Published September 14 2005 20:34 – Copyright The Financial Times
Ours is the second era of economic globalisation since the dawn of the industrial revolution. The first began in the second half of the 19th century and ended with a series of political and economic disasters in the first half of the 20th. If such calamities are to be avoided this time, much will depend on relations between the US and a rising China. These two very different countries will have to co-operate closely in the decades, indeed centuries, to come.
What are the chances of co-operative and harmonious relations, as pledged this week by their presidents? A start to the answer is that their similarities make the two powers natural rivals, while their differences make mutual understanding hard.
Both are nationalist and both have either fought (or are prepared to fight) to prevent secession. Historically, China was as proud of its cultural supremacy as the US is today. Their differences are no less striking: the US is a creature of the European enlightenment; contemporary China emerges from an ancient agrarian empire. US government is constitutional; China’s is autocratic. Americans have rights; the Chinese have duties. Americans worship freedom; the Chinese cherish stability. American governments are accountable to the people; Chinese governments are responsible for them.
The precedents are also ominous. In the late 19th century, the rise of four new powers – the US, Germany, Russia and Japan – shattered global stability. The results included two world wars, the communist revolutions in Russia (towards the end of the first world war) and in China (in the aftermath of the second world war) and, finally, the cold war. Only with the fall of the Soviet Union did the US emerge as victor in a struggle that had lasted a century.
Now the US confronts what many Americans view as a new challenger to its primacy. Today, China’s standard of living is still about one-quarter of South Korea’s. Yet suppose that China were to attain South Korea’s gross domestic product per head, at purchasing power parity (PPP, or common international prices) relative to the US. Then its economy would be almost twice as large as that of the US, at PPP, and bigger even at market prices. At the relative rates of economic growth of the past quarter of a century, it would take roughly three decades for China to achieve the same GDP per head, relative to the US, as South Korea has today.
Such an advance by China is far from a certainty, since it would require substantial further reform. But it seems perfectly possible. The US would retain a substantially higher standard of living and a more advanced technology. Nevertheless, a profound change would have occurred in the balance of global economic power and so, inevitably, of military power as well.
Some analysts take the view that such a transformation in relative power must lead to conflict. A well-known contemporary proponent of this “realist” position is John Mearsheimer of Chicago University. He argues that the US “will seek to contain China and ultimately weaken it to the point where it is no longer capable of dominating Asia. In essence, the US is likely to behave towards China much the same way it behaved towards the Soviet Union in the Cold War.”*
This bleak view suggests that the best one can hope for is a cold peace between the present and future superpowers. At worst, there could be military conflict. Fortunately, in the contemporary world, the cost-benefit assessment of conflict looks very different from that of a century ago, for three reasons. These are “mutually assured destruction”, the “capitalist peace” and the “democratic peace”.
The second world war, the most destructive in history, cost more than 50m lives. The next war among great powers would cost hundreds of millions, if not billions, of lives. While there have been many civil wars and conflicts since then, no direct clash between great powers has occurred since the Korean war. The two superpowers fought the cold war by proxy. The struggle ended peacefully, with the implosion of one of the adversaries.
The huge increase in the cost of war is not, however, the only reason to avoid it at all costs. Neither additional territory nor people nor resources bring prosperity. Instead, the route to wealth is the development of markets, investment in human and physical capital and openness to international trade and foreign direct investment.
As Adam Smith, the Scottish founding father of economics, argued in the 18th century, in a world of liberal trade empires are not merely unnecessary but burdensome. Peaceful commerce was the beneficial alternative. This insight was the foundation of the brilliant US diplomacy that created the postwar international economic order.
The experience of Chinese people in the past half-century has been a superb demonstration of these propositions. There are four economies in which Chinese make up the majority of the population. These are mainland China, with a population of 1.3bn in 2002; Taiwan, with 22m; Hong Kong, with 7m; and Singapore, with 4m. Average standards of living of the three small Chinese economies are between five and six times as high as on the mainland.
Evidently, small size is no obstacle to prosperity. Hard-working and ingenious people can secure the resources they need through trade. Capitalism is not, as Lenin declared, a reason for indulging in the fantasies of imperial plunder that helped cause the first world war, but an alternative to it.
Finally, as Immanuel Kant argued 210 years ago, republics (by which he meant constitutional or “liberal” democracies) are less likely to choose war, because those who bear the costs – the ordinary people – are also the ones who decide whether to start one. Democracies, being law-bound, can also sign treaties that are credibly binding on their governments. They can, as a result, create international institutions and procedures, to manage conflict.
Here, then, are powerful reasons why wars among great powers should vanish: they are costly, economically ruinous and inimical to the interests of the majority of the population.
As Erik Weede, the German sociologist, argued in a recent survey, evidence in support of the capitalist and democratic peace is strong. The achievement of prosperity through liberal trade and open markets is twice-blessed: not only is it a direct source of more peaceful relations but it is also supportive of peace indirectly, since prosperous countries are more likely to be democratic.**
What does this say about the implications of China’s rise? The most important answer is that communist China has imported the market. As Zheng Bijian of the China Reform Forum notes: “The most significant strategic choice the Chinese have made was to embrace economic globalisation rather than detach themselves from it.”***
By 2003, the ratio of China’s stock of inward investment to GDP was 35 per cent – against 8 per cent in Korea, 5 per cent in India and just 2 per cent in Japan – while 57 per cent of China’s exports came from foreign-invested enterprises in 2004. China is also already the world’s third largest trading nation. Last year, the ratio of trade to China’s GDP, at market prices, reached 70 per cent, much the same as in South Korea. China’s openness to trade is far greater than that of any other large economy: the US and Japan, for example, have ratios of trade to GDP that are below 25 per cent.
Even so, China is still far from possessing a law-governed, market economy. Government-owned banks continue to dominate the economy, while credit still goes preferentially to often moribund state-owned enterprises. Even though the Communist party has recognised the legitimacy of private property, the effectiveness of this guarantee is highly questionable.
Politically, China remains an autocracy. As Freedom House, an independent monitoring organisation, says: “Chinese citizens cannot change their government democratically or express their opposition to its policies. The CCP [Chinese Communist party] holds all political power, and party members hold almost all top national and local government, police, and military posts.” This institute ranks China in its second lowest category, along with Belarus, Uzbekistan, Vietnam and Zimbabwe.
The World Bank’s comprehensive governance indicators flesh out this depressing picture. These place countries in percentile rankings (with the lowest closest to the bottom). In terms of democratic “voice and accountability”, China was as low as the eighth percentile in 2004. In regulatory quality it was at the top of the 35th percentile. In “control over corruption” China was in the 40th percentile. In “rule of law” it was in the 41st percentile. Worse, the World Bank shows a marked deterioration in quality of governance in recent years. This is particularly true for control over corruption, which has fallen from the 61st percentile in 1998.
What then are the prospects for either the capitalist or the democratic peace with today’s resurgent China? The positive part of the answer is that China’s engagement with the world economy is creating a rich network of mutually supportive interests. A breakdown would impose huge economic costs on both sides, but particularly on China. At the same time, China remains a repressive autocracy presiding over a defective market economy. Under Mao Zedong, its regime inflicted horrors on the Chinese people, particularly in the “great leap forward” and the “cultural revolution”.
Today, the Communist party ignores this dreadful past. Instead, it is promoting market-led development and is transforming the government into a technocracy. But it is also prepared to cultivate nationalist sentiment, directed particularly at Taiwan and Japan. Meanwhile, rapid development is bringing with it the upheavals of mass industrialisation and urbanisation. These may make appeals to nationalism still more attractive, as they did in late 19th-century Europe.
Peaceful and co-operative relations are perfectly possible, therefore. But they are not inevitable. Much will depend on China’s own development. But just as much will depend on how the rest of the world and, above all, the US behaves. Will it create and sustain an international environment that supports China’s rising prosperity and manages potential points of friction?
China’s growth depends heavily on exploiting opportunities for trade and investment. Fortunately, a global trading system, supervised by the World Trade Organisation (of which China has also been a member since 2001) already exists. Apart from its role in promoting liberalisation, the WTO has the invaluable function of turning what would otherwise be conflicts among great powers into questions of law. Maintaining a healthy WTO is as important for China as it is for the US. That is why they share a strong interest in a successful conclusion of the Doha round of trade negotiations.
No comparable norms and rules have governed the international monetary system since the breakdown of the Bretton Woods system of fixed exchange rates in 1971. What some analysts think of as a second Bretton Woods exchange rate regime has grown up, based on the link between the Chinese renminbi and the US dollar. But this is a purely informal arrangement.
In July, China moved its exchange rate anchor from the dollar to a currency basket. It also accepted a minuscule appreciation against the dollar. Yet as the US current account deficit explodes towards 7 per cent of GDP, the tensions over trade will grow, with dangerous consequences both for trade and the wider political relationship.
It is wrong to argue, as some Chinese do, that low US savings alone are at fault. The US cannot adjust its external balance, on its own, without precipitating a global recession. Global macroeconomic co-operation will be needed, to which China can – and must – contribute through currency appreciation and an expansion of domestic demand.
Now turn from economics to the geopolitics of territory and security. Neither the US nor China is geographically expansionist today, though both have been expansionist in the past. Potential points of friction exist, however: Taiwan is one and North Korea is another.
Yet the Chinese authorities must be aware of their strategic vulnerability. Distrustful neighbours – India, Japan, Russia, South Korea and Vietnam – encircle their country, while the US, in effect a giant island, is free from this constraint. China could bring these neighbours into a classic balance-of-power coalition against it if it behaved in an unduly aggressive manner. A Chinese invasion of Taiwan would surely have that result even if it did not lead to war against the US. It is overwhelmingly in China’s interest to assuage its neighbours’ concerns, therefore, rather than exacerbate them.
On terrorism by non-state actors, the two powers will always be on the same side. This leaves the competition for resources and, above all, for energy. If the price of oil were to go still higher, China and the US might be tempted to use military power to secure resources and so increase their perceived energy security. That would be immensely dangerous. Much the more sensible response would be to increase energy efficiency, to co-operate in developing energy technologies and to trade for resources in the world market rather than attempt to secure them by force.
Chart sources: IMF; World Bank; Thomson Datastream
As George W.?Bush and Hu Jintao met in New York on Tuesday night, what stretched before them was a very long-term relationship between two increasingly equal powers. China’s economy may exceed the US economy in size within a generation. Its military is certain to become increasingly powerful.
In the longer term, however, their populations may come closer to balance. When the US became independent, almost 230 years ago, China’s population was more than 100 times as big. Today, it is just over four times as big. By the 22nd century, the US population may be half of China’s, as the latter’s birth rate falls as low as those of Japan or Hong Kong, while the US continues to absorb high levels of immigration.
Relations between the two powers will never be warm. But they could be workmanlike. China is not yet a law-governed capitalist country, let alone a democracy. But it is, above all, busily importing the market. It should also approach more closely to democracy as its population becomes more prosperous, sophisticated, urbanised and demanding. It is in US interests to promote this peaceful development. Equally, the phase of US unilateral hubris must be coming to an end, as the limits of its power become ever more evident. A country that cannot control Iraq can hardly remake the globe, on its own.
Both powers should see the benefits of co-operation rather than conflict. Both should also recognise the advantages of strengthening multilateral institutions that diffuse great-power conflict and give the rest of the world a stake and a say in their decisions. Provided their leaders recognise the need to sustain peace and co-operation, they should be able to manage their relations. We must hope they do so. The fate of the world depends heavily on it.
*John J. Mearsheimer, Better be Godzilla than Bambi. Foreign Policy, January/February 2005
>>**Balance of Power, Globalization and the Capitalist Peace. Ideas on Liberty 4 (Berlin, liberal Verlag, 2005)
>>***Zheng Bijian, China’s “peaceful rise” to Great-Power Status. Foreign Affairs, September/October 2005