While the gains from such an incremental approach would be slow and grueling, Rudd said it is the only way to handle China's conclusion that the U.S. will do whatever it takes to retain its status as the preeminent power globally.
Rudd, who was twice Prime Minister -- from 2007 to 2010 and again in 2013 -- said the consensus view among the Chinese leadership is that U.S. strategic intentions are to isolate, contain, diminish and internally divide China, and to sabotage the leadership itself -- accusations that Washington rejects, saying instead that China is trying to push the U.S. out of Asia.
Rudd, now president of the Asia Society Policy Institute and a Senior Fellow at the Harvard Kennedy School's Belfer Center for Science and International Affairs, said the United States will remain the dominant regional and global military power by a "massive margin" over the next decade.
He said there is no serious prospect of China reaching military parity with the U.S. before the middle of this century, if at all. "This is a core assumption in Chinese strategic thinking," Rudd said in the report, released by the Belfer Center last week.
Rudd, 57, is a lifelong student of Chinese history and a fluent Mandarin speaker from his time as a diplomat at the Australian Embassy in Beijing in the 1980s. During his first term as Australian leader, he irritated the Chinese leadership with his criticism of China's human rights record during an April 2008 speech to university students in Beijing. Rudd maintained he was simply speaking frankly as befitted one of China's zhengyou or "true critical friends." He knows Xi well, and describes him as the most powerful Chinese leader since Deng Xiaoping and someone the U.S. can do business with -- if it wants to.
Rudd said the two powers need to chart a new course, with a common strategic narrative built on "constructive realism and common purpose." This framework would be realistic about recognizing areas of fundamental disagreement -- Taiwan, claims in the East and South China Seas, human rights -- and constructive about areas where the U.S. and China potentially could work together.
A common purpose would be to "sustain, strengthen and where necessary, reform the existing regional and global rules-based order against forces seeking to erode it."
This order includes the United Nations and its various agencies, the UN Framework Convention on Climate Change, World Health Organization, World Trade Organization, World Bank and the G20. Examples of threats to the world order include cyber-terrorism, global jihadism, global pandemics, irreversible climate change and crises in food, water and energy supplies.
Rudd argued that China's economic rise over the next decade to a point where its GDP surpasses the U.S. is probable and sustainable. He rejected the "China collapse" view put forward by experts such as academic David Shambaugh.
Taking into account all the structural factors and the policy responses available to a sophisticated leadership in Beijing, Rudd envisaged a probable Chinese economic growth rate of 6%.
"It would be imprudent in the extreme for America's China policy to be based on an assumption that China will either economically or politically implode because of underlying contradictions in its political economy," he said.
The former Australian leader has been arguing for the past three years that China and the U.S. should carve out a new strategic road-map to enhance trade, investment and security in the Asia-Pacific region.
He has now refined his views to focus on the potential role of the G20, arguing that China and the U.S. should work to reinvigorate it as the prime institution for global economic governance. China will assume the presidency of the G20 next year and host the leaders' summit in Hangzhou in November 2016.
Rudd's report recommends the two rivals should also drive an investment initiative through the G20 on sustainable development, energy security and efficiency. He said Washington should modify its opposition to the China-backed Asian Infrastructure Investment Bank (AIIB), and should consider, over time, having a Chinese president of the World Bank.
He urged a continuation of regular bilateral working summits between the U.S. and Chinese Presidents that began with Sunnylands in June 2013, followed by Yingtai in November 2014. There should also be a trusted "point person" on each side to drive the process forward, he added.
Uneven political record
However, Rudd's views may resonate differently in Washington and Beijing. While his energy and intellectual firepower on China is widely known and respected, his political track record is uneven.
As Australian Labor Party leader, he won office spectacularly in 2007, defeating long-time conservative Liberal leader John Howard. But before his full term was up, and despite a relatively positive approval rating in public opinion polls, he was dumped as Prime Minister by his own party in June 2010, only days after he hosted a visit to Australian by then Vice President Xi Jinping.
He was replaced by his deputy Julia Gillard. She suffered the same fate three years later, with Rudd returning briefly to serve as Prime Minister from June to September 2013, before he lost the national election to Liberal leader and current Australian Prime Minister Tony Abbott.
Rudd retired from politics in November that year and took up the Harvard role in February 2014. He became first head of the Asia Society Policy Institute, based in New York, last October.