1. The Two-Good Theory: Predicting the
Relationship of China and the United States
in 2020
Kristin Roesch

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The United States’ relationship with China in 2020 will affect our economic and political
interests domestically as well as internationally. Today, the United States faces a challenge with
the emerging global role of China. Tensions continue to grow between the two world powers and
will lead to major political and economical consequences if the relationship does not improve.
China has become a significant trading partner, debt holder, and ally in Asia to the United States.
The U.S. cannot afford to lose China on any of these fronts. The United States is also not used to
such international economic and political competition. China has increased its military spending
and is also the largest holder of U.S. debts. In 2010, China surpassed Japan and became the
world’s second largest economy and is on its way to becoming the number one economy ahead
of the United States (Zissis 2012). In 2012, trade tensions grew between the U.S. and China
regarding China’s international trade violations. With a new generation of leadership in China
beginning in 2012, there is much discussion over the future and even decline of the United
States. It is predicted that it is possible by 2020 that China will overpass the United States as the
number one world economy (Zissis 2012). It is also predicted that by 2030 two thirds of the
middle class will live in China (Zissis 2012). The two-good theory assumes that states pursue
one of two things: maintenance or change of current policies. The two-good theory applies to the
future of China, in that China will continue to seek policy change over the status quo and
maintenance on issues, regardless of the opinions of the United States.
Mao Zedong established China in 1949 after peasant backed Communists overthrew the
nationalist government. The United States supported the nationalist government, which has led to
several decades of tension and limited relations between the U.S. and China. The Korean War
continued the United States’ strained relationship with China. China supported North Korea’s
communist regime and their invasion of South Korea, while the U.S. rushed to South Korea’s

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defense. President Eisenhower’s lifted naval blockade of Taiwan in 1953 created the first of
three Taiwan Strait crises. This would allow anti-communist Taiwan to invade and liberate
communist China. There were two more crises in 1956 and 1996. In the 1970s, a better
relationship grew after President Nixon and President Carter both visited China. However, in
1989 the Tiananmen Square Massacre of innocent protestors caused a break in the relationship
and the U.S. government suspended military sales to Beijing. The continued human rights
violations of China and political imprisonment has led to an icy relationship with the U.S. In
2000, President Clinton signed the U.S.-China Relations Act of 2000, which granted China
permanent normal trade relations with the U.S. and helped gain China admittance into the World
Trade Organization. China increased its military spending and has been criticized for spending
more than just for a peaceful purpose. In 2008, China became the largest holder of U.S. debts,
showing the countries necessary interdependence. China passed Japan and became the second
largest world economy behind the U.S. in 2010. Predictions show China will most likely pass the
U.S. as well and become the world’s largest economy in 2027. Just recently on April 8, U.S.
Secretary of Defense Chuck Hagel disagreed with China’s defense minister over their territorial
claim of islands in the East China Sea (Cooper 2014). Tensions have continued between the
United States and China recently and such consequences will impact this relationship in the
future.
Theory is central to the way policy makers and military understand global tensions. A
theory is not necessarily a truth, but it is a useful model simpler than reality. The two-good
theory assumes that states pursue one of two things: maintenance or change of current policies.
States will be status quo on some issues and will prefer maintenance policies, while they will
want to change other policy issues. Therefore, the United States must choose what it wants to do.

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There is also a tradeoff, if a state seeks more maintenance it harms the ability to seek change, and
vice versa. Conflict can cause economic uncertainty. The two-good theory also assumes that
environmental constraints and state preferences affect the amount of each good. Meaning the
more resources a state has the more the state will participate in maintenance and change,
particularly change with more resources. The two-good theory is general and does not seek to
explain one state’s foreign policy behavior. Instead, the goal of the two-good theory is to
understand factors that affect the foreign policy of all states. This makes the theory useful in
many cases and is applicable to a number of issues. The two-good theory can analyze broad
trends in the foreign policy relationship between the United States and China. It also helps
analyze specific foreign policy decisions and understand why such a decision was made.
However, like any good theory the two-good theory is falsifiable. It does not necessarily need to
be tested, but a theory must be supported, which is true of the two-good theory.
The two-good theory applies to the relationship between the U.S. and China. China’s
economic and political power has increased as the United States’ power has relatively declined.
As China’s economic power increases, it seeks more change and initiates conflict internationally.
When China gained membership in the World Trade Organization in 2001, it was seen as proof
of U.S. hegemonic power and dominance. China so desperately wanted to become a thriving
economic country like the United States that they accepted very demanding necessary terms for
success when entering the WTO. However, ten years later China began to emerge as the world’s
power economy as the United States’ economy seemed to decline with the financial crisis and
bailouts. American corporations like Wal-Mart have become increasingly dependent on trade
relations with China. China’s cheap labor and manufacturing ensures profitability for
corporations like Wal-Mart. Good trade relations is imperative for continued profit and has

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created a pro-China lobby in Congress, limiting U.S. policymakers’ ability to promote American
manufacturing. One of the most visible actions showing China’s increasing power internationally
and the United States’ relative decline is the rapidly growing foreign currency reserves China
holds from trade surplus (Beeson 2009). Without financing from China, the U.S. would be
unable to finance its federal budget and the recovery from the recession would have been more
difficult for Americans. China is the largest holder of U.S. debt, with about$1.3 trillion in
Treasury bonds (Puzzanghera 2013). The U.S. Treasury has found that there is little it can do to
convince China to make adjustments to its currency to help American financial problems
(Beeson 2009). Instead, China has sought change policy on the issue of the American dollar.
Beijing’s central bank governor recently called for the dollar to be replaced by a global reserve
currency. Along with China’s change seeking economic policy, China has also continued its
increase in military spending. This increase in maintenance and change seeking policy is
consistent with the two-good theory’s behavior of an increasingly powerful state. In March
China announced it would increase its military budget by 12.2% to almost $132 billion in 2014
(Wong 2014). This increase in spending shows China’s growing dominance in Asia and is the
second largest military spending in the world behind the United States (Wong 2014). China’s
military power is parallel to its economic power; both the second largest in the world, and
growing. If this trend continues, China could surpass the United States both economically and
militarily. Foreign policy analysts also believe China distorts its true military spending and that it
is actually more than the figure released to the world. China is asserting its dominance by
initiating maritime disputes in the East and South China Seas. After Japan’s purchase of the
Diaoyu/Senkaku Islands in 2012, China declared territorial claim of the islands, directly
challenging Japan’s authority (China’s Maritime Disputes 2014). This marks the end of Japan’s

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status quo control of the area. China then gained control over the area with its coast guard as
U.S. Secretary of State Hillary Clinton urged for a rational resolution between the two countries.
In 2013, China elevated its territorial disputes to air space when it demanded that all non-
commercial flights submit flight plans before flying over the Diaoyu/Senkaku Islands in the East
China Sea (China’s Maritime Disputes 2014). U.S. Secretary of State John Kerry responded with
deep concern urging China to reconsider and exercise caution in its decision-making (China’s
Maritime Disputes 2014). With such actions, China sends a strong message to the United States
and the world in that it will continue to assert its dominance as it grows in power. China is a
necessary ally to the United States; therefore, the U.S. must be careful in its response. A free
East and South China Sea is in the United States most important economic and political interests.
In the future, it is expected that China will have the confidence to attempt to gain territory as its
military becomes more powerful. If the United States does not create a successful crisis
management system it will fail to mediate the situation. Failing to mediate the situation would
portray the U.S. as a decreasing power. In accordance with the two-good theory, the United
States will seek more maintenance policy as its power and influence decreases. For instance,
President Barack Obama visited Japan, South Korea and the Philippines at the end of April to
discuss alliances regarding defense cooperation in Asia, given territorial disputes instigated by
China (Greitans 2014). President Obama sent a clear message to China that the United States will
support its allies in maritime territorial disputes. President Obama also signed a new defense
treaty with the Philippines, which would send more U.S. troops to Southeast Asia for support.
While the U.S. denies its goals are to contain China, this will certainly deter any Chinese troops
from moving towards disputed waters. With recent actions, it is clear China is on track to

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becoming an even more dominant power in international affairs. This will continue in the future
in accordance with the two-good theory.
With China’s growing international power and influence in contrast to the United States
relative decline, China will be the most concerning foreign policy issue for the U.S. in 2020.
While China is dependent on the U.S. for trade and as a debt holder, it is possible for China to
surpass the U.S. economically and politically in the near future. The two-good theory supports
this claim of China’s growing dominance. The United States must focus on creating a more
stable relationship with China as well as recovering from the economic crisis to ensure its
position as the top world power. Likely consequences of China’s increase in power include more
tense relations in the Asia-Pacific region. China will be more likely to instigate conflict, even
militarily. If their rise in power is accompanied by a decline of the United States power, the U.S.
will no longer be seen as the top world power.

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Works Cited
Beeson, Mark. "Comment: Trading Places? China, the United States and the Evolution of the
International Political Economy." Review of International Political Economy 16.4 (2009):
729-41. Print.
Bremmer, Ian. "Gathering Storm: America and China in 2020." World Affairs Journal. World
Affairs Journal, July 2010. Web. 14 Apr. 2014.
"China’s Maritime Disputes." Council on Foreign Relations. Web. 29 Apr. 2014.
<http://cfr.org>.
Greitans, Sheena. "Obama's Visit to Asia and the U.S.-Philippine Alliance." The Brookings
Institution. N.p., Apr. 2014. Web. 02 May 2014.
Mcdonald, Joe, and Ap Business Writer. "China Calls for New Global Currency." ABC News.
ABC News Network, n.d. Web. 14 Apr. 2014.
Palmer, Glenn, and T. Clifton Morgan. A Theory of Foreign Policy. Princeton, NJ: Princeton UP,
2006. Print.
Puzzanghera, Jim. "China Calls for Dollar to Be Replaced as Global Reserve Currency." Los
Angeles Times. Los Angeles Times, 14 Oct. 2013. Web. 14 Apr. 2014.
Wong, Edward. "China Announces 12.2% Increase in Military Budget." The New York Times.
The New York Times, 05 Mar. 2014. Web. 14 Apr. 2014.
Zissis, Carin, and Christopher Alessi. "U.S. Relations with China (1949 - Present)." 21 May
2012. Council on Foreign Relations. Apr 2014.