Tuesday, April 05, 2005

The China Syndrome, Part II

In Part I, I examined two areas that I see as potential catalysts for large scale confrontation with China: competition for oil and Taiwanese independence/re-incorporation with mainland China. To paraphrase Donald Rumsfeld, there are also other "known unknown" and "unknown unknown" possible sources of conflict with China, and I do not intend my short list of two to be exhaustive in any sense.

Further, relations with China must go beyond merely avoiding war in the near term. Starting with Nixon and continuing to this day, I believe the US has pursued the wiser path with China, and that has been to seek to involve and connect China with the international community in order to foster peaceful and productive relationships - as well as to plant the seeds of liberalization through economic agreements. For a snapshot of what isolation gets you, cast your gaze on North Korea and Cuba - both still mis-governed by despots who are long past their rightful life expectancy in terms of maintaining power, but who can better retain control without the subversive agents of free trade and bilateral relations encroaching on their respective spheres of influence. So in addition to counterbalancing China, we must also be seen as an ally and friend - a schizophrenic stance that requires much nuance and subtlety.
Brad DeLong touches on one salient point (via LAT) :

Alexis de Tocqueville could project before the Civil War that the U.S. and Russia were likely to become twentieth-century superpowers. We can project today that at least one of India and China--perhaps both--will become late-twenty first century superpowers. We have an interest in building ties of affinity now. It is very important for the late-twenty first century national security of the United States that, fifty years from now, schoolchildren in India and China be taught that America is their friend that did all it could to help them become rich. It is very important that they not be taught that America wishes that they were still barefoot and powerless, and has done all it can to keep them so.
In order to achieve our goals as both friend and rival, however, I think we must proceed from a position of strength and influence. In some regards, the Bush administration is greatly undermining our ability to accomplish this as I will examine below. I do not mean to suggest that the Bush administration is not doing anything right vis a vis China and foreign relations in general. It is just that this piece will focus on the disfunctional areas that could be improved upon since cheerleading would not be as constructive.

About Those IOUs....

According to various estimates, the Chinese government currently holds approximately $400-600 billion worth of US Treasury bonds and other dollar-based investments. From
Forbes magazine:

China's has the world's second-largest foreign currency reserves after Japan, with the equivalent of nearly US$610 billion (euro470 billion) at the end of 2004....The Chinese government won't disclose the composition of its foreign reserves, but acknowledges that most are in U.S. Treasury bills and other dollar assets.
The increasingly reckless borrowing, spending, and most importantly, tax-cutting by the Bush administration has spiked the current US account deficit and sent our government ever abroad in search of investors to purchase our bonds and finance our spending habits. In so doing, the Bush administration has helped to provide China (amongst other nations) with considerable leverage to be applied in any and all conflicts and disagreements. For example, if China were to sell off their dollar assets and Treasury bonds, they would send the value of the dollar tumbling. Similarly, without their steady stream of capital, the US would lose a lucrative supply of money needed to finance our debt and account deficits. If the spigot were turned off, combined with a plummeting dollar and subsequent rise in interest rates from a sell-off, our economy would be sent into a dizzying free-fall. (Brad Setser has some more wonkish nuts and bolts if you prefer) .

Contrary to Vice President Cheney's erroneous assertion, deficits do matter, and more than just as an issue of economic stability. They are now a matter of national security, and the profligate spending and record high deficits have compromised our ability to make clear, unfettered decisions on the international stage. The counterargument is that China would never wage economic warfare because they rely on US markets and raw materials for their own economic well being. This is true to some extent, but consider this, if the struggle for oil or the status of Taiwan were to reach a fevered pitch, China could now choose three courses of action where before there were only two: 1) do nothing; 2) start a hot war; or 3) torpedo the US economy. Option 3 will have serious negative consequences for China, but option 2 would be clearly worse, and if pushed far enough option 1 wouldn't really be an option for a regime that cannot afford to look impotent lest they lose control of their own sizable populace. So you see, option 3 might end up being the most attractive from the list of painful choices. It would, of course, precipitate a massive crisis for the US.

The only response from the Bush administration has been more of the same. The recent budget proposals wending their way through both houses of Congress, under the guidance of the respective Republican leaders, actually increase deficits. That's right, the
President's plan to cut the deficit in half over the next decade remarkably translates to higher deficits. It's not that there are no spending cuts, because there are - to the tune of $200 billion in domestic discretionary spending and $26 billion more in entitlements over the next five years. The catch is, the same budget includes so many more tax cuts aimed at the wealthiest Americans, that it offsets the savings and then exceeds them. In one example of bitter irony, taxes were cut on the Social Security benefits that the wealthiest tax bracket receives. At a time when the President is trying to sell the public on a crisis in Social Security, he is carving out more of the cherished entitlement's funding to give away to the most fortunate Americans who do not rely on it for survival and dignity in old age.

But the bottom line is this: the GOP continues to jeopardize our economic security by writing a mountain of IOUs to countries that might not have our best interest at heart in perpetuity. With China, that is probably a serious understatement. At the very least, China's potential economic warfare must now enter into the decision making process when determining policy, and that is like entering a boxing match with your jabbing hand tied behind your back. The only way out of this mess is to repeal President Bush's tax cuts, at least those that accrue to the benefit of the wealthiest Americans (which is most of them). But at a bare minimum, we must not pass more revenue draining tax cuts at a time when getting our financial house in order is a pressing concern.

Gratuitous Inflammation

In seeking to counter China when necessary, the US will rely in large part on the international community that has, unfortunately, been alienated by the Bush administration over the past four years. Without the cooperation of allies and multilateral organizations, containing China's desire for Taiwan and managing any other potential conflict will be considerably more difficult - as was illustrated by Europe's misguided flirtation with lifting the arms embargo on China.

There are signs, especially in
some key appointments (via Belgravia Dispatch), that the Bush administration is steering a course toward a smarter stance on multilateralism. In addition, the rhetoric used and gestures made, including the recent mending fences tour of Europe, has signaled a shift in attitude. But those alterations in tone must be backed up with substance or they will be dismissed as window dressing for the same old policies. This means that the Bush team should get around to the long overdue, and promised, alternative to Kyoto, as well as other matters that are of keen interest to our allies.

And while we're on the topic of improving our image and relationship with the world, it would be wise to avoid unnecessary provocation like appointing a man who thinks
the UN should cease to exist to the role of ambassador to the UN. The John Bolton nod was a gratuitous inflammation of relations with our allies - who are already feeling the strain from their own populations' growing disenchantment with America. As I've argued before, it is one thing to gain the cooperation of a head of state, but if that leader presides in a democracy, the underlying population must be wooed as well or he/she will go the way of Aznar in Spain. Karen Hughes, if you're listening, our efforts must go beyond spin and publicity. We must engage the world.

And since this post is about China, I would be remiss if I failed to mention that Bolton has often played the role of brash "
provocateur" in relation to the Taiwan issue - which in itself calls into question the wisdom of making him our man at the UN at a time when Chinese relations require a deft touch.

Overall, the Bush administration must make strengthening alliances and improving our standing in international bodies an important goal for the next four years, because this type of collective mindset will be an important asset in the effort to constructively affect China's progress toward becoming a world power. To do this, the Bush team must rein in the hostility to international bodies that runs rampant in certain circles - especially their nominee to the top international body.

Preemptive Alternatives

Because any conflict with China, military or economic, would be so costly, it pays to preemptively defuse areas of tension. In pursuit of this, the Bush administration should devote time and resources to the cultivation of alternative energies and sources of power. I take comfort at the budding
bipartisan alliances (via LAT) that are sprouting up around the issues of conservation and alternative fuels. Even some prominent neo-cons are going green, arguing that we must wean ourselves off of Middle East oil since our voracious appetite in this regard is supporting corrupt regimes and forcing us to coddle dictators for stability's sake. I would call that a win-win for America.

Our moving in this new direction, long overdue for a number of reasons, would also stave off a future showdown with China over the increasingly scarce resource. As
jonny pointed out in comments to Part I, China is already taking measures in an effort to stabilize their need for oil, and mitigate the environmental impact of burning fossil fuels.
Dependency on foreign oil, in [government official] Yang's opinion, inevitably leads to war. Every official I interview makes the same point. Yang uses a pun to summarize the leadership's view: "If you pump for oil, you have to fight wars for it." (Pump and fight sound similar in Mandarin.)...

In the face of an oil crisis, the government is embracing fuel efficiency and alternative energy resources. In every scenario, oil imports will rise, but the hope is that new technologies and conservation will minimize the rate of growth. The plan is to replace 10 percent of China's energy supply with renewable sources by 2010, 12 percent by 2020. (Today, less than 1 percent comes from renewables.) "We're not saying we can reduce consumption," he cautions, "but we can reduce the increase and win some time."
In 2003, China enacted fuel efficiency standards for automobiles that were even more stringent than our own. This sent Detroit into a bit of a panic about what to do: the cost of two separate production lines, one for the US markets and one for China's, would be prohibitively high, but they don't want to lose out on Chinese markets. This might result in China pushing us toward a more sensible approach to fuel efficiency, at least in some models (writing that sentence makes me slightly ashamed at our lack of leadership in this area).

The Bush administration, despite its ties to the oil industry, should not be content to let China blaze a trail toward greater fuel autonomy and environmental health while we are left in the smoggy dust clinging to outmoded methods. It's not just an environmental issue anymore. Now it is one of national security.

In closing, as stated above, I think there are three areas that the Bush administration is neglecting that are weakening our position in terms of China at a time when China's rapid growth and expansion are rendering the "unipolar moment" a historical anomaly. We should continue the detente started under Nixon, and join China as a partner to the greatest extent possible given the realities in Taiwan and in terms of competition for economic spoils and natural resources. But no matter our strategy, be it friend or adversary, we must take steps to strengthen our position by repealing the dangerous tax cuts that are leaving our nation's economy vulnerable, repairing in a meaningful way the frayed alliances with Europe and abroad, and leading, not following, in the area of alternative fuels and energy independence.

(As a final note, if the reader is interested since this is the China-fest, I wrote a prior two part series on China, its relationship with Wal-Mart, and the related impact on our economy
here and here).

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