China also subsidizes land, energy, and resource prices, in part to support its massive industrial sector. These subsidies are a major reason China is now the dominant global player in steel, cement, and other industries, but they have also distorted the Chinese economy. Beijing has begun to liberalize many commodity prices and has pledged to make further adjustments, including to oil and natural-gas prices. China has its own motivations for doing this—for example, to conserve resources and encourage efficiency. Continued movement toward market pricing would allocate resources more rationally and improve the workings of the Chinese economy, while also eliminating a major source of economic tension between Washington and Beijing. Similarly, there have long been tensions regarding China’s use of artificially low exchange rates to subsidize exports, but currency reform is manifestly in China’s own interest. Its leadership understands this and has made real progress here.
Finally, China’s long-term success, and even much of its near-term success, depends on innovation, as its leaders have said. Innovation, in turn, requires the protection of intellectual property. China has made many commitments to protect intellectual property in the past, but too often ignores them. Ultimately, that will hurt domestic companies such as Xiaomi and Alibaba more than it will hurt Apple or Amazon. China and the U.S. would also benefit from a global regime to protect intellectual property from hacking for commercial purposes.
By addressing each other’s chief economic criticisms, China and the U.S. would simultaneously improve their own economies, remove irritants to their relationship, and foster trust. Doing so would not make geopolitical tensions disappear, but it would anchor them in a framework of mutual interest.
For all their differences, the U.S. and China face several similar internal challenges: rising health-care costs, inadequately funded social safety nets, and fiscal problems at the state or municipal level. And each faces serious income-distribution issues, though the specifics are different. The U.S. continues to face significant pressure on low- and middle-income wages, as well as widening income disparity, which runs contrary to the nation’s objective of broadly shared growth. In China, the emergence of an ultra-wealthy class is stoking resentment and unease.
The two countries also share an important external challenge: the need for a smoothly working global trading regime. As the world’s largest trading nations, they both have an interest in heading off protectionism that would damage their economies. And beyond trade, the two countries have other common goals: Middle East stability, especially with regard to Islamic extremism; climate-change mitigation; nuclear nonproliferation.