When China Rules the World (61 page)

The danger is that at some point the United States and China will be drawn into the kind of arms race that characterized the Cold War and which produced such a climate of fear. There is no doubt that the United States feels rather more comfortable on the terrain of hard power than China, first because its military superiority is overwhelming and secondly because the language of hard power is deeply inscribed on the American psyche - partly as a result of the Cold War and partly as a consequence of the violent manner of the country’s birth and expansion, as exemplified by the frontier spirit - in a way that it is not on the Chinese.
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But there are dangers here for the United States too. The fundamental problem of China for the US is not its military strength but its economic prowess. This is what is slowly and irresistibly eroding American global pre-eminence.
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If the US comes to see China as primarily a military issue then it will be engaging in an act of self-deception which will divert its attention from addressing the real problems that it faces and in effect hasten the process of its own decline.
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These four issues - the United States’ attitude towards globalization; the shift in the balance of power in East Asia; China’s emergence as an alternative model to the US; and the issue of military power - do not lie at some distant point in the future but are already beginning to unfold; nor do they exhaust the likely areas of friction. As China’s power and ambitions grow apace, the points of conflict and difference between the US and China will steadily accumulate. Such is the speed of China’s transformation that this could happen more rapidly than we might expect or the world is prepared for: China-time passes rather more quickly than the kind of time that we are historically accustomed to. It is not difficult to imagine what some of these points of difference might be: growing competition and conflict over the sources of energy supplies - in Angola or Venezuela, or wherever; an intensifying dispute over the expanding strategic partnership between the United States and India; Chinese firms, awash with cash, threatening to take over American firms and provoking a hostile reaction (as happened in the case of the oil firm Unocal); the Chinese sovereign wealth fund, its coffers filled with the country’s huge trade surplus, seeking to acquire a significant stake in US firms that are regarded as of strategic importance;
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and a pattern of growing skirmishes over the militarization of space.
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Moreover, China being culturally so different from the United States, in a way that was not nearly as true of the USSR, only adds to the possibility of mutual misunderstanding and resentment. Furthermore the fact that China is ruled by a Communist Party will always act as a powerful cause of difference as well as an easy source of popular demonization in the US, with memories of the Cold War still vivid.
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Any serious, protracted depression could serve to heighten the prospect of friction as countries, in the face of stagnant living standards and rising unemployment, become increasingly protectionist amidst a rising tide of nationalist sentiment.
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Potentially overshadowing all these issues in the longer run is the growing threat of climate change and the need for the world to take drastic action to reduce carbon emissions. Under the Bush administration the United States adopted a unilateralist position on this question, refusing to be party to the Kyoto Protocol or accept the near-universal body of scientific opinion. As a developing country, China was not required to sign the Kyoto agreement, but now that it is the largest emitter of greenhouse gases its exclusion is unsupport able from a planetary point of view.
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Any new climate treaty will be meaningless unless it includes the United States, China and India. But any agreement - involving inevitable conflict between the interests of the developed countries on the one hand and the developed on the other, with China the key protagonist for the former and the United States for the latter - will be very difficult.
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If relations between the US and China should seriously deteriorate, any attempt that might be entertained to exclude China from the present international economic system would simply not be an option. China has become so deeply integrated into global production systems that it would be well-nigh impossible to reverse that process. Chinese manufacturing has become a fundamental element in a complex global division of labour operated by the major Western and Japanese multinationals, which presently account for a majority of Chinese exports. The fact that the value added in China (30 per cent or less) is only a small proportion of the total value added because of the extremely low cost of Chinese labour means that any attempt to impose sanctions on Chinese exports, for example, would inflict far greater economic harm on the many other countries involved in the production process, especially those in East Asia, than on China itself.
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Powerful evidence of China’s integration has been furnished by the global recession: from the outset its involvement was regarded as fundamental to any solution and its continuing rapid growth has been seen as vital in limiting the severity of the recession. One might add that the US’s options are also limited in East Asia. If it decided to start pressurizing its East Asian allies - such as the Philippines, Singapore and Indonesia - to move away from China, it is not at all clear that it would meet with a positive response; indeed, it is conceivable that such a move might even be counter-productive because, in the event of being forced to choose, these countries might opt for China as the rising power in the region. Finally, if the United States chooses to become more confrontational with China and engages it in an arms race, this could well harm the US’s global standing rather more than China’s, which is what happened in the case of the invasion of Iraq; and China, for its part, might simply refuse to be drawn into such a military contest.
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The problem for the United States, meanwhile, is that China’s relative economic power, on which all else depends, continues to grow in comparison with that of the US .

A key characteristic of the world’s leading power is its ability to create and organize an international economic system to which other nations are willing or obliged to subscribe. Britain’s version was the international gold standard system which, prior to 1914, encompassed a large part of the world in some shape or form. In the interwar period, as Britain declined, this gave way to an increasingly Balkanized system based on currency areas, protected markets and spheres of interest. After 1945 the United States became the world’s leading power and the new system that was agreed at Bretton Woods, and further elaborated in the years that followed, was essentially an American creation, made possible by the fact that the US economy was responsible for over one-third of global GDP at the end of the war. That system only became truly global when China joined the WTO in 2001 and the former members of the Soviet bloc queued up to join the international system following the collapse of the Soviet Union. With China’s growing economic power, the greatest single threat to the United States’ global economic pre-eminence, apart from its own decline, lies in China’s attitude towards the international system.
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Since Deng Xiaoping decided that the country’s interests would be best served by seeking admission to it, China has become an integral part of the international system, but China’s attitude towards it will not necessarily always remain unambiguously supportive.
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Take the IMF, for example, of which China is a member. During the Asian financial crisis, Malaysia and Japan proposed that there should be an Asian Monetary Fund, such was the level of dissatisfaction within the region about the role of the IMF. This was strongly opposed by both the US and the IMF, which correctly saw the proposal as a threat to the IMF’s position, and also by China, which was concerned that it had emanated from Japan. China has since abandoned its opposition and is now exploring with others in the region the possibility of creating such a fund. Any such body would undoubtedly have the effect of seriously weakening the role of the IMF. In the event of another Asian financial crisis, it is likely that a regional financial solution would play a much bigger role than was the case before. The power of the IMF, moreover, has declined significantly over the last decade or so, with its role as a lender having diminished. In fact sovereign wealth funds have injected more capital into emerging markets in recent years than the IMF and World Bank combined (see Figure 40). This brings us to the World Bank. As China’s financial power expands, its ability to make loans and give aid will increase dramatically, as we have seen in the case of Africa, where Chinese loans already exceed those made by the World Bank; in time, Chinese aid and loans could dwarf those made by the World Bank on a global basis as well.
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Meanwhile the WTO , with the demise of the Doha round - effectively torpedoed by China and India
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- together with the growing popularity of bilateral trade agreements, presently looks rather less important than it did a decade ago when trade liberalization was in full swing. The process of trade liberalization in East Asia since 2000, indeed, has largely bypassed the WTO, with China playing a key role through bilateral trade agreements. Another institution of the present international economic system, the G8, acts as a kind of metaphor for the way in which the international system might come to look increasingly less relevant. Bizarrely, China, as of 2009, had still not been admitted as a member - and with the G8 being clearly unrepresentative of the global economy, it now suffers from a chronic lack of legitimacy.
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This was explicitly recognized in autumn 2008 when the world was faced with the prospect of the worst global recession since 1945: pride of place was taken not by a meeting of the G8, but a gathering convened by President Bush of a previously obscure entity called the G20, which included not only the rich countries but also China, India, Brazil, South Africa, Indonesia and other developing countries. It represented, at a critical moment, a belated recognition that the rich world no longer had sufficient clout on its own and that the big developing countries needed to be embraced if any action was to be effective.

The rise of China and the decline of the United States are central to the present global recession. The fact that China is such a huge creditor, based on its propensity to save and export, and the United States such a colossal debtor, based on its addiction to spend and import, reflects a deep shift in the balance of economic power between the two countries. The American consumer boom depended on China’s willingness to keep lending to the United States through the purchase of US Treasury bonds. In its present enfeebled state, the United States is still enormously dependent on China’s willingness to continue buying US Treasury bonds, even though the rate of return makes little sense from a Chinese point of view: the resources of a poor country could be put to far better use, as is now being openly discussed in China.
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But the Chinese, as I discussed earlier, are in a catch-22 situation: if they start selling US Treasury bonds, or cease buying them, the dollar will plummet and so will the value of their dollar assets. So a Faustian pact lies at the heart of the present relationship between the US and China, which in the longer run is neither economically nor politically sustainable. The United States’ position as the global financial centre and the dollar as the dominant reserve currency are on a Chinese life-support system. At the heart of the present global financial crisis lies the inability of the United States to continue to be the backbone of the international financial system; on the other hand, China is as yet neither able nor willing to assume that role. This is what makes the present global crisis so grave and potentially protracted, in a manner analogous to the 1930s when Britain could no longer sustain its premier financial position and the United States was not yet in a position to take over from it. Any talk of a global solution to the present economic travails has to confront these highly complex and intractable questions.

As a harbinger of the decline, and ultimate demise, of the present US-DOMINATED system, there is the prospect of the emergence over the next decade of the renminbi as a reserve currency, which would mean it could be used for trade and be held by countries as part of their reserves.
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Having acquired full convertibility against other currencies, it could rapidly assume a very important role outside China, acting as the de facto reserve currency in East Asia, marginalizing the yen, and challenging the position of the euro and ultimately the dollar as global reserve currencies.
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It is clear from the American financial meltdown in 2008 that the days when the US economy could sustain the global reserve currency are now numbered.

The present international system is designed primarily to represent and promote American interests. As China’s power grows, together with that of other outsiders like India, the United States will be obliged to adapt the system and its institutions to accommodate their demands and aspirations, but, as demonstrated by the slowness of reform in the IMF and even the G8, there is great reluctance on the part of both the US and Europe.
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Fundamental to this has been the desire to retain these institutions for the promotion of Western interests and values. For example, after China and Russia vetoed the Anglo-American bid to impose sanctions on the Zimbabwe president Robert Mugabe and some of his regime in July 2008, the US ambassador to the UN, Zalmay Khalilzad, stated that Russia’s veto raised ‘questions about its reliability as a G8 partner’.
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From late 2008 there was much talk of a new Bretton Woods, but any such agreement would require far more fundamental reform than the West has hitherto entertained. At present the Bretton Woods institutions - the IMF and the World Bank - are dominated by the Western powers. The US still has 17.1 per cent of the quotas (which largely determine the votes) and the European Union an additional 32.4 per cent in the IMF as of May 2007, while China had just 3.7 per cent and India 1.9 per cent.
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If these institutions are to be revived as a result of any new agreement, the West will have to cede a large slice of its power to countries like China and India. China, after all, is hardly likely to put very large resources at the disposal of the IMF unless it has a major say in how they are used, as Premier Wen Jiabao has made clear.
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Should reform remain reluctant, partial and ultimately inadequate, then the international system is likely over time to become increasingly bifurcated, with the Western-sponsored bodies abandoning any claim to universality in favour of the pursuit of sectional interest, while a new Chinese-supported system begins to take shape alongside.
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