Global Policy Forum

By Jan Fichtner*

In the middle of the 15th century China commissioned a giant fleet comprising the largest wooden ships ever made by man – nine-masted "Treasure ships". Commanding Admiral Zheng He expanded Chinese influence beyond the Strait of Malacca into the Indian Ocean and led expeditions at least as far as East Africa. China at that time clearly constituted what we would nowadays term a "Great Power". In the centuries that followed, China's focus turned inwards and foreign powers from the Mongols to the Japanese invaded and weakened the "Middle Kingdom".

Nearly 600 years later China is once again incrementally increasing its power in the international arena by drawing on its increased economic heft. Since the Communist Party under Deng Xiaoping initiated a process of economic reforms in the late 1970s, the Chinese economy has grown with an annual average of over nine percent, the fastest growth rate for a major economy in recorded history. Measured by official exchange rates, China at present is the fourth largest economy in the world – having superseded Italy, France and Great Britain in the last two years. China has also become the third largest trading nation after the US and Germany. If current growth rates were to be sustained, China would overtake Germany, Japan and the US by the middle of this century to become the largest economy in the world (Nye, 2006).

The position of China

Although this might look very impressive at first sight, it has to be noted that China will have to face enormous challenges in order to rise to the pinnacle of the international economic system. The Chinese environment is already severely polluted, several hundred million people in rural China lack access to clean drinking water. Desertification is expanding drastically in the northern and western parts of the country. The inequalities within the society are growing steadily – between the rich and the poor on the one hand and between the thriving coastal provinces and the vast "hinterland" on the other hand (Morrison, 2006).

China's banking system faces major problems, because the government uses it to keep money-losing state-owned enterprises afloat. In 2002 the level of non-performing loans held by Chinese banks was estimated to be equal to 43% of China's Gross Domestic Product (GDP) (Morrison, 2006). Another huge problem is the ailing state-owned enterprises themselves. Most of them are not competitive on the world market, but nevertheless employ a great number of workers. If closed down, millions would be added to the large pool of unemployed people. The growing number of migrant workers leaving their rural communities – who are not entitled to permanent residency in the cities – already amounts to between 100 and 200 million individuals (Bezlova, 2003). Furthermore, corruption among local and provincial cadres of the Communist Party is high. This is causing a rising number of protests by peasants and workers against land expropriation and layoffs, both often perceived as unfair. The social fabric in China is thin and every year millions of young people have to be integrated in the labor market. Economic liberties are steadily increasing, while means of political participation have been frozen since the bloody suppression of the Tiananmen Square protests in 1989.

Even if the Chinese leadership should prove capable of steering a course between Scylla and Charybdis, economic history shows that – as its economy matures – Chinese growth rates are likely to decelerate. Many analysts depicting China as the future powerhouse are committing the same error made by numerous observers in the 1980s with regard to Japan. They extrapolate current growth rates into the future and neglect taking into account contingencies, such as economic crises, political unrest, major epidemics, fossil fuel shortages or military clashes with foreign powers. Thus, it remains to be seen whether current GDP growth rates of more than nine percent can be sustained in the coming decades. One thing is clear: the Chinese leadership is diligently working on its "peaceful rise" (Bijian, 2005) back onto the world stage – at least as a regional actor – where the "Middle Kingdom" had been performing for the better part of the last three millennia.

The position of the United States

At the moment the unrivalled protagonist on this grand stage is the United States of America. Ever since the demise of its peer competitor – the Soviet Union – in 1989 the USA has enjoyed unparalleled preponderance in international affairs. The power of the US, especially its awe-inspiring military capabilities, outstrips that of other major countries by such a wide margin that an academic discourse arose of whether the United States constitutes an empire.(1) Most often cited as evidence for the self-perceived superiority of the US associated with imperial powers are the frequent use of the military to enforce its global interests and the repudiation of international law (Bacevich, 2002).

This "empire", however, is not flawless. The US still constitutes the largest economy in the world by far, but the foundations on which this behemoth rests increasingly show signs of cracks. The ongoing occupations of Afghanistan and Iraq have strained the armed forces. Some observers regard this as the beginning of an "imperial overstretch".(2) The US economy displays precarious imbalances. Consumer debt is at record highs. The budget deficit and the current-account deficit are at all-time peaks and keep rising. Many analysts believe that prices in the real-estate markets in the United States are seriously inflated and that these "bubbles" eventually have to deflate or might even burst. (White, 2006) All these imbalances could lead to a dramatic fall of the dollar, impairing its role as the de-facto world currency.

China needs very high economic growth rates to sustain its rise. Therefore, cooperation(3) with the current arbiter of international relations – the USA – is imperative. But economic growth is of paramount importance to the United States as well. Economic vigor is vital if Washington wants to remain at the apogee of the international system. Thus both countries have incentives to strengthen their economic relations.

Economic symbiosis

China is a very open economy and depends on trade for half of its GDP (Eland, 2005). In 2004, China surpassed Japan to become the world's third largest trading nation – after the US and Germany. In the same year, nearly one third of all Chinese exports went to the United States, making it the biggest export market for China by far (Morrison, 2006). Wal-Mart alone, treated as an economy, would rank as the sixth largest export market of China, just after Germany (Schafer, 2005).

These massively growing exports are enabled by huge inflows of Foreign Direct Investment (FDI) into China.(4) Multinational Corporations (MNCs) from the USA, the European Union, Japan and Taiwan are the main investors in China. These MNCs mainly construct export-oriented factories drawing on the very low wages – probably the biggest competitive advantage China enjoys in the global economy. From 1979 to 2004 the United States was the second biggest foreign investor in the Chinese economy with cumulative FDI of close to USD 50 billion (Morrison, 2006).

China has become the second biggest origin of imports for the US after Canada. The United States benefits from the growing flows of low-cost imports from China because they keep inflation low and allow consumers to buy more products for less money as the case of Wal-Mart suggests. Consumer spending accounts for a staggering two thirds of US GDP and the economic boom since 2002 is in large parts fueled by elevated levels of private spending. In fact, households spend so much that they have stopped saving; in 2005 the savings rate turned negative for the first time since 1933 (Crutsinger, 2006).

However, the real degree of economic symbiosis between the two countries only becomes visible when the foreign exchange markets are taken into account as well. China seeks to avoid volatile exchange rates of its currency, the renminbi. The leadership believes that the financial system needs a higher level of sophistication to withstand the powerful forces a floating rate would entail. Therefore, the renminbi was pegged to the dollar in 1994. Only in 2005, after heavy pressure by the US, China shifted the peg to a basket of currencies and allowed some fluctuation in a move to avoid criticism. The exact composition of this basket was not revealed, as Beijing wanted to keep some room to maneuver. Although China probably added the euro, the yen and other currencies, the US dollar most likely still constitutes the biggest share in the basket by far (Morrison, 2006).

In order to maintain a certain rate vis-á-vis other currencies, namely the dollar, the Bank of China has to intervene in the currency markets. Every month, China buys billions of US dollars – in treasuries and other financial instruments – for that purpose. At the end of 2005 China had accumulated more than USD800 billion in foreign reserves. China has already surpassed Japan as the single largest holder of currency reserves on the planet. Analysts expect that in 2006 the Bank of China will cross the mark of accumulating one trillion US dollars in reserves (Avery, 2006).

Such massive buying of dollars has helped the US to finance its growing current-account deficit and enabled the Federal Reserve to keep interest rates at historically low levels. Low interest rates in turn greatly benefited the US economy by making an unprecedented rise in real estate prices in markets all over the US possible. A steep rise in interest rates could wreak havoc with heavily indebted consumers, who have stopped saving and refinanced themselves by (re)mortgaging their inflated real-estate assets. Low interest rates also keep investments in the stock market attractive vis-á-vis bonds. The stock markets are of paramount importance for the US economy as the proportion of the country's wealth invested in stocks is markedly higher than in other countries. Pensions depend to a great degree on the performance of the stock market. Consequences of a steep and prolonged downturn in the stock markets would be very serious for the US economy (Rogoff, 2006).

Geopolitical competition

However, there also exists the other side of the coin, which is rivalry in the political arena. China pursues a strategy of "peaceful rise", which means primarily expanding its economic clout by cooperating with countries in its region and beyond. Although, Beijing continues to expand its influence around the globe; it does so by relying exclusively on peaceful means. Arguably the single largest reason why China is expanding its footprint into regions such as Africa, the Middle East and South America is the quest for resources, especially fossil fuel reserves. China relies on these resources to fuel its economic growth.

Beijing cooperates with states such as Myanmar, Sudan and Iran. This angers Washington because it thwarts its own interests. The US has repeatedly marked Beijing as a threat to stability in Asia because of the recent modernization of China's military. However, the program to modernize China's huge yet outdated army can be better explained by Beijing's wish to contain the many centrifugal forces in China and to field a credible force in regard to Taiwan (Friedman, 2006). Taiwan is seen by Beijing as an integral part of China. A declaration of independence by Taipei probably constitutes the only reason why Beijing would resort to military force. Other countries in Asia perceive China as a benevolent power. Recent polls have shown that the populations of many Asian countries do not feel threatened by China. In fact, many countries hold very positive images of China, while the standing of the US in public opinion has declined (Shambaugh, 2005).

Many Chinese analysts view the extensive deployments of US troops in Asia as an attempt to strategically encircle China. Bases in South Korea, Okinawa, Guam, Diego Garcia and the presence of US troops in Afghanistan and other Central Asian countries form a ring of US military presence along all but China's northern flank.(5) Together with the powerful US naval forces in the waters around China, the US could effectively cut off vital shipments of oil and gas to China. To counter this danger, Beijing has greatly expanded its arsenal of increasingly accurate ballistic missiles, cruise missiles and long-range strike aircraft, which would greatly complicate any US intervention in China's proximity. Beijing also seems to use a "string of pearls" strategy of bases and diplomatic ties along the sea lanes to the Middle-East to secure oil shipments (Gertz, 2005). Military cooperation with Myanmar and the construction of a deep-sea port in Pakistan reaffirm this. The facility currently under construction at Gwadar, close to the Straits of Hormuz, would eventually enable China to transport oil from southern Pakistan to its westernmost province of Xinjiang (Ramachandran, 2005). Furthermore, China is wary of a future construction of a US missile defense shield covering Japan and possibly even Taiwan. The nuclear deal between Washington and New Delhi, struck in early 2005, concerns Beijing as it could lead to the enlistment of India in an initiative to contain China (Shambaugh, 2006).

Washington perceives China as a possible future rival, because it is becoming a "multidimensional" power (Liu, 2006). The Soviet Union only constituted a military threat. Japan, in the 1980s, became a serious economic competitor, but was not a military power. China could eventually become strong in both categories. As officially proclaimed in the 2002 National Security Strategy, the USA will not accept a peer competitor that threatens its predominance (White House, 2002). Ivan Eland argues that the Pentagon and the massive US defense industry know that a threatening country has to be found to legitimate future generations of complex and costly weapons systems: "China, with a rapidly growing economy, a large population, an authoritarian government, and increasing military expenditures, will undoubtedly become the ideal candidate"(Eland, 2006). In fact, some analysts claim that a war with China is inevitable (Kaplan, 2005; Mitton, 2006).

Taiwan, however, is the only issue which could realistically spark a Sino-US conflict. If Taipei were to declare independence – some have claimed the 2008 Beijing Olympics would be the perfect opportunity – the Chinese Anti-Secession Law and the US Taiwan-Relations Act would collide head-on.

Competitive symbiosis

I have argued above that the economies of China and the United States form a symbiotic relationship of mutual stimulation and dependency upon each other. Therefore, neither China nor the US would benefit by such a conflict, but China has much more to lose. A neo-realist mind in Washington – thinking in relative gains, not in absolute ones – could be compelled to risk such a perilous venture as it would obliterate Chinese ascendancy for the foreseeable future.

Geopolitically both countries could collide in the future, as the US basically claims global supremacy and China seeks to rise peacefully to a regional power status. Beijing has embarked on a modest program to modernize its antiquated forces in order to ensure its territorial integrity and to secure vital fossil fuel shipments. The US feels threatened by the eventual rise of a multidimensional power, which could rival its hegemonial standing in some decades time. A latent tension exists between both countries, demonstrated by the 1996 Taiwan Strait Crisis, the aftermath of the 1999 US bombing of the Chinese embassy in Belgrade, and the downed spy plane incident in 2001. During President Hu Jintao's recent visit to Washington, the US leadership symbolically slapped Beijing in the face by allowing a Falun Gong follower to disturb a press conference and by announcing the anthem of the "Republic of China"– which is of course Taiwan (Friedman, 2006).

As shown above, economics is forming strong and mutually beneficial bonds between both countries. China depends on American consumers and US FDI for its economic growth. The US greatly benefits by the giant financial flows emanating from China. As Henry Kissinger has pointed out – using a concise comparison between the western strategic theoretician Carl von Clausewitz and his eastern counterpart Sun Tzu – China is following a strategy of "careful study, patience and the accumulation of nuances" only rarely risking a "winner-take-all showdown" (Kissinger, 2005).

The question it all comes down to in the end is whether Washington would be willing to sacrifice a symbiotic relationship in the economic realm in order to keep its status as the unchallenged hegemonial power in the contemporary system of international relations.

About the Author: Jan Fichtner is a student of the Joint Master of Arts Program in International Relations by the Free University Berlin, the Humboldt University of Berlin, and the University of Potsdam.

Footnotes

(1) See for example (Bachevich, 2002) and (Speck/Sznaider, 2003).
(2) The term is associated with the book „The Rise and Fall of the Great Powers" by Yale historian Paul Kennedy (Kennedy, 1987).
(3) China cooperates with the US in international organizations such as the United Nations or the World Trade Organization. However, due to space constraints, this aspect of Sino-US relations will not be addresses in this article.
(4) The statistics on FDI inflows into China are somehow distorted by the presence of two "gateway-countries" in the top five origins of FDI. Hong Kong (first place) and the British Virgin Islands (fifth place) – a major tax haven – mask the true origin of FDI inflows into the People's Republic by rerouting them from other countries.
(5) In late 2005 a US President visited Mongolia for the first time. This could indicate an expansion of US influence in that region. (Cody, 2006)

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