Chapter 1 The Last Great Powers
A GREAT POWER WILL NEVER VOLUNTARILY SURRENDER pride of place to a challenger. The United States is the preeminent great power. China is now its challenger. The great questions of our time are, first, whether China can translate its potential into reality without democracy and without genuine capitalism; and, second, whether the United States will be wise enough to keep its markets and the wider world system open to China as this Chinese drama plays out, and by so doing accelerate the fundamental reform that must come to it. Our prosperity and even global peace depend on the answers.
Every state in the world may harbor ambitions to have the autonomy of the archetypal nineteenth-century nation-state, but most must come to terms with the constraints of their relatively small size compared with the scale of global markets. Only China and the United States with their continental economies, vast populations, and huge military machines genuinely think in old nation-state terms. They calculate their spheres of military, diplomatic, and economic influence. They are prepared to use military power to secure national ends. Each believes its civilization and culture has a special destiny. The world’s future hangs on whether these two powers can resist the temptations of rivalry and find a constructive accommodation that allows them to do business.
For sixty years the United States has overcome its protectionist tradition—no other country in the nineteenth century and the early twentieth century had such tariffs for so long—to lead the development of an open global economy. Flows of trade, investment, and technology have reached an unsurpassed intensity. Growth and living standards have risen remarkably. True, there are disturbing and dangerous new inequalities between countries whose capacity to take advantage of these opportunities varies hugely. But the overall balance sheet is positive. The United States itself is up to $1 trillion richer as a result of globalization.1 The Asian miracle, including the rise of China, would have been impossible without it.
But within the United States, anxiety has grown about the stagnating incomes and financial insecurity of much of its middle class. Because these afflictions have shown up at the same time as globalization, they are too often said to have been caused by it. In fact, the principal causes lie within the United States (see Chapter 11), including the onward march of new technologies; changing tastes of consumers; an epidemic of mergers, takeovers, and acquisitions; and the increasing unwillingness of American businesses and policy makers alike to accept a duty to care for the American workforce.
Even before 9/11, doubts were voiced in the United States about whether the network of multilateral treaties and institutions that had developed under American leadership since the end of the World War II was still working. Was it right for the United States to be constrained by international law, whether over trade or weapons systems? Since 9/11, the historical American tendency toward unilateralism and suspicion of foreigners has been exacerbated. The expensive, deadly, poorly executed involvement in Iraq is reinforcing the distrust of foreign entanglements; and the threat from Islamic fundamentalist terrorism has spurred calls for clamping down zealously on immigration and sealing U.S. borders. The globalizing economy is blamed by critics for the outsourcing of jobs, causing wage deflation in the United States, and for unfair competition from foreign goods, especially from China, resulting in the largest bilateral trade deficit in 2005 with any single country in its history—$202 billion.
As a result, popular support for the idea that the United States should take the lead in further integrating the world economy is eroding. The congressional majority in favor of international treaties and free trade, always hard to put together, is challenged. The hysterical campaign in 2006 against plans to have Dubai Ports World manage six U.S. ports as a consequence of its takeover of the British company P and O is symptomatic of a new attitude. The United States, however, is not alone in this regard. Around the world, almost no country or trading bloc now looks at the global economy as something that needs to be built and sustained for collective benefit. Rather, it’s considered a juggernaut that should exploited to one’s own advantage. The World Trade talks aimed at extending trade liberalization were suspended in July 2006, with none of the key actors prepared to initiate concessions for the sake of a collective settlement.
Yet the global economy is not an unstoppable force. What has been made by political choices can be unmade by political choices. If everyone bends, disobeys, and ignores the rules, soon there are no rules. The architecture that sustains the world’s growing interdependence is under great strain. It needs to be recrafted and reinvigorated, but this requires preconditions that are lacking—intellectual conviction and a high degree of trust and common values between the great powers.
This is why China’s rise is so significant. China’s economy in 2006 is nearly nine times larger than it was in 1978: the fourth largest in the world, after the United States, Japan, and Germany. If current trends continue, it is set to become the second largest within a decade.2 The only comparable rise of an economy as a proportion of world GDP in such a short time is that of the United States at the end of the nineteenth century.3 Between 1981 and 2001, 400 million people had been brought out of poverty.4 Between 1978 and 2003, China’s average per capita income rose by a multiple of six. The proportion of the population living in towns and cities has doubled to nearly two-fifths. Up to 150 million workers have moved to China’s booming cities—the biggest migration in history.5 It is a head-spinning achievement.
China is the new factor in global politics and economics. No global architecture can be constructed without it. By the end of 2006 it will have some $1 trillion of foreign exchange reserves. The United States could not be running a current account deficit of $800 billion without consistent selling pressure on the dollar if Chinese purchases of U.S. Treasury bills and bonds were not so high. China is the world’s second largest importer of oil. Before 2010, it will be the world’s largest exporter of goods.6 It is, comfortably, the world’s second largest military power: the Pentagon believes that China’s defense expenditure is up to three times more than the $30 billion China officially declares. The Pentagon’s four-yearly defense review stated that the scale of China’s military buildup has already put “regional military balances at risk” and that China is the power most likely to “field disruptive military technologies that could over time offset traditional U.S. military advantages.”7 If you are prepared to compare China’s output not on the basis of current market foreign exchange rates but on estimates of the real purchasing power of what China produces, then China already is the second largest economy in the world. On this basis it could overtake the United States within twenty years.8
The problem is that this new great power is communist, and its rise to power has been masterminded by the Communist Party. The party may have made major ideological changes; it praises only 70 percent of Mao’s record, for example, condemning the disastrous Cultural Revolution and the Great Leap Forward in which more than 30 million Chinese died. It now aims to build a “socialist market” economy rather than a planned communist economy. It permitted the dismantlement of 26,000 communes in rural China. Hundreds of millions of peasants are again farming plots on long leases once held by their ancestors. China wants its state-owned enterprises to compete as autonomous companies largely free to set prices as they choose in an open economy.
China’s communists have declared that the class war is over. They now claim to represent not just the worker and peasant masses but entrepreneurs and business leaders, whom it welcomes into its ranks. The party refers to this metamorphosis as the “three represents”—meaning that the party today represents, in the ideological categories in which it thinks, “advanced productive forces,” “the overwhelming majority” of the Chinese, and “the orientation…of China’s advanced culture.”9 Party representatives abroad say that the country wants to rise peacefully, not to play power politics or to aim for any kind of hegemony. China has joined the World Trade Organization and is a judicious member of the United Nations Security Council, using its veto largely in matters that immediately concern it, like Taiwan.
Yet it remains formally a communist power adhering to the doctrines of Marxism, Leninism, and Mao. It is a one-party state with no regular competitive elections, no independent rule of law, no freedom of speech, no right of association, and no entrenched basic human rights. Although it condemns 30 percent of Mao’s legacy, it praises 70 percent. Difficult as this may be for many foreigners and even some Chinese to accept, a majority of China’s 1.3 billion people and its communist rulers regard the communist revolution of 1949 as a significant, important, legitimate event, analogous to the American and French revolutions. The China of 2006 could not have happened without the revolution. Mao’s mass murders are condemned, as the French might condemn Robespierre and the Terror; but Mao is seen as part of a process that also included much good, notably a dramatic increase in male and female literacy, and the shattering of the imperial Confucian system, which had held China back for 150 years. Deng Xiaoping, China’s great pro-market reformer, did not build contemporary China out of nothing; he built on foundations left by Mao and always aimed to preserve the primacy of the Communist Party.
That foundation is now, however, a profound problem for China, the United States, and the world. It makes China a difficult partner internationally because there is an objective clash of interests over the importance of democracy, the rule of law, and human rights and how they should be represented in the world’s architecture. Meanwhile, at home, China’s communists, notwithstanding their success to date, are confronting limits regarding how far they can develop a pluralist market economy without also instituting pluralist political institutions. The party leadership has not yet embraced the “soft” institutional infrastructure that accompanies successful capitalism: impartial courts, clear property rights, proper commercial processes for bank lending, independent auditors, accountability to a free press, independent trade unions, effective corporate governance, transparent antimonopoly rules, free intellectual inquiry, and even a properly functioning welfare system. The party is also facing a growing issue of legitimacy. If it no longer rules as the democratic dictatorship of peasants and workers, because the class war is over, why does it not hold itself accountable to the people in competitive elections? Answers are not easy for it to find.
China is confronting an ideological crisis. With the collapse of the Soviet Union, communism in China cannot now justify itself as part of an international communist movement whose success is historically and scientifically preordained. Instead it has to justify itself through its domestic accomplishments as well as its historic role in enabling China to regain the pride and international respect that had been lost ever since the Opium war of 1839–1842. Successful economic development has thus been one strand of policy to legitimize the party; the other has been nationalism.
This latter sentiment has deep roots. Confucian emperors portrayed China as the center of the universe. For that reason, China’s reversals during the nineteenth century were felt particularly keenly; by the 1870s there was already a patriotic “self-strengthening” movement, aiming to copy foreign methods to recover China’s power, and the mood intensified after defeat by Japan in 1895. After World War I, when German concessions in China were handed over to the Japanese as part of the treaty of Versailles, with no regard for China’s views, this was felt to symbolize all that was wrong. The spontaneous demonstrations that erupted on May 4, 1919, developed into a loose nationalist political movement that was one of the antecedents of the Communist Party’s own official foundation in 1921. Thus today’s introduction of “patriotic” education to inculcate pride in China and in the party’s achievements builds on long-standing instincts. China has to be permanently on guard against its enemies, who have not essentially changed their spots. “The Chinese people must never again be humiliated by foreign aggressors,” runs the official interpretation of history.10 China must avoid disunity at home and be protected abroad by a vigilant communist government.
The weakness of communist ideology, assuaged only partially by this nationalism, is matched by a growing awareness that the logic of reform is rapidly confronting China with a choice. The current halfway house of trying to retain political control of what is in truth only half a market economy is unsustainable. Is China to accept that economic pluralism, along with an institutional infrastructure to confer political pluralism, is the only way a market economy can flourish? Or can it hold the line and manage today’s ambiguities and economic contradictions?
The economy provides an unwelcome answer for the conservative wing of the Communist Party, which wants to hold the line. So far, China has few great companies capable of competing internationally, and almost no global brands. Its private sector consists of a plethora of small transient companies usually dependent on political patronage. China’a state-owned, state-directed, or state-influenced corporations may have the freedom to set prices and wages, but only within limits laid down by the party. Their productivity is disastrous.
The system that has brought China this far is Leninist corporatism rather than anything approaching a proper market economy, let alone a socialist market economy. It is Leninist in the primacy it affords the Communist Party, and corporatist rather than capitalist because it does not foster capitalist economic pluralism. It is neither a communist nor a capitalist economy. The central argument of this book is that for all China’s success to date, ultimately the system that the communists have created is structurally unstable. The next phase of China’s economic and political development must permit more economic pluralism. But that will set in train a process that must challenge the preeminence of the Communist Party.
China does not face this conundrum in a vacuum. Its sheer scale forces it into structural tension with the United States. There are three primary flashpoints between the two countries—oil, trade, and currency. Looming over all of them is Taiwan, and the possibility that one day China will test the commitment of the United States to defend Taiwan from a Chinese invasion.
The peak of world oil production is clearly imminent. According to some estimates it is already on us, and if it is not, very few expect it much after 2020.11 So it is hardly a surprise that the last two great powers eye each other’s intentions concerning oil with suspicion. A network of Chinese-financed pipelines is appearing or planned in Canada, Venezuela, Sudan, and Iran that will take oil away from the United States and toward its challenger. Four-fifths of China’s oil is transported through the Strait of Malacca between Malaysia and Indonesia. At one end of the Strait is an American fleet at the Changi naval base in Singapore. At the other end, the United States’ Indian Ocean fleet operates from Diego Garcia. From Beijing’s perspective, the United States has its fingers on China’s windpipe; President Hu Jintao makes frequent reference to the “Malacca problem.” China wants more oil brought in by pipeline across Asia and by tanker across the Pacific. It also wants a deep-sea fleet to protect its interests. Richard Nixon’s former secretary of state, Henry Kissinger, has warned of a potential great-power conflict over oil: this is it.12 China’s “ring of pearls” strategy, developing close relationships with Pakistan, Cambodia, Thailand, and Myanmar (Burma), is designed to give it access to ports for its naval and merchant vessels if hostilities break out with the United States.
However, the most pressing issue between the two countries is over trade and currency. Up to 70 percent of the products Wal-Mart sells are produced in China, to the advantage of the American consumer. Cumulatively American consumers are $100 billion better off, as one authoritative economist estimates, because China’s cheap exports have lowered consumer prices in the United States.13 China’s role in financing the United States’ trade deficit is critical, as I have already noted.
After 9/11, however, these advantages may not outweigh, in the public mind, the perceived damage from free trade with China. The United States did not become a genuinely open economy until the 1940s, when it became clear that U.S. industry had no serious rivals abroad and there was a strategic interest in accepting imports from Japan as well as the rest of capitalist Asia and Europe. By encouraging trade, the argument went, the United States would advance the cause of capitalism against communism.
But in the mid-1980s there was a ferocious backlash against Japanese imports, and we are now seeing a possible backlash against China. There is no obvious strategic interest in boosting communist China’s economic base; indeed, the American public may be unsure that it wants its trade deficit financed by the People’s Bank of China or wants to depend on China at all. The forces that want the United States to pull up the economic drawbridge are becoming ever more powerful, drawing on the nation’s historical ambiguity about its relationship with the rest of the world and its belief in its own special destiny. Rationality is made immeasurably more difficult by George Bush’s warnings that the United States is now in a long war against terrorism.
Non-Americans have difficulty in coming to terms with the contradictions and complexity of American nationalism. The United States, because of its special destiny and difference, is felt to have an obligation to lead others; it can also feel no compunction about using its presumed special destiny to justify behaving astonishingly self-interestedly even when there is a clear global interest in collective collaboration. Global warming is one example. Although the United States accounts for about 25 percent of the world’s carbon dioxide emissions, George Bush could unblinkingly oppose the Kyoto Protocol in March 2001 because “it exempts 80 percent of the world, including major population centers such as China and India, from compliance, and would cause serious harm to the U.S. economy.”14 The United States could abdicate leadership, pursue its own interests undeterred by an international treaty, and stand aside from concerns that affect humanity. This stance was and is of serious concern to a significant part of the American public and to the United States’allies. Yet Bush suffered little. He was putting America first.
Public opinion and political leadership in the United States are divided between this protectionist, “America first” tendency and an opposing internationalist tendency that favors free trade and a multilateral foreign policy. Under President Bush, the “America first” strain, which was already gaining ground before 9/11, has become predominant. The reaction to 9/11 recalls an analysis by the American political historian Richard Hofstadter, who identified what he called a “paranoid style” in American politics. There have been periods in American history when conspiracy theories about alien influences, ranging from suspicion of international bankers during the Green-back and Populist era at the end of the nineteenth century to Mc-Carthy’s witch hunts in the early 1950s for suspected communists, have given a paranoid, even xenophobic, style to American politics. China is provoking such paranoia as well as the America-first tradition, and the resulting spectacle is not edifying.
The anti-China sentiment that has surfaced in the last two or three years is obvious. Some of the twenty bills introduced in this period, aimed at retaliation against China or its imports, would have disastrous consequences. One bill would impose a 27.5 percent tariff on Chinese imports if China does not immediately revalue its currency, the renminbi, significantly. Another bill would set conditions for expelling China from the World Trade Organization, because—allegedly—China flouts the rules of free trade. Either bill would have an economic impact analogous to a unilateral missile attack. Flows of Chinese finance to support the dollar and U.S. asset prices would collapse; there would be a sell-off in world stock markets; Europe would have to follow the American lead and adopt U.S.-style protectionism to head off a flood of cheap Chinese exports being diverted to the European Union; and the Chinese economy would rapidly slow down with incalculable implications for its political stability.
The scope for miscalculation by either the United States or China is huge. These are two nationalist juggernauts, and the Chinese have very limited room to maneuver in responding to the United States’ demands, presented with mounting urgency. In the first place a sudden revaluation of the renminbi would have a very depressive effect on the incomes of the 900 million Chinese living in peasant households, because it would lower China’s food prices, keyed as they are to world price levels. It would damage savings, arrest export growth, slow down the economy, and raise the specter of a banking crisis. Second, to call for China to comply immediately with western and best Asian standards of corporate governance, transparency, and accountability is to force systemic change on China. Such change is vital and in my view inevitable, but these reforms must be handled with great sensitivity. Change can and will come; and external pressure should be applied, but not to the point that the fallout causes at least as much pain for the west as it does for China.
Seen from Beijing, the call to revalue the renminbi or transform the Chinese economic system is a de facto act of aggression that will destabilize the government. Seen from Washington, the refusal to become a good international economic citizen is willful neglect of what Deputy Secretary of State Robert Zoellick regards as China’s duties as a responsible stakeholder in running the world system. It is an eyeball-to-eyeball confrontation, a great-power game to see who blinks first. The strength of sentiment on both sides should not be underestimated. Only fifteen members of Congress voted in 2005 to allow one of China’s national oil companies—CNOOC—to take over the U.S. company Unocal, arguing that concerns of national security were specious, as they largely were; 398 voted against the takeover. In China suspicion of American intentions runs no less high.
Never far beneath the surface of conflict is Taiwan, Japan’s former colony, which was commandeered by the Nationalist armies in 1949 and who claimed to have taken the genuine republic of China with them. China wants it to rejoin the motherland, like Hong Kong and Macao; this would remove the last stain of the century of humiliation and, far more important, eliminate an ideological rival. What stands between China and its goal is the U.S. fleet. China continues a military buildup that the Pentagon and senior military analysts agree is congruent only with a projected invasion of Taiwan. The United States maintains substantial military strength in the region, and promises to stand by its understanding with Taiwan in the event of a Chinese attack. The question is whether China will ever choose to test the American commitment.
Underneath the tension lies a greater truth. The two sides are codependent and essentially benefit from their relationship, and the internal difficulties on either side are homegrown—though this political analysis is hard to accept—rather than the fault of the other. Nor should the United States think a Chinese takeover is imminent. It needs to remind itself that as an $11 trillion economy it is still five times larger than China and many times richer in terms of per capita income. It still produces more than one-fifth of the world’s output. Thirteen of the world’s top twenty brands, and fifty-three of the top 100, are American.15 The United States leads the world in innovation and patents. Its military power is overwhelming: in 2005, the United States’ military expenditure outstripped the combined total of the next fourteen countries by $116 billion.16 The United States’ “soft power” is also overwhelming. This is the country with the Enlightenment inheritance of free speech, free association, rule of law, free thought, and pluralist checks and balances, even if today these look slightly tattered. Some self-confidence and generosity of spirit are in order. China has people, exports, foreign exchange reserves, and enormous potential; it is the only country capable of challenging the United States. But the United States remains in the driver’s seat in determining how the challenge will play out and what the final settlement might be.
Indeed, the more China grows, the more likely it is to develop its middle class and an appetite for institutional changes that will make it a more comfortable partner. Alistair Iain Johnston, a China watcher at Harvard, notes that according to opinion polls, China’s middle class is already more internationalist than its poor.17 And the longer the economic reform program continues, the clearer it becomes that China will have to loosen political control. There is already debate within the Communist Party about whether reform has gone too far.
The American interest is to make it impossible for China to turn back. It is not just an economic issue that the bigger and more open China is, the better the prospects for American and western companies to sell in its market. It is that a plural democratic China is more likely to be the stakeholder in the international system that we need it to be. For its part, China has an interest in carrying on with reform and peaceful progress and accepting the logic of where that takes it. These may be objective interests. History, however, is littered with examples of where the temptation not to follow objective interests leads.
Globalization: A Short History
With China’s rise, globalization has entered a new phase. Companies, especially from Hong Kong and Taiwan, flock to China, attracted by low wages. Wages for skilled workers are never more than one-fourth of those in Europe and the United States, and on average are one-tenth;18 wages for unskilled workers are one-thirtieth of those at home. China has a first-world infrastructure of ultramodern ports, highways, and cheap container ship transport, along with factory building costs up to 70 percent cheaper.19 Also, through the Internet, telephones, and ever cheaper air travel, foreign companies have the capacity to keep in close touch with operations on the ground. The question whether to produce domestically or outsource production to China has become critical in multinationals’ strategic planning. Outsourcing precludes the rise of a Chinese competitor (by capturing the same cost structure) and offers an advantage over a company’s existing domestic rivals. These are powerful countervailing arguments: there are hidden costs to doing business in China, and advantages to producing close to home. But for manufacturing in well-established technologies with wage costs that are relatively high, China offers great attractions.
The Chinese market itself is an opportunity for western producers. Indeed China is still largely a final assembly exporter, with most of its plants owned and managed by foreigners, and so is still heavily dependent on imports. Nobody knows what the ultimate impact on jobs will be, although gain will almost certainly affect losses, but in both the United States and Britain politicians, unionists, and businesspeople are already predicting darkly that “China is coming,” as if globalization is inevitable and the only trajectory is more and more global economic integration. But that is not the lesson of history. Over the course of 500 years, there has been more and more interpenetration of national economies; however, the process has not been linear. Periods of opening have been followed by partial or complete closure as societies have sought relief from competition, immigration, and social and cultural change. In periods of economic and social openness, nothing seems more inexorably natural than interdependence. The journalist and later Labour parliamentarian Norman Angell (who won the Nobel Peace Prize in 1933) made a famous prediction three years before World War I. In a book translated into eighteen languages—The Great Illusion—he argued that war would be self-defeating because countries were now so economically and financially interdependent. By contrast, in times of closure and depression, like the mid-1930s, nothing seems more obvious than loyalty to the national unit and the fragility of globalization. The British economist John Maynard Keynes, once a strong advocate of free trade, found himself praising a world of little trade, homespun production, and national rather than international systems of finance.20 He could no more imagine today’s globalization than Angell could imagine war. Both were wrong, as we may be.
The lesson is that globalization is and always has been vulnerable to setbacks. The American historian Harold James describes Europe’s first embrace of globalization, arguing that the Reformation, the consequent religious wars, and the creation of nation-states in the seventeenth century were in part a reaction to the disruptive, inflationary impact of Latin American gold and silver, and of the profits from the Asian trade, on the settled societies of late medieval Europe. Martin Luther in 1524 railed against the effect of Indian silks on the culture and attitudes of solid, God-fearing Germans.21 Although the trade in such luxury goods might have been small relative to European output, its economic and cultural impact was much greater. Venice, then Portugal, then the Netherlands and France were all beneficiaries of long-distance trade. British economic and political history is inexplicable without it. The institutions needed to foster such trade then interacted with the institutional creativity of the Enlightenment to give Europe a decisive advantage over China, which until then had been ahead scientifically and technologically. The result was the industrial revolution.
In the 1820s, a second phase of globalization began, based on the European factory system. This was an era of exchange of cheap manufactured goods produced within national economies for increasingly mass markets. Trade grew at between 3 and 4 percent annually for nearly a century, until 1914—a sustained upward growth that was unprecedented. The architecture and rules of the game were created by the hegemonic power Britain, which insisted on free trade throughout its formal and informal empire, instituted with most of Europe through bilateral trade treaties. Sterling and the gold standard held sway. During this period China’s backwardness and insularity became painfully evident. China lacked the institutional and technological wherewithal to participate on anything other than unequal terms.
For all the growth in trade, the years just before 1914 brought increasing strains. The gold standard operated by imposing periods of austerity and growth on economies as gold stocks flourished or shrank. Unemployment jumped violently: these were massive movement of people between countries and even continents. Between 1871 and 1915, 36 million people left Europe for the Americas, Africa, and Australasia.22 Europe and North America both witnessed powerful reactions against social distress, and Europe saw the birth of socialist parties and eventually communism. Between 1914 and 1950 the global system simply broke down. There was neither the international architecture nor the internal domestic social consensus on which the prewar system had depended, and the world retreated from globalization.
Britain was too weak and the United States too reluctant and inward-looking to enforce rules of the game and sustain a common economic, trading, and financial architecture—and no other country was powerful enough to do this in their stead. In Europe, tariffs on manufactures had been rising ominously toward 20 percent before World War I, except in Britain (which espoused free trade). In the United States, tariffs were over 40 percent. After 1914 tariffs rose again everywhere as countries tried to protect themselves from unemployment, economic slowdown, and social protest.23 The growth of trade shrank to the lowest level ever recorded, either before or since.24 Countries retreated into their national economic citadels; exchange and capital controls were imposed. It was an era of depression, war, and a clash between communism and fascism—which in China manifested itself as the communist revolution.
Then, starting in 1950, a third phase of openness began. The leading developed countries were determined to establish a global financial and trade architecture; and at home a commitment to social welfare and full employment helped to construct a more stable social order that could alleviate the pain of adjusting to international competition. The United States instituted and maintained an architecture of trade openness with the dollar as the world’s reserve currency and medium of exchange. Tariffs on manufactured imports fell to an average of less than 4 percent. The result was that trade ballooned, achieving an astonishing 8 percent growth rate in the golden years from 1950 to 1973 and subsequently an impressive 5 percent.25 Multinational companies, with Americans in the vanguard, began multisourcing their production and distribution within a small but growing pool of developed countries; foreign direct investment exploded.
Since the mid-1990s this type of globalization has become even more vigorous and ambitious. In a sense, it is “true” globalization. Multinationals have outsourced more production in selected low-wage developing countries, thereby producing a surge of exports based on a dramatic cheapening of the price of manufactured goods. There has been a phenomenal buildup of assets held overseas together with international capital movements amounting to $250 trillion a year—five times world output. Two trends have come together. The first is the arrival of new information and communication technologies that have reached a tipping point in the intensity, sophistication, cheapness, and scope of exchange of goods, services, money, and ideas. The second is that these cross-border technologies have emerged just as the borders themselves have come down. Low average tariffs are now extending into the less developed countries, as exchange controls melt away.
Crucially, huge countries that were formerly closed have entered the world system. China has redefined communism to indulge markets and trade; India has decided that openness is a better development strategy than protection; the former Soviet Union repudiated communism and its former satellites in Eastern Europe joined the EU. There is a new sense of security among multinationals in the north and the south alike that they could and should take advantage of low wages, low transport and communication costs, and low tariffs. A successful commercial strategy now necessitates developing global capacities, a global reputation, and global brands.
This last phase of true globalization is one in which China, by virtue of its size and its readiness to be open, has taken a principal role in intensifying and structuring new interdependencies. During the Cultural Revolution and the Vietnam war, a growing number of the Chinese communist elite, including Deng Xiaoping, observed how China’s Asian neighbors were profiting from globalization. Deng’s willingness to champion reform in part originated in a determination to follow the route of the Asian tigers. He has been proved right
But one danger is that the increasing presence of China, along with India, Brazil, and Russia, will destabilize the global system. We could see a rerun of the period leading up to 1914, with internal social strains and a fragmentation of the global architecture. Germany’s rise in Europe and the rise of the United States in the world economy between 1870 and 1914 led to tension in Europe and the North Atlantic that in turn led to war and depression. The world system led by Britain was not sustainable; there was no intellectual or political imperative for countries to stay open and keep the peace, given the internal tension that was mounting as a result of rapid industrialization and urbanization—and of German national ambition.
Suppose that China is today’s Germany, on a collision course with Asia’s top regional power, Japan. Then, does the United States, any more than Britain in 1914, have the economic power, or the political and intellectual conviction, to sustain the present order? Can countries continue to maintain openness and internal stability? Globalization may, historically, advance or retreat. The possibility of another retreat, unless the United States, Europe, Japan, and China are mindful of the dangers, is all too obvious.
The China Effect
The growth of exports from China, always impressive, has recently become startling. For more than fifteen years exports have grown at more than 20 percent a year, with the rate of growth accelerating since China joined the World Trade Organization in 2001. Over the last twenty-five years Chinese exports and imports have each grown from 1 percent of the world’s total to more than 6 percent. Not only has China grown very rapidly; it has been exceptionally open to the world. In 1980 the share of trade in China’s GDP (exports plus imports) was 15 percent; in 2005 it will exceed 70 percent. The United States is the only continental economy ever to have matched China’s growth,26 as noted earlier, and it was not as open to trade as China.
The flood of manufactured exports, at what western consumers regard as unnaturally low prices, has been largely directed at the United States, which takes around 40 percent of the total. I have already mentioned the benefit to American consumers, but Europe and Japan have also profited. Another way of looking at this trend is to see how China has lowered the global inflation rate. Dresdner Kleinwort Wasserstein, a major German investment bank, calculates that American inflation over the last few years is 1 percent lower as a result of the competition from China. The U.S. Federal Reserve agrees that China is driving inflation down.27
The resulting cheap money has contributed to a housing boom in both Britain and the United States. The Federal Reserve and the Bank of England have been able to keep interest rates much lower than could have been expected, given the growth of credit, because the world prices of manufactured goods have been falling and the growth of wages has been so low. In Britain, the United States, Canada, and Australia, home owners have benefited as the price of housing has soared in response to low interest rates. The deregulated financial systems in these countries are particularly aggressive in marketing money—and home owners are borrowing it widely. Consumers have borrowed against the increase in equity in their homes and spent the cash, reducing savings in both countries to ever-lower levels. The continual rise in consumption has spawned shopping malls, restaurants, and whole new industries that rely on buoyant personal spending; all this in turn has generated new jobs; and the new jobs in turn have made people confident that they can borrow more. The process has kept the economic wheel spinning.
Nor is that all. The mushrooming of the United States’ trade deficit has happened at the same time as dollars have poured out of the country to be invested in factories all over Asia and financial assets everywhere while the government has been paying for Iraq and Afghanistan on top of its already vast and growing network of U.S. military bases and fleets.28 The U.S. current account has soared to 7 percent of GDP—a record. In more normal times you might expect some weakness in the dollar, and some upward movement in American interest rates as a result.
But no: another aspect of the “China effect” is China’s readiness to hold the surpluses it earns from its export trade in dollars rather than sell them back into its own currency, the renminbi. Indeed it is so concerned to maintain the renminbi at a stable rate against the dollar, to promote exports abroad and social stability at home, that it will offer trillions of renminbi to stop it from rising. This has been doubly important since the People’s Bank of China, under intense pressure from the United States, adjusted the currency upward by 2 percent in July 2005 (after holding the same rate for more than a decade). The People’s Bank may countenance further rises in its new phase of managed floating—whetting the appetite of international financiers for Chinese currency. China’s purchases of bonds and bills mean that the price of bonds has risen and their yields have fallen despite the mountainous domestic and overseas debts of the United States (whose international debts now exceed $3 trillion). The low yields on bonds reinforce the trend for money to stay cheap, helping to keep the boom going. The counterpart, of course, is the $1 trillion of China’s foreign exchange reserves.
China is also blamed for downward wage pressures in the United States. Median wages in the United States have grown only slowly for a generation; and the argument is that with 760 million potential new Chinese workers joining the global labor market, the impact on the American and European pattern of employment and wage rates will become even stronger.29 In 2003 China also produced 700,000 science graduates compared with 60,000 in the United States, so it is easy to make the situation seem very alarming. However, despite all the rhetoric, the statistics so far indicate only a tiny effect (see Chapter 11). The more reliable impact may have been to make workforces more fearful and accommodating, anticipating the arrival of China’s hordes; also, examples of successful outsourcing are being exaggerated to terrify workers into accepting lower wages. The rhetorical deployment of China to subdue wage inflation is at this stage more important than any direct effect.
Still, China is having direct as well as indirect effects on our lives. The prices we pay for goods, housing, and oil are being shaped by the big new kid on the economic block. The soaring price of gasoline, with little immediate prospect of any significant fall, is inexplicable without the rise in demand from China, now the world’s second largest oil importer. And in 2003 and 2004 Chinese buying drove world commodity prices to record highs.
China has given new force to the arguments environmentalists have been making for decades. Debates over how soon oil production will peak30 have become more urgent, as has the imminent exhaustion of copper and zinc reserves, predicted by industry analysts within fourteen and eleven years respectively.31 If China continues growing at the same rate, it will start to press against the limits of some world resources within the next decade. Moreover, its growth is having an impact on the Chinese environment. China is extraordinarily wasteful of energy. To generate every $1 of GDP, China uses three times more energy than the global average, four times more than the United States, and 8 times more than Japan.32 Pollution is endemic; 400,000 Chinese die prematurely every year from air pollution. And in addition, China is chronically short of water.
China is also beginning to flex its muscle as an Asian power. Americans—and Europeans in the peaceful comfort of their EU—have little idea of how edgy and raw relationships are between China and the surrounding states, or how nationalistic and warlike rhetoric and sometimes actions can become. China readily entered the Korean War in 1950; fought India in a bloody border war in 1962; invaded Vietnam in 1978, with a loss of 50,000 men; and has had skirmishes with the Russians. Borders are contested; ownership of islands in the East and South China Sea is not accepted; and old wounds from World War II and even earlier are unhealed. Asia knows that China wants Taiwan back. The region frequently sounds and feels more like pre-1914 Europe than part of twenty-first century globalization.
For example, in February 2005 Japan formally took possession of the Senkaku Islands, whose control is the key to claiming sovereignty over vast offshore oil and gas reserves. In April 2005 China sent an official warning to Tokyo to withdraw or “take full responsibility” for any consequences. It was the kind of ultimatum a great power might have issued during the nineteenth century. Japan’s defense ministry drew up contingency plans to deploy 55,000 troops if China invaded the islands. In September 2005 five Chinese naval ships, including a guided-missile destroyer, were found near the Chunxiao gas field in the East China Sea. Eventually, both sides drew back; but this kind of brinkmanship over a territorial dispute is now almost unknown in the rest of the developed world. The People’s Daily has declared that the competition for oil resources in the East China Sea is just “the prelude of the game between China and Japan over international energy”33
China feels ideologically isolated, encircled by enemies and rivals. These are also challenges at home, even if they are currently submerged. In 1989 China was rocked to its foundations by a coalition of workers, students, and intellectuals like the one that brought down communism in eastern Europe and Russia. The same causes for complaint exist today, arguably with even more force; and a repeat of Tiananmen today might succeed. That is an ever-present fear of China’s communist leadership. To understand today’s China, we must first understand Tiananmen and its legacy.
The Internal Bargain
Tiananmen was China’s own attempted perestroika and “velvet revolution” rolled into one. Not only did the protests convulse Beijing for six weeks in 1989; there were demonstrations in 181 cities, including all the provincial capitals, the major cities, and special economic zones.34 Nearly every city with a university experienced some kind of public march.35 Official records indicate that students from 319 Chinese universities were represented in Tiananmen Square.36 The party itself was divided over how to respond, as was the army; 150 officers openly declared that they would not fire on demonstrators after martial law was declared, and at least a third of the central committee wanted to reach a compromise with the protesters.
At the beginning of the 1980s, China—inspired by Deng—was much more intellectually free and easy than it is today. Political reform and economic reform were more obviously proceeding hand in hand. But there were problems. In 1986–1987 inflation had been rising sharply, and the growth in general living standards had halted, in stark contrast to the extravagant lifestyles of party officials. Corruption was rampant.
In the spring of 1989 a group of students at Beijing University, impressed by the events unfolding in eastern Europe and by Gorbachev’s reforms in the Soviet Union, began to wonder if they dared engage in public street protests. The movement was an uneasy, incoherent coalition.37 It included party members from the reformist wing who wanted the pace of reform to be matched by a commitment to social justice; it also included those who wanted to accelerate privatization and market liberalization as well as those who wanted western-style democracy and were agitating for a thoroughgoing change in the regime. The only common ground was a fierce hatred of corruption. Tragically, this was not enough, in the first phase of protests, to let the protesters find an effective common line in their negotiations with the compromisers among the party leaders.
An initial daring march by a motley group of students on the morning of April 27, 1989, with banners proclaiming “Vive la liberté,” was not opposed by police gunfire; it spontaneously swelled into a street march of more than 500,000 people that lasted all day. For the next six weeks more than 1 million people manned barricades and blockades, effectively occupying central Beijing. They made their headquarters Tiananmen Square, the vast square outside the Forbidden City that is the public heart of China. Alongside a makeshift statue of the goddess of democracy, the newly formed Beijing Workers Autonomous Federation set up a tent and began to recruit and mobilize workers, copying Solidarity in Poland.
Deng and the party elders—the so-called eight immortals, veterans of the revolution—were furious. They were unafraid to shed blood if necessary to repress what they deemed a counterrevolutionary rebellion. However, the party’s general secretary, Zhao Ziyang, the reformer whom Deng had elevated first to the presidency in 1980 and then to the general secretaryship of the party in 1987, was opposed. He wanted compromise, proposing a partial meeting of demands for reform rather than systematic change, and the avoidance at all costs of bloodshed.38 He had publicly insisted in early May that the “just demands of the students be met” and encouraged extensive news coverage of the events to bolster his position, which he allowed to be understood as a challenge to Deng.39 As a result the protests grew.
Alarmed at the scale of the demonstrations, the elders finally acted. Zhao lost the argument, his job, and his official reputation; he remained under house arrest until his death in 2005. Martial law was imposed on May 19, and a fortnight later the tanks rolled into Tiananmen Square. However, Deng had to leave Beijing to ensure that army groups 28 and 29, personally loyal to him, would provide the core of the force rather than the uncertain army groups based around the capital. It was a bloody and murderous engagement. The General Office of the State Council reported to the Committee of Elders afterward that 5,000 soldiers and police officers and 2,000 civilians were wounded in the action. Of the 443 dead, 223 were soldiers and police officers, thirty-six were university students, and the rest were ordinary Chinese citizens.40 At least as many were arrested and disappeared into the Chinese prison system. In sharp contrast to what was to happen in the Soviet Union, the party had reasserted its authority, but at a terrible long-term cost. The image of the anonymous student single-handedly stopping a tank is one of the most arresting of the twentieth century.
The scale of the international response shook the leaders, although privately they congratulated themselves on having shown their willingness to act, irrespective of the views of foreigners. Negotiations over membership in the General Agreement on Tariffs and Trade (GATT, a forerunner of the World Trade Organization), which had begun two years earlier, were immediately suspended; and a European arms embargo was imposed, joining the American embargo, that has continued to today. The pace of inward investment from foreign companies leveled off, and investors were persuaded to return only by being given generous tax concessions that continue to distort and weaken the government’s fiscal position.
Equally serious was the crisis of legitimacy at home. The citizens that the party had killed were not just any citizens. Young students have for millennia had a special place in Chinese life as the generation training for China’s greater good, and Beijing University is the country’s elite institution. The rhetoric applied to defend the suppression—that the event was a “counterrevolutionary riot”—was so obviously a self-serving misdescription of reality that the official language of communism lost any vestigial respect. To call for an official reassessment of Tiananmen has become the most potent and politically challenging declaration in China.
The Communist Party leadership and its 70 million members know that they might not survive another Tiananmen. There would be no committee of elders with revolutionary credentials who could command the loyalty of the military or the personal loyalty of some army groups. The divisions that incapacitated the protesters of 1989 would be unlikely to be repeated; there would be more willingness to campaign for systemwide change as the only way to stem corruption and establish the rule of law. Also, repression imposed as in 1989 would today incur even more international opprobrium; and given China’s integration into the world economy, such reaction would make China more vulnerable. The argument for democracy is more strongly entrenched internationally, despite its association with Bush’s foreign policy. More states have converted to democracy since 1989, and resisting it seems retrograde.
There is no possibility of an ideological renewal, a “back to basics” reassertion of core communist values such as a modified Cultural Revolution. When that was tried in the mid-1960s, communism was still a live ideology at home and abroad—and even then it failed. The party has now acknowledged that the class war is over, but it finds itself in a catch-22. It resists elections because they would expose it to political competition; but without elections there are no channels except protest through which to express dissent and anger. China’s communists confront the same conundrum as the old Confucian emperors. Legitimacy depends completely on continued economic success and urgent appeals to nationalism.
Yet the gap between the booming cities and depressed rural areas grows ever wider. There is a stark contrast between Shanghai, where adjusted per capita income exceeds $15,000 and provides almost first-world living standards, and poverty-stricken Guizhou province in the rural west, with a per capita income of $1,247.41 Roughly half of China’s people, mainly in the rural west, live on comparably low incomes. Income gradually rises toward the coast, but even within the rich coastal cities and provinces there is phenomenal inequality between the migrant workers and the richer middle classes. Eight of China’s thirty-one provinces, which comprise 40 percent of its population, have provided almost three-quarters of China’s growth since 2000. The UN World Development Report ranks China, with its formal communist commitment to equality, as more unequal than both the United States and Britain.42
Regarding employment, the best estimate is that to stave off a potential avalanche of dissent and protest, China has to create 24 million new jobs a year for migrants leaving the countryside, for students leaving schools and colleges, and for people left newly unemployed by the rationalizing of state-owned enterprises.43 Yet employment is growing by only slightly more than 1 percent a year. Open and disguised unemployment, according to some estimates, is as high as 170 million, or 23 percent of the labor force.44
Another problem is corruption. A leading Chinese economist and intellectual, Hu Angang, who has an edgy relationship with the Chinese leadership because of his outspokenness, calculates that in the late 1990s corruption resulted in an economic loss to China of 13.3 to 16.9 percent of GDP.45
The number of public protests demanding social justice—especially protests against unfair compensation for compulsory land purchases—has increased significantly. According to official Chinese sources, the numbers involved in public protests increased from 740,000 in 1994 to 3.7 million in 2004. Strikes have risen as well: from 1,909 in 1994 to 22,600 in 2003, with the numbers involved jumping from 77,704 to approximately 800,000. Even the larger numbers are, of course, a small proportion of the total population (1.3 billion). But given the bravery it takes to dissent in an authoritarian state, the fact that some 4 million protesters and 1 million strikers have run the risk is testimony to the growing strength of feeling. The Ministry of Labor and Security has warned that the growing income gap is likely to make the system unstable by 2010 if no effective solutions are found.46
The debates within the party about whether to maintain the pace and structure of reform have become increasingly acute. The left has become more vocally critical; a proposed law to enshrine private property rights has been deferred for further consultation. Critics claimed it would undermine Chinese socialism: it was surnamed capitalist, not surnamed socialist.47 Hu Jintao, China’s president and general secretary of the party, has cracked down on the Internet and the media. He praises the communist parties of Cuba and North Korea and eulogizes Mao, using Maoist rhetoric about the danger of bourgeois liberalism in internal party speeches. The returning economic liberals educated at American and British universities are regarded with growing suspicion. Liu Guoguang, onetime reformer and member of the party’s standing committee, now says that introducing western reforms into China was a mistake; Liu Guoguang societies are growing dramatically without party opposition. The party’s priority is now “harmonious development,” lowering inequality, giving rights to migrant workers, sustaining rural incomes, and trying to limit rural protests. Its mounting worry is that if ever the growth machine slows down, it will be in mortal trouble.
For fifteen years China’s economic growth has approached an average of nearly 10 percent a year. Its planners have penciled in a more modest growth rate of 7.5 percent for the eleventh five-year plan, which extends to 2010; but the reality is that the average growth rate the Chinese have become accustomed to must be maintained. China needs to maintain the highest growth rate possible more or less indefinitely if it is to prop up the Communist Party.
This is not possible with the current economic structure. The model that has taken China thus far will have to be transformed, because it cannot withstand the strain of a near tripling of the economy’s current size over the next fifteen years. If the current structure of growth continues, by 2020 Chinese exports would constitute nearly $5 trillion, or about 100 percent of its then GDP—and approaching half the likely merchandise exports of the world at that time. But China’s export growth has been driven mainly by non-Chinese companies. To reach this total we have to suppose that there are sufficient non-Chinese companies with the capacity to transfer production on such a scale to China, and that western markets have the capacity to absorb such enormous flows of imports. Already 80 percent of American toy imports come from China. So far some 400 of the Fortune 500 in the United States and a comparable proportion of European and Japanese producers have invested in China; in other words, most of those who could move production to China have already done so.48 Growth projections that extrapolate current trends have to suppose that over the next fifteen years western multinationals in China are going to be able to continue increasing Chinese production and exports at six or seven times the rate of growth of their domestic markets.
This is both a mathematical and an economic impossibility. The law of large numbers is going to apply. To achieve the target, China will have to start exporting under its own steam, with its own companies, its own technology, its own new product lines, and its own brands. But that is equally impossible. At the time of writing, there are no Chinese brands in the world’s top 100; and so far only three Chinese companies, all very small—Huawei, TCL, and Lenovo—can be called genuine multinationals. In short, sometime in the next decade export growth from China is necessarily going to subside to more normal levels.
Thus China must be pulled along more by domestic consumption; it must allow investment in its infrastructure to decline relatively, develop indigenous Chinese enterprise, and begin to revolutionize its approach to the use of resources. These are iron laws of economics and, increasingly, of nature. But here is the rub. Chinese enterprise under the current rules has so far shown itself incapable of meeting such challenges. China has developed neither a viable concept of the company nor the institutional network to supp
Why We Must Embrace China as a Partner or Face It as an Enemy
The Writing on the Wall
Why We Must Embrace China as a Partner or Face It as an Enemy
In today’s highly globalized world economy, so much of the economic health of the United States—our low inflation, high profits, and cheap credit—rests upon China’s economic growth and its massive investment in the United States. A great deal has been said about the economic and military threat China poses. But rather than provoking China with the military hawkishness of recent years and resisting Chinese economic supremacy with the saber rattling of protectionist antitrade policies—twenty such bills have been introduced in Congress in just the last year—the United States must build a strong relationship that will foster China’s transition from an antiquated Communist state beset with profound problems to a fully modern, enlightened, and open society. Doing so will require understanding and engagement, not enmity and suspicion.
China’s current economic model, Hutton explains, is unsustainable, premised as it is on the myriad contradictions and dysfunctions of an authoritarian state attempting to control an economy in its transition to capitalism. If the twenty-first century is to be the China century, the Chinese will have to embrace the features of modern Western nations that have spurred the political stability and economic power of the United States and Europe: the rule of law, an independent judiciary, freedom of the press, and authentic representative government that is accountable to the people. Whether or not China does so rests in large part on how well the United States manages the relationship and persuades the Chinese of the virtues of an open, enlightened democratic system. The danger is that fearmongering will intensify animosities, leading both countries down a path of peril.
Turning conventional wisdom on its head, this brilliantly argued book is vital reading at a crucial juncture in world affairs.