China wants to assert a new world order, but the price is very high

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Ten years ago journalist James Mann published a book called The China Fantasy, in which he criticised American policymakers for using something he called “the Soothing Scenario” to justify the policy of diplomatic and economic engagement with China.

According to this view, China’s exposure to the benefits of globalisation would lead the country to embrace democratic institutions and support the American-led world order. Instead, Mann predicted, China would remain an authoritarian country, and its success would encourage other authoritarian regimes to resist pressures to change.

Mann’s prediction turned out to be true. China took advantage of the growing potential of unrestricted global commerce to emerge as the No. 1 trading nation and the second-largest economy in the world. It is the top trading partner of every other country in Asia. Sixty-four countries have joined China’s One Belt One Road infrastructure initiative, which was announced in 2013 and consists of ports, railways, roads and airfields linking China to Southeast Asia, Central Asia, the Middle East and Europe.

Meanwhile, China has remained an authoritarian, one-party state that is backed by an increasingly powerful military. China’s military budget has risen at the same rate as its gross domestic product for the past quarter-century, from $17 billion in 1990 to $152 billion in 2017 – a 900 per cent increase.

China's Premier Li Keqiang and China's President Xi Jinping attend a reception in Beijing.
China’s Premier Li Keqiang and China’s President Xi Jinping attend a reception in Beijing. Mark Schiefelbein

China has attained this new position of power while mostly complying with the rules of the World Trade Organisation, which it joined in 2001. Still, in 2016 Western governments found it necessary to renege on a commitment they made when China joined to give it full “market economy status” after 15 years of membership.

This status would have made it harder for other WTO members to sue China for “dumping” – selling products at less than market-price production cost to drive out competitors – but the promise to accord that status had been based on the expectation that China would turn into a Western-style market economy.

Industrial espionage

That has not happened. Instead, the state has continued to control the Chinese economy in its effort to expand the market share of Chinese enterprises. Beijing has carried out industrial espionage to acquire advanced Western technology, forced the transfer of technology from Western to Chinese enterprises through joint ventures and merger agreements, and, for a time (although not now), suppressed the exchange value of its currency in order to stimulate exports.

China’s increasingly pervasive economic influence has contributed to the anti-globalisation movements that are now taking hold in many countries in the West, including in the US with President Donald Trump. In a striking reversal, it was Chinese President Xi Jinping rather than a European or American leader who delivered a strong defence of globalisation at the January 2017 meeting of the World Economic Forum in Davos, Switzerland.

Chinese military at a ceremony marking Martyrs' Day at Tiananmen Square.
Chinese military at a ceremony marking Martyrs’ Day at Tiananmen Square. Mark Schiefelbein

President Barack Obama sought to strengthen US alliances in Asia in the hope of keeping China’s rise in check. By contrast, Trump has questioned the value of alliances with Japan and South Korea and withdrawn from the Trans-Pacific Partnership. At the Mar-a-Lago summit in April, Trump embarrassingly acted like Xi’s pupil on the question of North Korea’s growing nuclear menace, stating, “After listening [to Xi] for 10 minutes, I realised it’s not so easy.”

He then cast aside his campaign commitments to raise tariffs on China and challenge China on currency manipulation in what turned out to be the vain hope that China would solve the North Korea problem for him. To the contrary, the threat has only grown, with Pyongyang’s recent series of nuclear bomb and missile tests.

These signs of confusion in American policy have accelerated the growth of China’s economic and political influence. In Asia, Philippine President Rodrigo Duterte softened the previous Filipino administration’s position on its South China Sea territorial dispute with China and accepted a large Chinese trade and investment package; Malaysian leader Najib Razak agreed to the first purchase of Chinese vessels for his navy; and Korean voters selected a new president, Moon Jae-in, who during his campaign promised closer relations with Beijing.

Japan-US alliance

A woman in Beijing passes a government poster promoting the "China Dream".
A woman in Beijing passes a government poster promoting the “China Dream”. Andy Wong

Japanese Prime Minister Shinzo Abe has stuck to the American alliance, but if US policy continues to show weakness, Japan will ultimately face a choice either of compromising with China’s territorial claims in the East China Sea or of re-arming more heavily.

According to Graham Allison, director of Harvard Kennedy School’s Belfer Centre for Science and International Affairs, in his new book Destined for War, “As far ahead as the eye can see, the defining question about global order is whether China and the US can escape Thucydides’ Trap,” which he defines as a likely war between a dominant power and a rising power.

Two other recent books, however, suggest that China is not as threatening as many commentators would have us believe. Michael Auslin, a research fellow at the conservative Hoover Institute, declares the end of the Asian Century before it has much begun, because leading Asian countries, including China, have not adopted the business-friendly economic practices, pro-democracy political reforms and cooperative regional institutions that would enable them effectively to rival the West.

Oliver Stuenkel, a Brazilian academic more on the left, argues instead that the emergence of China and other Asian powers is an accomplished fact that cannot be reversed, but that the power shift does not present a serious threat to Western interests.

Auslin’s analysis is grounded in the contested set of ideas that used to be called the Washington consensus – the belief that free markets, free trade and political democracy are necessary for economies to grow and political systems to be stable. Since the Chinese approach disregards this theory, Auslin believes the country will stumble before it seriously challenges American pre-eminence.

He sees many problems in the Chinese economy, including opaque corporate governance, huge government debt (200 per cent of GDP by some estimates) and overdependence on exports. But this adds up simply to a description of how the economy is run, not to an argument that this way of running it will not work.

In fact, the Chinese economy is not as vulnerable as Auslin believes. First, because the Chinese currency, the yuan, is not freely convertible, it is difficult for yuan holders to invest on a large scale anywhere but China without government permission. To be sure, there is a dribble of capital abroad sufficient to allow the purchase of high-end real estate in Vancouver, Los Angeles and New York, but this is hardly enough to starve investment in China or subject the yuan to currency speculation.

Yuan stimulant

Second, just as the US dollar enjoys the “exorbitant privilege” of being accepted everywhere as a bearer of value even though it is not backed by any tangible asset, so too the Chinese yuan is accepted by participants in the Chinese economy and even to a limited extent overseas as a bearer of value, which gives the government the ability to print money at will in order to stimulate economic growth, with limited risk of inflation.

Third, both the debtors and the creditors in the Chinese economy are mostly government entities, so the government can adjust their debt relationships without causing a financial crisis. Beijing worked its way out of previous debt overhangs by creating “asset management companies” (or “bad banks”) to take bad loans off the books of state banks, and it worked.

Auslin is more persuasive in suggesting the extent to which high-level corruption has damaged the legitimacy of China’s one-party rule, and how ineffective the regime’s heavy-handed propaganda is in its aim of reinforcing that legitimacy. Even so, surveys show that the Chinese public gives the regime credit for sustained economic growth and for carrying out a serious battle against corruption.

Unlike Auslin, Stuenkel does not believe that Chinese power will fade, but he sees China’s ambitions as more economic than military. It is true that China has built sand islands in the South China Sea, increased its allocation of troops to UN peacekeeping operations in Africa and dispatched ships to participate in the multilateral anti-piracy patrol in the Gulf of Aden.

But in Stuenkel’s view, these efforts are not likely to lead to the creation of a US-style global military empire. It would be difficult for China to defend its far-flung, fragile network of economic interests by chiefly military power. China’s enormous investments in resources and infrastructure abroad can pay off only if peace is maintained by political means, including respect for international law.

According to Stuenkel, China wants nothing more than to preserve the main elements of the world trading order from which it has benefited so much, while gaining greater influence in the institutions that enforce this order.

Because the US Congress refused until recently to authorise increased voting rights for China in the World Bank and the International Monetary Fund, Beijing set out to create what Stuenkel calls a “parallel order” of international institutions.

‘Soothing scenarios’

He identifies 22 newly created multilateral institutions, ranging from the Asian Infrastructure Investment Bank to the Shanghai Cooperation Organisation. Stuenkel argues that these are “parallel” rather than “alternative” institutions because they provide infrastructure investment, regulate trade and facilitate international payments in much the same way as similar Western-dominated institutions.

Auslin and Stuenkel both present, to use Mann’s phrase, “soothing scenarios”: Either China’s rise will stall before it poses a serious threat to American interests, or it will bring new vitality to the existing international order. But both are too optimistic. Although China’s rate of growth has slowed from double digits to an official annual rate (which some economists think is exaggerated) of 6.7 per cent in 2016, and will slow further as the economy matures, few believe it will fall below 3 per cent in the foreseeable future.

As Stuenkel points out, at that rate it will inevitably overtake the US economy, simply because China’s population is four times as big as America’s. In a few more decades, China’s economy will be twice as big as that of the U.S.

Stuenkel is persuasive in arguing that Beijing cares chiefly about political stability at home and economic access abroad, and not about promoting its authoritarian political model. Nor do China’s leaders seek, as some have suggested, to expel the US from Asia. They are, however, pursuing two goals that clash fundamentally with important American interests.

The first is its effort to alter the military balance in Asia. Along its long, exposed coastline, China is confronted with a string of American allies and partners: South Korea, Japan, Taiwan, the Philippines, Singapore and Vietnam. There are some 60,000 American troops deployed in the area, and American bases in Guam and Pearl Harbor command the Pacific. Along its land borders China likewise confronts American deployments, alliances and military cooperation arrangements – in Afghanistan, Pakistan, Central Asia, Mongolia and India.

With China’s power rising, its rulers no longer accept being so tightly hemmed in. They are now in a position to press South Korea to reverse the deployment of an American Terminal High Altitude Area Defense, or THAAD, missile system; to pressure Taiwan to accept unification with China; and to harass US ships and planes in the South China Sea. These moves challenge the established American position in Asia.

Thought control

The second serious clash of interests has to do with the freedoms of thought and speech. The regime is hypersensitive about its image because of its shallow legitimacy at home. This has led it to use diplomatic pressure, visa denials, financial influence, surveillance and threats to try to control what journalists, scholars and Chinese students and scholars abroad say about China.

This offensive poses a special challenge to the West, one in which the usual cliche about balancing values and interests in foreign policy does not apply. As China extends its efforts at thought control beyond its own borders, our values are our interests.

Some have suggested that the US scale back its position in Asia to accommodate China’s desire for greater military influence in its own region. In his 2011 book On China, Henry Kissinger proposed that the two sides agree on a “Pacific Community” – “a region to which the United States, China and other states all belong and in whose peaceful development all participate.” Allison’s ideas for how to avoid war are equally anodyne: “Understand what China is trying to do,” “Do strategy” and “Make domestic challenges central.”

Other strategists have been more specific, proposing that the US and China establish a mutually acceptable security balance by making concessions to each other over Taiwan, military deployments and offensive and defensive missile systems.

The difficulty with such proposals is that Beijing is likely to interpret them as asking it to accept an intrusive American presence just when the shifting power balance should allow that situation to be corrected. And on the US side, yielding pre-emptively to Chinese ambitions would destroy its credibility with all of its allies.

Auslin’s recommendations for managing the rise of China are for the US to strengthen its military presence in the region; build additional links – such as with India and Indonesia – on top of its existing alliance system; and intensify American pressures for democratic transformation.

Grand vision

This is a grand vision that faces three obstacles – the lack of consistency across administrations in Washington needed to implement such a strategy; the unwillingness of countries like India, Indonesia and even our formal allies South Korea and Japan to tilt so conspicuously against the largest regional power; and the unlikelihood that China would come to accept this American posture as beneficial.

For his part, Stuenkel recommends that the US enlarge the participation of the rising powers in existing institutions so they have a fair share of influence, encourage China and other rising powers to contribute even more to global public goods such as anti-piracy patrols and “fully embrace, rather than criticise or try to isolate” the new parallel economic institutions that China is creating. These are constructive ideas, but they do not address the core problems of regional security and human rights.

The US should cooperate with China in those areas where common interests exist, such as nonproliferation and climate change. And the US must push steadily to open the Chinese economy on a reciprocal basis. But in order to respond successfully to China’s growing military power, the US must hold the line firmly where strategic interests clash, such as over Taiwan.

Above all, the US must defend international standards of human rights and freedoms more strongly than it has in recent years; it makes no sense to defer to the loudly voiced sensitivities of the Chinese regime even as China interferes more and more often in our freedoms.

Competition, friction and testing between the United States and China are unavoidable, probably for decades. To navigate this process, the US needs an accurate assessment of China’s interests, but even more of its own.

by Andrew Nathan
New York Review of Books | Financial Review

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