An alternative perspective

01 May 2010

The Future of US – China Relations

IAN BREMMER, PRESIDENT, EURASIA GROUP

DECOUPLING

China has embarked on a process of ‘decoupling.‘ The Western financial meltdown pushed millions of Chinese workers into the streets in early 2009, as factories that produced goods bound for US and European consumers were forced to close their doors. China bounced back nicely, thanks mainly to a massive state spending package targeted at bolstering job creation via investment in labour intensive construction projects. Over the past 18 months, Beijing has seen first hand that dependence for growth on market conditions in the West can produce unacceptably high levels of risk at home. Its solution is to begin shifting the model for growth from heavy dependence on exports to the US, Europe, and Japan toward greater reliance on a growing Chinese consumer base. This plan will have to be undertaken with great care to ensure that the transition does not displace enough people all at once to stoke widespread social unrest. It is an enormously complicated long-term project.

Yet, China‘s political decoupling has already begun. We saw this at last December‘s climate change talks in Copenhagen, where China spearheaded resistance from developing states to Western proposed hard targets on carbon emissions. We saw it in the much stronger-than-usual reaction to an announcement in February of US arms sales to Taiwan and President Barack Obama‘s meeting with the Dalai Lama days later. The two sides have taken care in recent weeks to moderate some of the more rejectionist rhetoric, but we will see more public Chinese pushback against what Beijing considers bullying or ‘interference‘ from Washington in months to come. As China becomes a larger issue in US domestic politics, lawmakers in both political parties will respond with threats of punitive action of various kinds, particularly on trade.

HOW WE GOT HERE

Beijing and Washington have coexisted in relative harmony for the past thirty years because China‘s rise and America‘s power have proven remarkable complements. In the late 1970s, the Chinese leadership began to tinker with capitalism and to cautiously open the country to foreign trade and investment. Less hawkish officials in both Washington and Beijing hoped that a mutually satisfying bilateral relationship could be built, but fallout from the Tiananmen Square massacre a decade later put their plans on hold. As the Warsaw Pact governments collapsed later that year and the Soviet empire followed in 1991, China‘s hardliners hit the brakes on reform, and the bid to open China‘s economy lost crucial momentum. But Deng Xiaoping breathed new life into market reform in 1992 with his famous ‘southern tour‘ of China‘s special economic zones, small enclaves of managed capitalism that his government had created years before. Deng‘s successor, Jiang Zemin, then used that signal to beat back resistance to liberalisation from the party leadership‘s old guard, accelerating the pace of capitalist experimentation as he consolidated power in the early 1990s.


Ultimately, the collapse of European communism taught China‘s leadership that, to maintain its monopoly hold on domestic political power, it must succeed where other socialist states had failed – in offering its people an ever-rising standard of living. This meant accepting that the state cannot simply mandate economic growth. Building China‘s economy meant establishing the country as an export powerhouse, a plan that required access to consumers in the US, Europe and Japan – still China‘s three largest trading partners. That, in turn, meant opening China‘s economy to ever-higher levels of foreign trade and investment, and exposing the country‘s domestic tranquility to political and economic changes born far beyond its borders. It meant ‘coupling‘ China‘s growth with the West‘s.

American companies were happy to oblige. Wal-Mart became the world‘s largest retailer in the early 1990s because its founder, Sam Walton, was among the first to recognise the possibilities created by access to low-cost Chinese labour. In the years since, a growing number of Western companies have begun banking on huge profits over many decades based on sales to China‘s potentially enormous middle class. Chinese companies looking to move up the value chain have benefitted from exposure to the management and marketing techniques of US, European and Japanese firms – and the advanced technologies they bring with them. Both sides profited from China‘s rise.

INDISPENSABLE AMERICAN POWER

Beijing‘s relationship with America‘s government reached a crucial moment in January 1993, when Bill Clinton entered the White House. Candidate Clinton had denounced China‘s leaders as ‘butchers‘, and promised to end the ‘most favoured nation‘ trade status that China had enjoyed since 1980. As President, Clinton proved more circumspect, adopting a policy of ‘constructive engagement.‘ China‘s rise benefitted US consumers, as heavy volumes of inexpensively-made Chinese products helped keep inflation in check during the 1990s, a period of strong US growth. Before leaving office, Clinton formalised the new US-Chinese relationship by signing into law ‘permanent normal trade relations,‘ codifying China‘s trade privileges while putting an end to the often rancorous annual congressional debates on the political merits of the fast-growing commercial partnership. The US China relationship became too big to fail.

At the time, Beijing had good reason to value US power and Washington‘s willingness to use it. Developing trade and investment relationships with potentially volatile emerging states in Africa, the Middle East, Southeast Asia, and Latin America – and depending more than ever on tanker traffic through troubled waters – meant exposing China to unprecedented levels of political risk, a challenge that state-owned Chinese companies and political bureaucrats had little experience of managing. America‘s willingness to play the global policeman helped open and maintain trade routes and sea lanes for Chinese companies. Expanded access to US consumers helped China‘s economy create millions of jobs. Washington proved willing (for the most part) to respect official Chinese sensitivities on Taiwan, Tibet, and Tiananmen Square – and this created the makings of, if not a beautiful friendship, at least a profitable partnership. By allowing China to protect its hard-won gains and to build a capitalist future on a solid foundation, US power proved indispensable for China‘s expansion.

STATE CAPITALISM WITH CHINESE CHARACTERISTICS

In the years since China joined the World Trade Organization in 2001, a landmark moment in the leadership‘s embrace of the global status quo, the creative destruction that comes with decades of double-digit growth has created enormous problems inside China – like disparities of wealth between coastal cities and the rest of the country, serious environmental damage, and social unrest. To ensure a more ‘harmonious‘ rise, a new generation of leaders led by President Hu Jintao and Premier Wen Jiabao has pushed for a more direct state role in managing China‘s expansion. Certain that command economies are doomed to fail, but fearful that truly free markets will eventually spin beyond their control, the leadership has invented something new: state capitalism with Chinese characteristics. The government already relied heavily on various kinds of state-owned companies to secure long-term access to the resources China will need to feed growth and create large numbers of jobs in decades to come. They have also used select privately owned companies to dominate certain economic sectors. The leadership now relies increasingly heavily on these tools to manage the pace of growth and the distribution of its benefits. They use sovereign wealth funds, created from the country‘s enormous reserves of foreign currency, to direct huge flows of investment.

In sum, the Chinese Communist Party is using markets to create wealth that can be directed as political officials see fit. The ultimate motive is not economic but political – to maximise the state‘s control of China‘s development and the leadership‘s chances of survival. This is a form of capitalism, but one in which the state uses markets primarily for political gain. It is a model which has so far proven strikingly successful – successful enough that China no longer feels the need to keep a low profile, to let the US take the lead, and to remain ‘coupled‘ with the fate of Western free-market capitalist economies. As a result, China‘s is not a system that will sustain a level-playing field for foreign companies and investors.

The growing divergence of US and Chinese interests need not spark a new Cold War. There is still considerable mutual dependence in US-China relations, grounded mainly in their commercial ties. But this interdependence has become a source of unprecedented risk – and it explains why the now unfolding conflict is in many ways more dangerous than the US-Soviet standoff. Economic decision making in Moscow and changing trade patterns within the communist bloc had little direct impact on Western power or standards of living. There is no Berlin Wall separating the US and China and insulating each side from turmoil inside the other. Globalisation has seen to that. In fact, the risk is rising that an intensifying rivalry will take on a life of its own, growing beyond the ability of the two governments to contain it.

Ian Bremmer, President, Eurasia Group

Ian Bremmer is president of Eurasia Group, the world’s largest political risk consultancy. He is also a columnist for Slate, a contributing editor at The National Interest, and a political commentator on CNN, Fox News and CNBC.

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