The Chinese government has taken some umbrage at Secretary Clinton's speech on internet freedom last week. The Secretary, to be sure, called China out for censoring the internet, but she couched that criticism in pretty cozy language:
The internet has already been a source of tremendous progress in China, and it is fabulous. There are so many people in China now online. But countries that restrict free access to information or violate the basic rights of internet users risk walling themselves off from the progress of the next century. Now, the United States and China have different views on this issue, and we intend to address those differences candidly and consistently in the context of our positive, cooperative, and comprehensive relationship.
Ma Zhaoxu, a spokesman for the Chinese foreign ministry, was less friendly in his response:
The US attacks China's internet policy, indicating that China has been restricting internet freedom. We resolutely oppose such remarks and practices that contravene facts and undermine China-US relations.
China's internet is open. China is a country with the most vibrant internet development. By the end of last year, China had 384 million internet users, 3.68 million websites and 180 million blogs. China's Constitution guarantees people's freedom of speech. It is China's consistent policy to promote the development of internet. China has its own national conditions and cultural traditions. It supervises internet according to law, which is in parallel with the international paractice...
We urge the US to respect facts and stop attacking China under the excuse of the so-called freedom of internet.
Once we're past the PRC's spurious claims about how free their internet is, we can see this in the context of a much bigger picture. Much like our ongoing spats over Tibet, Taiwan and human rights, the Chinese see internet policy as a purely domestic matter, and take criticism of their policy as an affront to their sovereignty. Given our persistent failure to affect China's behavior on any other sovereignty issues, we're likely to continue receving nothing but hostility when we bring up internet freedom.
But China's trucluence shouldn't be taken as a reason to shut up about internet freedom and censorship. As the Secretary made clear in her speech, freedom of information is at the heart of both our economic prosperity and our national security. Deeper than that, freedom of information is-- in itself-- a core value of American society.
The progress of freedom around the world has been swamped because developing countries see China as a living example that economic success can be achieved without relaxing the grip of authoritarian rule. For the first time in decades, perhaps centuries, freedom is in retreat around the world. Now more than ever, America must stand as a beacon of liberalism and an exemplar of the power of openness.
We may not get the needle to move on censorship in China, but we must be vocal in support of information freedom-- an unambiguous good-- and in our criticism of those who stifle liberty anywhere on the globe.
Salon Magazine asked me and a few others to offer their thoughts on the first year of the Obama Presidency. My short essay is below. A version of the essay can be found on the Salon site here.
Crafting an American Response to the Rise of the Rest
The first year of the Obama Administration was largely reactive to an agenda left by the previous Administration. The new President and his team have spent their time cleaning up the extraordinary messes left for them – financial crisis, the Great Recession, Guantanamo, exploding deficits, Iraq, deteriorating Afghanistan and Pakistan – and attempting to tackle problems left unaddressed for far too long – climate change and energy policy, health care reform and immigration reform.
In that regard the agenda of President Obama’s first year was determined to a great degree by the Bush Administration’s strategic reaction to a global political and economic environment which no longer exists. While President Obama cannot escape the governing inheritance left to him, he can do more to discard the outdated vision and rhetorical framework which came along with it, and begin to offer a much more compelling, modern and Obama-driven take on the challenges ahead and how we must meet them.
At the core of this 2nd generation Obama narrative must be a strategic response to the most significant transformation taking place in the world today, what Fareed Zakaria has called the “rise of the rest.” The twenty years of American-led economic liberalization and globalization which followed the collapse of communism has brought – with extraordinary rapidity - dozens of countries and billions of people into the modern economy. Their growing geopolitical and economic might is creating a radically different global environment than America faced in the 20th century, and arguably even 5-10 years ago when the Bush Administration made the strategic choices Obama is wrestling with today.
The true scope of this transformation is only really becoming apparent now, and it leaves our new President with the historic opportunity, and tremendous responsibility, to craft a comprehensive strategic response to this global “new politics” of the 21st century. It will also allow him to extricate himself from the anachronistic rhetorical framework suited for another day and another President.
This new strategy might have three main elements: Challenge America To Raise Its Game – The global economy of the 21st century will be much more competitive for our companies, workers and capital than the century just past. In the decade since China entered the WTO, for example, median income in the US has actually declined, an unprecedented event we believe is directly tied to more virulent global competition characteristic of this new age. If America is to have rising standard of livings in the face of what will be extraordinary competition coming from China, India, Brazil, Mexico and many other countries, we will have to raise our game, try harder, invest smarter, accelerate innovation, lessen our exposure to foreign energy sources, over time bring our government's spending and income more in line, modernize our health care system, continuously upgrade our skills and radically improve our public schools. This agenda is not about enabling the “recovery" of an economic age which will never return, but about building a 21st century American economy and workforce that can successfully compete in a much more competitive world.
Reimagine the Architecture of Global Governance – The rising powers and their people will want – and deserve – a seat at the global rulemaking table. We’ve seen the early stages of this new era with the recent discussions about updating the IMF, the swapping of the G20 for the G8 and the assertiveness of India, China and other nations at the recent Copenhagen conference. The day in which the “Western powers” can call the global shots has come to an end, new arrangements will have to made, and a new and different role for America will have to be crafted. Existing foreign commitments in Afghanistan and Iraq, and our global counter-terrorism efforts, will need to be explained in this new geopolitical context.
But at the same time America will have to become a much more spirited advocate for ensuring that this new global political table is one where the traditional American formula of free markets, political liberty, democracy and the rule of law is not watered down or worse replaced by a much less liberal global formula. At this time when so many people across the world are working to improve their own societies is the most important time for America to recommit itself to the values which have done so much to improve the human condition in recent decades. Modernize Government So It Can Do More With Less – With a huge percentage of the federal workforce hitting retirement age soon, it is an opportune time to start thinking creatively about we can reinvent America’s government for the digital age. Can we replace large bureaucracies with more entrepreneurial, problem-solving oriented, leaner work forces using the extraordinarily powerful set of new digital tools available to them to deliver better outcomes for less money? Getting more for less will not only help deal with the growing federal debt, but also help free money up to make the investments needed for America to build a 21st century economy.
By reorienting his government around meeting the challenge of the rise of the rest and a much more competitive age, President Obama can extricate himself from a faded strategic orientation of a bygone era; give the nation a powerful national mission to rally around in the years ahead; and help ensure continued American prosperity and pre-eminence in a vastly changed world outside our shores.
Update: See this related essay about the role of the ever tougher struggle of every day people in recent American elections, The Great Volatility in the American Electorate Today.
The Economist has a thought-provoking article in this week's edition which discusses the findings of a new Freedom House report, "Freedom in the World 2010: A Global Erosion of Freedom."
The article has this compelling passage:
For freedom-watchers in the West, the worrying thing is that the cause of liberal democracy is not merely suffering political reverses, it is also in intellectual retreat. Semi-free countries, uncertain which direction to take, seem less convinced that the liberal path is the way of the future. And in the West, opinion-makers are quicker to acknowledge democracy’s drawbacks—and the apparent fact that contested elections do more harm than good when other preconditions for a well-functioning system are absent. It is a sign of the times that a British reporter, Humphrey Hawksley, has written a book with the title: “Democracy Kills: What’s So Good About the Vote?”.
A more nuanced argument, against the promotion of electoral democracy at the expense of other goals, has been made by other observers. Paul Collier, an Oxford professor, has asserted that democracy in the absence of other desirables, like the rule of law, can hobble a country’s progress. Mark Malloch-Brown, a former head of the UN Development Programme, is still a believer in democracy as a driver of economic advancement, but he thinks that in countries like Afghanistan, the West has focused too much on procedures—like multi-party elections—and is not open enough to the idea that other kinds of consensus might exist. At the University of California, Randall Peerenboom defends the “East Asian model”, according to which economic development naturally precedes democracy.
Whatever the eggheads may be saying, there are some obvious reasons why Western governments’ zeal to promote democracy, and the willingness of other countries to listen, have ebbed. In many quarters (including Western ones), the assault on Saddam Hussein’s Iraq, and its bloody aftermath, seemed to confirm people’s suspicion that promoting democracy as an American foreign-policy aim was ill-conceived or plain cynical.
In Afghanistan, the other country where an American-led coalition has been waging war in democracy’s name, the corruption and deviousness of the local political elite, and the flaws of last year’s election, have been an embarrassment. In the Middle East, America’s enthusiasm for promoting democracy took a dip after the Palestinian elections of 2006, which brought Hamas to office. The European Union’s “soft power” on its eastern rim has waned as enlargement fatigue has grown.
But perhaps the biggest reason why democracy’s magnetic power has waned is the rise of China—and the belief of its would-be imitators that they too can create a dynamic economy without easing their grip on political power. In the political rhetoric of many authoritarian governments, fascination with copying China’s trick can clearly be discerned.
I have believed for some time now that the way the world was developing would inevitably force President Obama and his Administration to become much more spirited global advocates of political freedom and liberty than was their initial instinct. Why?
For the great political dynamic of the early 21st century is what Fareed Zakaria has called "the rise of the rest" - or the increasingly rapid rise in power and socio-economic status twenty years of globalization has brought to many developing nations. In these nations there are billions of similarly "rising" people, individuals and families who though this process of modernization have seen a dramatic rise in their affluence, education levels and access to information. It seems inexorable that these rising citizens, tied to the world through the rapid beat of global technology, media and commerce, will increasingly demand greater openness, transparency, accountability and democratic institutions from their leaders. They will want more than affluence and stability - they will want the political self-determinination and freedom they see in other nations.
As I have written before, I think the emerging ideological struggle in the world today is more open society versus closed, than it is a replay of the 20th century construct of left and right. As this Freedom House report reminds us, it is at this moment in history, when so many nations and peoples are rising and reinventing old and less modern societies, when America and its ideological allies must make their case for their vision of how humanity will best prosper together in a very different century ahead. We really don't know how the 21st century will turn out. But with the world being so young now, and with so many nations going through profound transformation, we have to see this struggle to ensure successful transitions of these rising nations to modern, democratic, and free countries as the next stage of the great battle we waged to defeat totalitarianism, communism and fascism in the 20th century. Our work, my friends, is not yet done.
In that regard I think it is critical, essential, required that this President and this Administration make it crystal clear to the people in these rising nations that America stands with them and their aspirations; that we want to work side by side with them in forging better nations with greater opportunities and freedom; that we will be patient but resolute in our commitment; for at no moment can an authoritarian government which denies basic freedoms to their people ever be considered better or even an acceptable alternative to well constructed democratic societies which offer liberty, democracy itself, free markets and the rule of law.
Of course we cannot be foolish in how we advocate for this traditional American creed in the new world of the 21st century, but nor can we ignore it. Too many people across the world are waiting to hear from us. And I dismiss the idea that this discussion is about "human rights," or "universal rights," as if these things are somehow secondary to the important things great powers discuss when they meet. The firm and resolute advocacy of open and free societies has to be the very cornerstone of America's foreign policy at this critical - and exciting - juncture in human history. It is not something left to the coffee after the diplomatic main course. There has been no moment in our history in fact when so many people and so many nations have had the chance to rise to the level of freedom and self-determination the 21st century offers; which is why the effort to help them achieve it should be seen as the great geopolitical opportunity for America of this new era, one which must be enthusiastically seized.
We will get a sense of the state of the Administration's thinking on all this Thursday, when the very able Secretary of State will deliver an important speech on internet freedom. My hope is that she goes big, is bold, and makes clear what is at stake, and helps us all understand the historic opportunity in front of us today.
Martin Wolf in the FT sums up nicely the big problem with China’s currency practices:
At the conclusion of a European Union-China summit in Nanjing last week, Wen Jiabao, the Chinese premier, complained about demands for Beijing to allow its currency to appreciate. He protested that “some countries on the one hand want the renminbi to appreciate, but on the other hand engage in brazen trade protectionism against China. This is unfair. Their measures are a restriction on China’s development.” The premier also repeated the traditional mantra: “We will maintain the stability of the renminbi at a reasonable and balanced level.”
We can make four obvious replies to Mr Wen. First, whatever the Chinese may feel, the degree of protectionism directed at their exports has been astonishingly small, given the depth of the recession. Second, the policy of keeping the exchange rate down is equivalent to an export subsidy and tariff, at a uniform rate – in other words, to protectionism. Third, having accumulated $2,273bn in foreign currency reserves by September, China has kept its exchange rate down, to a degree unmatched in world economic history. Finally, China has, as a result, distorted its own economy and that of the rest of the world. Its real exchange rate is, for example, no higher than in early 1998 and has depreciated by 12 per cent over the past seven months, even though China has the world’s fastest-growing economy and largest current account surplus.
Do these policies matter for China and the world? Yes, is the answer. Mark Carney, governor of the Bank of Canada, notes in a recent speech, that “large and unsustainable current account imbalances across major economic areas were integral to the build-up of vulnerabilities in many asset markets. In recent years, the international monetary system failed to promote timely and orderly economic adjustments.”* He is right.
What we are seeing, as Mr Carney points out, is a failure of adjustment to changes in global competitiveness that has unhappy precedents, notably during the 1920s and 1930s, with the rise of the US, and, again, during the 1960s and 1970s, with the rise of Europe and Japan. As he also notes, “China’s integration into the world economy alone represents a much bigger shock to the system than the emergence of the US at the turn of the last century. China’s share of global gross domestic product has increased faster and its economy is much more open.”
Moreover, today, China’s managed exchange rate regime is quite different from those of other big economies, which was not true of the US when it rose to prominence. Thus, China’s managed exchange rate is shifting adjustment pressure on to other countries. This was disruptive before the crisis, but is now worse than that in this post-crisis period: some advanced countries, notably Canada, Japan, and the eurozone, have already seen big appreciations of their currencies. They are not alone.
China’s currency practices are hurting the United States far less than developing nations and the eurozone, amongst others, and the US government knows it. Two things are mind-boggling to me: why other countries don’t stand up to the Chinese more (I’m glad many have avoided the all-too-easy protectionist route, because that could be a disaster, but am not sure the current dialog on rebalancing is going to move the ball enough), but, more importantly, how the Chinese could possibly think that currency manipulation is a good long term strategy. Sure, it helps exports, and the CCCP has basically made a massive political bet on dramatic GDP growth based on exports, but it doesn’t have to be this way.
For a so-called socialist country, China is barely one at all. The domestic social safety is virtually non-existent, and as badly as the U.S. needs to expand healthcare coverage, China needs to much more. A social safety net would lessen the incredibly high savings rates that Chinese operate with (because they have no choice), in turn giving China’s people a greater ability to consume, a positive outcome for both the Chinese economy and the rest of the world.
In America these days, it’s popular to agonize over the amount of money we owe China. But China is saving because it has to, not because it wants to. As the saying goes, when you owe the bank $100,000, the bank owns you, but when you owe the bank $1.6 trillion, you own the bank. (For more on this, read Christopher Hayes’ recent article in The Nation.)
David Barboza of the New York Times has one of those pieces today which just catches your eye, and makes you think. He writes:
China has begun transforming itself from a global font of low-priced goods fueled by cheap labor into a much more diverse and complex economic power.
But it is the incredible chart the Times has produced tracking China's growth that I strong urge you to review. You can find it here.
Two stats really stuck out for me:
- In 2000, the US had 180 of the Fortune 500 largest companies by revenue. China had 8. This year the US had 140 of the 500 largest global companies. China had 37, an almost five fold increase.
- In 2000 the US had 29 of the top 50 companies of the world by market capitalization. China had 1. This year the US had 21 of these top 50 market cap companies. China had 9.
These charts, and this trip by the President to Asia this week, reminds us how fundamentally the global economy is changing. We really are entering a completely different economic era, one characterized by the "rise of the rest" as Fareed Zakaria calls it. A significant part of the rise of the rest is not just the growing geo-political and economic power of these rising powers, but the emergence of globally competitive corporations from these countries which are challenging the hegemony of American and European global brands, making it much harder for our corporations to make money. The global corporate playing field is getting much more crowded, global competition is getting much more virulent, reducing the pricing leverage of our companies, which Rob Shapiro and I have been arguing is at the core of why it is has been so hard to get wages and incomes up here in the US this last decade.
This new dynamic of this new era of globalization is one we simply have to talk about much more - global competition has grown permanently more competitive. As these rising power economies mature we will see global competition get ever more intense, as they produce not just low-wage low-quality companies, but the unimagined and yet unbuilt Microsofts, Intels and Nokias of the new century, and new much more global economy.
"Recovery," or returning to the old American economy, is not just impossible, but it is a dangerous illusion, preventing us from recognizing and addressing the underlying structural changes happening in the American economy today. There is no going back now, there is only the fashioning of a new economic strategy for America, one which takes into account these historic and game-changing developments and begins to strategically transition America and its people successfully into this new era.
Of the many things President Obama is taking from his trip this week I hope a deeper understanding of this dynamic - and a commitment to address it forthrightly when he returns - is at the core of his takeaways. For preparing America, our workers and our students for this new much more competitive global economy may just be the most important domestic responsibility of our leaders today.
Writing in the Financial Times about the four things that stood out to him about the G-20 Summit, Philip Stephens points first to "China’s, albeit reluctant, embrace of multilateralism:"
Beijing is at last owning up to the fact that it is a leading actor on the global stage. A year or so ago, China was still clinging on to an essentially passive role in international affairs. Western injunctions for it to act as a responsible stakeholder in the multilateral system were met with protestations that such demands were premature: China was still a developing country, and it prized non-interference above western concepts of mutual dependence.
The global economic crisis upended that strategy by showing that Beijing cannot detach its domestic from its international interests. True, China has had a good crisis, demonstrating that it can continue to grow while the west is in recession. But the collapse of its exports has served as a potent reminder of the inextricable ties woven by globalisation.
This interdependence is taken for granted in western capitals. For Beijing it carries the uncomfortable implication that states have a legitimate interest in the framing of others' domestic policies.
This interdependence led to, as Stephens points out, China's headline grabbing climate change announcement, an important marker on the road to Copenhagen. Frankly though, that work by China, in the interplay between domestic and international politics, was a fairly easy calculation. China has already made a strategic decision to develop a home-grown renewable energy industry, this was a logical move.
Rather, the heavy lift for China will come in the commitment to balanced growth from the G-20. China’s consumers are notoriously reticent to, well, consume. And it's virtually entirely due to policy. As Michael Pettis, a professor at Peking University, writes in the New York Times:
The Chinese save such a high fraction of their income largely because of long-standing policies aimed at promoting and subsidizing domestic investment and manufacturing.
These policies inevitably require households to foot the bill, primarily through sluggish wage growth, low interest rates on their bank deposits, an undervalued currency and a weak social safety net. Since total savings is just the difference between what is produced and what is consumed, subsidizing producers at the expense of household consumers necessarily causes savings to rise.
Since, as NDN's Rob Shapiro writes, there is little chance of the U.S. bailing the world out of the great recession, there is, as Pettis says, a scary possible outcome to rebalancing:
As the U.S. rebalances its economy toward higher savings rates, China has no choice but to rebalance toward higher consumption rates. This can happen either because of a sharp pick-up in consumption growth or, more likely, a sharp slowdown in GDP growth. I worry that China will find it difficult to generate the kind of consumption growth that will take up some of the American slack, and we may be locked into a period during which the world adjusts by growing more slowly.
This G-20 seems to have been more successful than many would have thought, but the real crux of the global economic recovery may lie in getting the world's rising powers to connect their people to the global marketplace. As China adjusts to the responsibilities that come with others having a stake in their domestic economic policies, it will inevitably do what everyone else does: balance that responsibility with domestic politics. (Perhaps Chinese leadership will see fit to develop a social safety net in the form of universal healthcare; all the socialists are doing it these days.)
Rich countries will agree to give up 5 per cent of the total voting shares to be distributed to under-represented countries, including rapidly growing emerging economies such as China. The aim is to increase the legitimacy of these institutions. The leaders have agreed to put aside disagreements over the representation in the governing bodies of these institutions.
Developing countries—many of the same ones that are demanding that rich countries underwrite their transition to a clean-energy economy—spent $310 billion in 2007 to subsidize fossil-fuel consumption, the International Energy Agency says.
Stop spending so much to keep gasoline, diesel, and electricity artificially cheap, in other words, and you’ll have the cash to promote clean energy at home.
A World Trade Organization panel ruled on Wednesday that China had violated international free trade rules by limiting imports of books and movies, in a decision that buttresses growing complaints from the United States and Europe about Chinese trade policies.
The W.T.O. decision in Geneva is a victory for the United States at a time when a growing number of business executives and politicians perceive China as becoming increasingly nationalistic in its trade policies.
The restrictions also required foreign financial news services to operate through a government-designated distributor.
Ron Kirk, the United States trade representative, praised the panel’s legal finding. “This decision promises to level the playing field for American companies working to distribute high-quality entertainment products in China,” Mr. Kirk said, “so that legitimate American products can get to market and beat out the pirates.”
Michael Pettis, a Peking University professor who I had the good fortune to meet as part of a college program in Beijing, writes in the Financial Times that it's time to get ready for lower Chinese growth. Pettis spells out the change that is likely to occur and hints at ramifications for policymaking in China and beyond:
For 20 years, and especially in the past decade, rapidly rising debt has allowed America’s consumption growth to exceed economic growth, with a concomitant rise in the country’s trade deficit. One consequence of this too-rapid growth in American consumption has been that the non-US global economy was able to grow faster than non-US global consumption. This was especially true for Asia, the main beneficiary of the US consumption boom, and for China in particular.
While Chinese consumption was growing at an impressive 9 per cent a year over the past few years, Chinese gross domestic product growth substantially outpaced it, clocking in at 10 per cent to 13 per cent annually. China was able to do this in large part because as it poured resources and cheap financing into manufacturing, and in so doing produced many more goods than Chinese households and businesses were able to consume, the balance was exported abroad, where much of it was absorbed by US consumers.
But everything has changed. Whether America likes it or not, US debt levels will decline over the next several years. As a result American consumption will grow substantially slower than the US economy, and so the trade deficit will decline. For the rest of the world, even ignoring the possibility of a decline in global investment, a contraction in the US trade deficit will bring with it a period in which economic growth will be less than consumption growth. ...
Over the next five years or more Chinese economic growth will necessarily be lower than growth in Chinese consumption. The massive but unsustainable investment in infrastructure and new production facilities that characterises the Chinese fiscal stimulus package will not be able to change this fact. From its dizzying heights during the past two decades, the world needs to prepare itself for a decade during which, if all goes well, China grows at a still respectable but much lower rate of 5-7 per cent. If the current fiscal stimulus package retards China’s adjustment process, as many analysts argue that it does, growth rates may be much lower.
The Council of Economic Advisors, the National Economic Council, and many others have told us that the American economic recovery will export driven. It seems that, for the sake of the economic future of both the U.S. and China, policymakers need to thing about getting as many of China's 1.3 billion people into the (low-carbon, sustainable) consumption game as possible. For more on China and the U.S.-China Strategic and Economic Dialogue, take a look at pieces from Michael Moynihan and Robert Shapiro this week.
Oh, and you should certainly buy the newly released, paperback version of Shapiro's Futurecast, which focuses a great deal on China.
The fault lines in this week's "strategic dialogue" between American and Chinese leaders remained largely unseen, like a low-grade infection that can flare up without warning. Those fault lines matter mightily, however, because the United States and China are the critical players in the globalization process shaping every economy in the world.And despite America's insecurities about China's rising power, the fact is, we retain most of the advantages in a complicated relationship best described by the Financial Times this week as "adversarial symbiosis."
The convergent interests of the United States and China are obvious and a cause for satisfaction at this week's talks. Most important, each is an enormous purchaser of the other's goods, so that domestic demand in one is a source of employment in the other. Nevertheless, the trade relationship will continue to have a sharp political edge so long as China sits on the other side of America's largest bilateral trade deficit. Yet, it really shouldn't be. We import more from China than from anywhere else, because China is both the world's largest producer of many cheap goods that Americans hardly make at all anymore - tee shirts and toys, for example - and a favored place for U.S. multinationals to assemble more complex products for the U.S. and other markets. In fact, nearly half of the high-tech products imported from China - computers, televisions, cell phones, and so on - are goods that U.S. producers merely finish or assemble there, sometimes using advanced parts made in America.And so long as the American economy is three to four times the size of China's, and much more weighted to consumption, no one should be surprised at our importing four to five times as much from China as China imports from us.
The economic truth is that America runs huge trade deficits with the world, because for years we have insisted on consuming much more than we produce, and imports are the only way to make up the difference. The flip side of this high consumption has been our low savings - at least until the current recession decimated so many people's savings and wealth - creating another fault line in the U.S.-Sino relationship. That low savings forces us to borrow abroad to finance some of our consumption, along with our budget deficits and business investment; and China with the largest surplus savings in the world has become our largest creditor. No one thinks of their creditors as their buddies - or the other way around - producing an unfamiliar and unpleasant dependency on an autocratic regime we don't trust. We cannot ignore that if China were to decide to abruptly reduce its lending to us, we would quickly find ourselves in deep economic trouble. But China needs us just as much economically, and not just to keep on buying Chinese goods.Just as important, China has to rely on the U.S. following economic and currency policies that will preserve the value of all the American assets - Treasury securities, stocks, real estate, and companies -- that China buys with the dollars we pay her for her goods.
China is dependent on the United States in other critical ways as well.American companies have been and remain a major source of Chinese modernization, through U.S. foreign direct investments (FDI) that transfer many of the world's most advanced technologies, equipment, and ways of doing business from here to there.China depends on these transfers as the ultimate source of much of its growth, and sustaining strong growth is a central factor for the legitimacy for its leaders' authoritarian regime.
China's reliance on the U.S. is also geopolitical. Chinese leaders desperately want and need peace, especially in Asia and the Middle East, so they can continue to direct most of the country's resources to their gargantuan modernization project. These leaders have long recognized - and said so - that American superpower has become the only force in the world capable of projecting the military and economic might required to contain local conflicts and terrorist threats that could threaten regional or global stability. That's why the last U.S.-Sino military confrontation occurred 13 years ago, when President Clinton sent the Independence carrier battle group into the Taiwan Straits and the Nimitz to the South China Sea, and why we rarely hear Chinese criticism anymore about "American imperialism" or "U.S. warmongering."
In no area is China's dependence on American superpower more important to China than the U.S. Navy's guarantee of the world's sea lanes. These are the routes not only for most of China's exports to the rest of the world, but also for the oil shipments from the Middle East, Africa and Latin America that fuel much of China's economy. Yet, energy also is an increasingly important fault line in the U.S.-Sino relationship. For the last decade, China has aggressively pursued long-term supply relationships with state oil companies across much of the world, including joint ventures, extended leases, and other arrangements. In some cases, China develops another country's oil fields in exchange for sole or heavily-favored access to whatever is found. (In Iran's case, China also sweetened the development deal by building a new Tehran subway system.) China's emerging global network of oil-supply relationships could become a point of conflict in the next global oil crisis.Beyond such a crisis, China's rising economic influence in countries that the United States sees as vital to its own geopolitical plans and interests will almost certainly create new fault lines in future U.S.-Sino relations. But it also could foreshadow a time when China will constructively engage in a number of serious global matters, from climate change and terrorism to intellectual property rights and currency adjustments, where the United States and most of the rest of the world would welcome their contribution.
Yesterday, the US and China concluded high level talks between Secretaries Geithner and Clinton and China's State Councilor Dai Bingguo and Vice Premier Wang Qishan on the relationship that President Obama said, at the outset of meetings, will define the 21st century. The President is right. How the US and China manage their relationship will determine the balance of growth and contraction, war and peace and freedom and its opposite in the 21st Century. This then was an important set of meetings raising the deeper question of what should the US do about China.
China's rocket-like growth over the last decade has been extraordinary. However, beyond the sparkling towers, new roads and designer airports lies the fact that China's rise has inextricably altered the economic and diplomatic balance of power of the 20th century. According to economist Steven Roach, China's growth alone is likely to keep global growth above zero this year. China, America's largest creditor, holds about $2 trillion in US dollar debt, an amount growing daily. To put that sum in perspective, the entire balance sheet of the US Federal Reserve prior to the financial crisis was less than $1 trillion. China is quite simply rocking the global economy.
Rapidly emerging powers, by definition, alter the status quo and in prior epochs success or failure in accommodating that change has proven critical to global stability. At the end of the 19th century, Europe mismanaged the rise in power of Germany which (with Bismarck's dismissal by the erratic Wilhelm II) contributed to World War I. Then in the early 20th century, the world failed to recognize Japan's emergence as a major power after she defeated Russia in 1905 and began building airplanes capable of crossing the Pacific. In contrast, through the post war framework of the Bretton Woods institutions including the GATT, the Bank for International Settlements (designed to lessen exchange rate imbalances), the IMF and the World Bank and the UN as well as the European Union and other organizations, the world did a much better job of accommodating the rise of Japan, the NICs and the peripheral European states at the end of the 20th Century.
Now, with China's emergence, however, the world faces a new rebalancing of political and economic power. And the task, as President Obama suggested, is to manage it in a way that benefits the US, China and the world.
Economic theory--in contrast to the popular notion of competing nations--teaches that one country's rise should benefit others. A richer China should consume more US goods. It should produce more and through spillovers and the creation of knowledge, contribute to the global commons.
One country, moreover, cannot succeed as China has without others. China remains dependent on the US as the major market for its exports. In some ways the US China relationship is deeply symbiotic. We design goods. China makes them cheaply. We buy them, allowing US consumers to get more for less. However, to the extent that the Chinese consistently sell more to us than we buy--as a result of the Yuan being kept artificially low, America gets more stuff but loses industry, China gets less stuff but gains industry and China ends up holding US dollar denominated debt. That is the story of our recent relationship in a nutshell. Chinese economic officials, waking up their huge exposure to the value of the US dollar, have scolded the US about its deficits which could weaken the dollar and have floated the idea of diversifying into other currencies. The threat to unseat the dollar as the world's reserve currency is a serious shot across our bow. Besides these economic issues, other matters on the table in Washington this week included nuclear proliferation and climate change.
In many ways, China in its economic strategy has followed the same trajectory of Japan and the other Asian tigers. She has pursued a policy of export-oriented growth leveraging her low cost base built on the four pillars of a cheap currency, high savings financed through suppressed consumption, an aggressive state role in the economy, and a policy of securing technology transfer for market access. The strategy is neo-mercantilist which is to say, its practical effect is to generate a trade surplus and accumulate hard currency. (The original mercantilism practiced in Europe prized trade surpluses to accumulate gold and silver.)
However, China's story is qualitatively different than that of Japan and the NICs in certain respects. First, on the political track, beginning as a Communist country, China has, so far, not followed South Korea and the other NICs toward authoritarian democracy. China remains a totalitarian police state. And second, she is simply larger in scale and scale changes everything. Long before China reaches western standards of living, her overall GDP will be the largest in the world. And, unlike the other Asian NICs, she is so large and her labor supply so abundant that her cost of labor can stay low even as her exchange rate appreciates.
On the political side, China does not appear aggressive in foreign policy. Like the 19th Century resource-hungry European powers, she has been courting natural resources in Africa to fuel production. However, she has pursued a commercial as opposed to political strategy. While she is a nuclear power, she appears more preoccupied with economic growth currently than military objectives.
In many ways, the relationship with the US has proven beneficial for both. An example of positive symbiosis would be the manufacture of the Apple iPhone. Designed in the US, it is made in China by a company called Foxconn. Both the US and China benefit from the success of the iPhone. As an example of the political and human pitfalls of the relationship, however, one can point to the case of a Foxconn employee recently hounded to the point of defenestration by police and company security after he lost an iPhone prototype. Afterward, Apple issued a statement saying it was awaiting results of an investigation into the employee's death.
The US China meeting this week made no news on the issue of climate change or nuclear proliferation, a complex initiative that will take time. The principle outcome was that the US pledged to work to lower US budget deficits to protect the value of the dollar and China pledged to increase domestic demand.
With respect to the US concession, the very fact that the US had to apologize for our deficits shows how the balance of power in the relationship has changed. As for the Chinese concession, it is indeed the right policy for the US and China to pursue. As a result of the massive stimulus package enacted in China of close to $600 billion, some 88% of China's GDP growth this year will occur in investment, much of it in infrastructure. Most of the rest of the growth will come from exports. Virtually none will come from consumption and increased living standards for the Chinese people. This must change. By allowing its people to consume more and buy more of the world's products, China can help its own people live better and the rest of world produce more.
For its part, the US has to stop living beyond its means which means borrowing less both to fund government and imports. That will put the US back on track toward more sustainable growth.
Economically, what remains unresolved is the depressed Yuan which continues to drive the Chinese trade surplus and the US deficit. Clearly the Yuan has to appreciate to the point where US goods are competitive with Chinese ones. The US should exert its negotiating leverage sooner rather than later on this point because the more US debt China accumulates, the worse the negotiating position of the US will become.
The one issue not explicitly on the table--apart from sympathy expressed by the US toward Chinese minorities--but that ultimately must underscore our relationship with China is how Chinese success will impact the US commitment to freedom and democracy.
The strategy not only of the US but of the West in general has been to encourage economic growth in China while hoping this will lead to greater freedoms. This policy of engagement as opposed to containment is the right strategy for now because it would be absurd for the US to disengage when China is moving in the right direction. However, China has moved far more slowly than many hoped and the US posture toward China has, all too often lacked even a semblance of muscularity.
The US has been a poor or non existent negotiator on behalf of US companies in standing up for values we hold dear such as freedom of expression. The government has left companies such as Google and Yahoo to cut individual deals with the Chinese to gain market access. Our government has also been missing in action when it comes to allowing companies to negotiate away technology in exchange for access to the Chinese market. The US could be doing far more to strengthen the negotiating position of US-based companies which ultimately would benefit not only us but the Chinese people by widening their access to goods and information.
President Obama is right that the US China relationship will be critical to shaping the 21st century. And ultimately, this is about accomodating China's rise without sacrificing America's values or our standard of living. This week's meeting was a useful first step. Still problematic, however, are the huge trade imbalances resulting from an exchange rate imbalance and China's negotiating position toward US firms that is far tougher than ours in the opposite direction As we go forward, we should accelerate action to move the two countries toward a truly sustainable, long term partnership.
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