Wednesday, October 27, 2010

Much Ado About China

. Wednesday, October 27, 2010

Dan Drezner hits the road to hawk his new book at ZomBcon, but drops a challenge on his way out the door:

Question to readers: if you had to engineer the U.S. strategy in the Pacific Rim, what would you do to deal with a rising China? In your answer, be sure to acknowledge the risks and costs, as well as the benefits of your strategy.

Well, I'm at least as (un)qualified as everyone else writing on the subject, so why not?

1. Don't freak out. This is very important. Do not give credence to anything that Thomas Friedman heard in a cab in Beijing. Do not assume that China intends to be an evil empire. Do not assume that China has a masterplan at all. Do not assume that even if China had a masterplan that it would be able to carry it out. Do not assume that the U.S. has entered its autumn while China is beginning to bloom. As Jon Western writes:

[M]y broader objection to this discussion and to the broader debate on relative decline, power transition, and the "rise of China and India," is the failure to understand or examine the complexities and challenges that both China and India face. No one can dispute the extraordinary economic transitions and growth rates realized by China and India over the past twenty-five years. But most of the political discourse on power transition (and the lament of American decline) seems to assume linear trends over the next twenty-five to fifty years. ...

With all due respect to the challenges facing the United States, both China and India face far greater obstacles in terms of internal political challenges and vulnerabilities, in terms of the relative disparities in the distribution of wealth, in terms of dealing with abject poverty, in terms of rural to urban migration and the subsequent social and cultural dislocations, as well as in terms of environmental degradation and resource scarcity. Given these challenges, I'm not sure I see China's rise as inevitable -- we may see it, but we may not.

2. Remember the security dilemma. The traditional realist security security dilemma, yes, but also the economic security dilemma. Unless proven otherwise, our first interpretation of China's economic policies should be that they are intended to appease China's domestic audience, not global domination. Right now China's internal audience demands employment-boosting policies, and they are willing to suppress consumption and make really lousy investment decisions to get that. As Brad DeLong writes:

Look. China has 900 million rural dwellers who are still living at a standard of living not that far above subsistence. The pressure to migrate from the countryside to the coastal cities is enormous. China needs to grow at more than 8% per year in order to avoid mass unemployment in the coastal cities. And mass unemployment in the coastal cities is likely to be followed by political collapse and turmoil on a gigantic scale.

Part of growing at 8% per year is to continue to rapidly expand exports to the North Atlantic core of the world economy. But in order to expand exports Chinese-produced goods must look like good values. And if demand for dollar-denominated assets falls and the value of the dollar falls, Chinese-produced goods will no longer look like good values. We [China] know very well that when we unwind these purchases of dollar-denominated assets a generation from now the financial rate of return on our investments will be lousy. But in the meantime we get something much more important to us--export growth, full employment in Shanghai, and societal stability.

Right now it does not appear that China is interested in expending the resources necessary to become a global leader. And it likely will not for quite some time, even if recent growth rates persist.

3. Remember recent history. This isn't the first that Americans have gone all ZOMG! when another country's economy started growing. There was similar hysteria over 1950s-USSR, 1980s-Japan, 1990s-Russia, and others. Recent history suggests that underdeveloped economies will have periods of rapid growth, but this will not result in the overtaking of the U.S. in any worrisome timeframe. To this point, rumors of America's decline have been greatly exaggerated. As Kevin Drum notes:

[I]n relative terms America has declined since World War II. How could it not? There's simply no possible world in which a single country could retain the kind of power and influence that America held over a shattered world in 1945. As other countries rebuilt and grew, the inevitable consequence was that their power would grow relatively faster than ours.

But what's remarkable, really, is how little America has declined. We are perpetually astounded that our military might doesn't guarantee us instant victory anywhere we go and that other countries are routinely able to make trouble for us, but that says more about our national psyche than about our actual global influence or military power. If anything, our ability to project power may be greater today than it's ever been, and it's certainly greater relative to other countries than it was 50 years ago. Economically, our share of GDP fell surprisingly little in the postwar era, from 28% to about 22%, and has stayed very nearly flat since 1980. And political idiocy aside, our ability to lead the world in a rebound from a world historical financial crash has actually been pretty impressive.

The crisis has also caused all potential challengers to U.S. hegemony to turn inward. Germany and France are trying to somehow resolve the mess that is the E.U., the U.K. is intentionally contracting via austerity, China is acting like a bratty child rather than a mature power, and... that's it. Russia is still a mess, Japan hasn't recovered from a 15-year economic slump, India is still finding its footing, and there really aren't any other contenders.

4. Know your role. Right now the job of the U.S. is to act like a hegemon. It is to stabilize the global economy by keeping markets open and preventing tit-for-tat behavior. It is to not act selfishly by beggaring its neighbors. It is to strengthen and support institutions that foster cooperation rather than discord. It is to provide liquidity to the international system, and provide a market for distress goods. If there are going to be devaluations against the dollar, rather than fight them try to coordinate them so that exchange rates are somewhat stable. Some of these may slow the U.S.' internal recovery by a bit, but not as much as allowing the international system to collapse around it will. We want this to be more like the 1980s and less like the 1930s.

5. Build and maintain coalitions. The U.S. needs to reassure a skeptical international system that it is willing to do what is necessary to maintain a global recovery. That means it needs to credibly signal that intention to other countries. It needs to stress that it is in the interests of the United States to help emerging markets develop, and then follow up that rhetoric with actions. It needs to get stalled trade agreements moving. It needs to push -- hard -- for the elimination of agricultural subsidies in the U.S. and E.U. in order to get Doha going again. It needs to make short-run commitments to domestic growth (that is welcoming towards imports) and medium-run commitments to fiscal rectitude. It needs to build closer relationships in the Pacific Rim and elsewhere, but not for the purpose of frightening China. Rather, it should do it in a way that encourages further Chinese integration into the global economy.

Admittedly, much of this is difficult and likely cannot happen overnight. But China's recent belligerence towards Japan, South Korea, internal dissidents, and other groups has already drawn many of those countries closer to the U.S. If America can welcome that development without putting China too much on the defensive, then it could lead to better cooperation in the future.

I didn't spend too much time discussing potential costs and benefits of each of these, for two reasons. First, they are very hard to assess with any precision. Two, this post is already long enough. But my inclination is to say that none of these are especially costly, while the downside risk of neglecting them is great indeed. Just as TARP has ended up costing very little (or nothing) for the benefit it provided, any short-run expenditures in the service of the stability of the international economic system will be well worth it. Some of these have already been done, or are already being done, but I do fear that the Obama administration has been so focused on domestic issues that they've put some important international issues on the back-burner. That cannot go on too much longer.


Much Ado About China
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