue also remains a potential flashpoint in Sino–U.S. relations, with over 1,200 Chinese ballistic missiles arrayed against the island. Diplomatically, China has cultivated relationships with countries that openly oppose and threaten the United States, including North Korea and Iran. China has also become much more strident in opposing traditional freedom of navigation along its coast, directly challenging the long-standing American principle of freedom of the seas.

Only the United States has the ability to balance China and keep this increasing assertiveness in check. No Asian state currently has the ability to match China’s nuclear arsenal, growing conventional military capability, and burgeoning defense budget. Similarly, Taiwan can hope to defend itself only with U.S. support, including arms sales. For these reasons, Beijing has pushed the U.S. to assume a smaller role with respect to Taiwan. China has acquired weapons that are much more suited to countering U.S. military capabilities than they are to simply defending China’s own borders and sea lines of communications.

There is a growing sense that, despite the economic relationship, Beijing’s leaders are becoming more intent on challenging Washington’s presence in East Asia, especially where China has disputes with American allies, friends, and partners. Confrontation could result in disaster for the regional—and even the global—economy. For example, if China were to block freedom of transit in the South China Sea, the disruption of trade would be a disaster for U.S. allies such as Taiwan, which imports 98 percent of its oil via the South China Sea. Use of force by China would have a devastating effect on U.S.–PRC relations, inhibiting the ability of the U.S. to cooperate with regional allies at a minimum, and posing a risk of a broader military conflict. The lack of funding and resources to realize the so-called Asia pivot, coupled with American policy vacillation, has raised questions in various quarters about American reliability and the potential loss of U.S. military predominance.


  1. Remain economically engaged with China and encourage free-market cooperation. Economic discussions should be tightly focused and based on open-market, not protectionist, principles. Although the PRC will not give up state intervention quickly or fully, the U.S. should encourage greater competition and fewer subsidies by aggressively seeking to roll back China’s mercantilist policies at the World Trade Organization. Freer movement of money in and out of China is another key issue; the U.S. should press it in appropriate bilateral and multilateral forums. Most important, however, the U.S. should focus on getting its own house in order and not mimic unwise Chinese policies.
  2. Honestly evaluate Chinese “cooperation” to date. The U.S. and China can work together on certain issues, but the U.S. should not credit China for helping where progress has not been made. China’s interests, whether regarding Syria, outer space, or maritime legal regimes, do not mirror those of the United States. China’s voting pattern at the U.N. is often antithetical to U.S. interests. China does not pretend that its interests are always the same as America’s, and the U.S. should recognize the same reality. We should not assume that there is a broadly shared vision of desirable outcomes; instead, we should adopt a more realistic view of cooperation based on coincidence of interests on a case-by-case basis.
  3. Remain committed to treaty alliances and forge deeper relations with the other nations in East Asia. The U.S. has five treaty allies in the Asia–Pacific region (Japan, South Korea, the Philippines, Australia, and Thailand). The U.S. should be unequivocal in its commitment to mutual defense under these treaties. The U.S. should engage these and other, non-ally nations in the region so that they do not perceive China as the sole game in town. India is the leading power in South Asia, but China has made inroads with neighboring countries that could come at the expense of stability and democratic trends in the region.
  4. See to completion and passage of a free-trade-oriented Trans–Pacific Partnership (TPP). The U.S. first joined talks on the TPP under the Bush Administration. The 12 nations that are currently part of the negotiations encompass 40 percent of the global economy. The outcome should be as sweeping as possible in lifting barriers to trade and reaching behind borders to free investment. Its scope should be at least as ambitious as the U.S.–South Korea free trade agreement.
  5. Develop and maintain a strong, comprehensive response to bad Chinese behavior. Progress in one area does not excuse China’s shortcomings in other areas. China should not escape condemnation with the pretense of being a “responsible stakeholder” when it provides diplomatic assistance to authoritarian regimes—such as Syria, North Korea, Iran, and Sudan—that abuse their own people and/or threaten American security. Likewise, China’s unwillingness to recognize the negative aspects of its conduct as a powerful nation, such as the rampant cyber-intrusions originating from China, must be addressed.
  6. Maintain a strong U.S. military presence in Asia. U.S. Navy and Coast Guard shipbuilding and modernization programs must be fully funded. The United States should also invest in long-range power projection systems (such as unmanned aerial vehicles, bombers, and nuclear attack submarines) and other systems that would counter efforts to deny U.S. forces access to the region or interfere with the freedom of the seas. In addition, the U.S. must maintain robust bases in the region to support U.S. forces.

Facts & Figures

  • With a freedom score of 52.5, rising slightly from 2013, China placed 137th out of the 178 nations in The Heritage Foundation’s 2014 Index of Economic Freedom.
  • As of October 2013, China’s official foreign exchange reserves exceeded $3.6 trillion, setting a new record; much of this is stored in low-yield U.S. government bonds.
  • The U.S. trade deficit with China in 2012 reached a record $315 billion.
  • According to the PRC, China’s official defense budget rose from 669.1 billion yuan in 2012 to 740.6 billion yuan (equivalent to $119 billion) in 2013, a rise of 10.7 percent.
  • China now has the second largest defense budget in the world.

Selected Additional Resources

Heritage Experts on China

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    Dean Cheng

    Senior Research Fellow, Asian Studies Center

  • Walter Lohman

    Director, Asian Studies Center

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