China and America both need to pursue policies that will reduce economic and geopolitical tensions and foster healthy cooperation on global challenges. If they fail to achieve a new understanding on the issues driving their current confrontation, they will eventually collide – with disastrous consequences for the world.

The United States and China remain on a collision course. The new cold war between them may eventually turn hot over the issue of Taiwan. The "Thucydides Trap" - in which a rising power seems destined to clash with an incumbent hegemon - looms ominously. But a serious escalation of Sino-American tensions, let alone a war, can still be avoided, sparing the world the cataclysmic consequences that would inevitably follow.

There will always be at least some tensions when a rising power challenges the prevailing global power. But China is facing off against the US at a moment when America's relative power may be weakening, and when it is committed to preventing its own strategic decline. Both sides are thus becoming increasingly paranoid about the other's intentions, and confrontation has mostly supplanted healthy competition and cooperation. Both sides are partly to blame.

Under President Xi Jinping, China has become more authoritarian and moved further toward state capitalism, rather than adhering to Deng Xiaoping's concept of "reform and opening-up." Moreover, Deng's maxim, "hide your strength and bide your time," has given way to military assertiveness. With China pursuing an increasingly aggressive foreign policy, territorial disputes between it and several Asian neighbors have worsened. China has sought to control the East and South China Seas, and it has become increasingly impatient to "reunify" with Taiwan by any means necessary.

But Xi has accused the US of pursuing its own aggressive strategy of "comprehensive containment, encirclement and suppression." On the other hand, many in the US fear that China may challenge US strategic hegemony in Asia - a decisive factor in the region's relative peace, prosperity, and progress since World War II.

Chinese leaders also fear that America is no longer committed to the "One China" principle that has underpinned Sino-American relations for half a century. Not only has America become less "strategically ambiguous" on the question of whether it would defend Taiwan; it has also fanned Chinese fears of containment by reinforcing its Indo-Pacific alliances through the AUKUS (Australia, the United Kingdom, and the US) pact, the Quad (Australia, India, Japan, and the US), and an Asian pivot by NATO.

A first step toward preventing a collision is recognizing that some of the reigning concerns are excessive. For example, US anxiety about China's economic rise is reminiscent of its attitude toward the rise of Germany and Japan decades ago. After all, China has significant economic problems that could cut its potential growth to only 3-4% per year, far below the 10% annual growth rate that it achieved over the past few decades. China has an aging population and sky-high youth unemployment; high debt levels in both the private and public sectors; falling private investment as a result of intimidation by the ruling party; and a commitment to state capitalism that hampers total factor productivity growth.

Moreover, Chinese domestic consumption has weakened, owing to deepening economic uncertainty and the lack of a broad social safety net. With deflation setting in, China now must worry about Japanification: a long period of lost growth. Like so many emerging markets, it could ultimately end up in the "middle-income trap," rather than reaching high-income status and becoming the world's largest economy.

While the US may have overestimated China's potential rise, it also may have underestimated its own lead in many of the industries and technologies of the future: artificial intelligence, machine learning, semiconductors, quantum computing, robotics and automation, and new energy sources such as nuclear fusion. China has invested significantly in some of these areas under its "Made in China 2025" program, but its goal of achieving near-term dominance in ten industries of the future now seems far-fetched.

American fears about China dominating Asia are also excessive. China is surrounded by almost 20 countries, many of which are strategic rivals or "frenemies" - most of the few allies it does have, like North Korea, are a drain on its resources. While its Belt and Road Initiative was supposed to make new friends and create new dependencies, it is encountering many challenges, including massive failed projects (white elephants) that are leading to debt defaults. As much as China wants to dominate the Global South and its international "swing states," many middle powers are resisting and countering this ambition.

The US has rightly imposed some sanctions to keep key technologies out of the Chinese military's hands, and to frustrate China's quest for dominance in AI. But it must be careful to limit its strategy to one of de-risking, rather than decoupling, apart from some necessary technological decoupling and limits to direct investment in China and the US. As it determines which sectors to include in its "small yard and high fence" approach, it must avoid going too far. The trade sanctions that Donald Trump imposed on China applied to a vast range of consumer goods, and should be mostly phased out.

On Taiwan, the US and China should try to reach a new understanding to defuse today's dangerous escalation. US President Joe Biden should clearly reaffirm the One China principle and realign his public commitments and statements with the principle of "strategic ambiguity." The US should sell Taiwan the weapons it needs to defend itself, but not at a pace or scale that could provoke China to invade the island before its "porcupine" defense advances too far. America should also state clearly that it opposes any Taiwanese move toward formal independence, and it should avoid high-level visits with Taiwanese leaders.

China, for its part, should stop its air and naval incursions near Taiwan. It should state clearly that eventual reunification will be strictly peaceful and mutually agreed; it should take new steps to improve cross-strait relations; and it should defuse tensions with other neighbors on territorial disputes.

China and America both need to pursue policies that will reduce economic and geopolitical tensions and foster healthy cooperation on global issues such as climate change and AI regulation. If they fail to achieve a new understanding on the issues driving their current confrontation, they will eventually collide. That would lead inexorably to a military confrontation that would destroy the world economy, and which could even escalate to an unconventional (nuclear) conflict. The high stakes demand strategic restraint from both sides.

From Project Syndicate

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