China’s Bad Bet Against America

China’s Bad
Bet Against America

By Joseph S. Nye,
Jr.

Joseph S. Nye, Jr.,
is Chairman of the Pacific Forum CSIS Board of Governors. He is a former
assistant US secretary of defense, and professor at Harvard University and
author of “The Powers to Lead.” This article originally appeared in the
Korean
Times March 14, 2010. F
or more on Dr. Nye’s
views on China go to
http://www.asiainreview.com/asia-in-review.html. Dr. Nye’s broadcast in Asia in Review was
recorded from Pacific Forum CSIS’ Annual Board of Governors Dinner, Feb. 23,
2010.

 

China-US relations
are, once again, in a downswing. China objected to President Barack Obama’s
receiving the Dalai Lama in the White House, as well as to the administration’s
arms sales to Taiwan. There was ample precedent for both decisions, but some
Chinese leaders expected Obama to be more sensitive to what China sees as its
“core interests” in national unity.

Things were not
supposed to turn out this way. A year ago, the Obama administration made major
efforts to reach out to China. Secretary of State Hillary Clinton referred to
“being in the same boat,” and that China and the United States would “rise and
fall together.” Treasury Secretary Timothy Geithner said he spent more time
consulting his Chinese counterparts than those in any other country. Some
observers even referred to a US-Chinese “G2” that would manage the world
economy.

The G2 idea was
always foolish. Europe has a larger economy than both the US and China, and
Japan’s economy is currently about the same size as China’s. Their participation
in the solution of global problems will be essential. Nonetheless, growing
US-Chinese cooperation within the G20 last year was a positive sign of bilateral
as well as multilateral cooperation.

Whatever the concerns
regarding the recent events related to the Dalai Lama and Taiwan, it is
important to note that the deterioration in US-Chinese relations began
beforehand.

Many US congressmen,
for example, complain that American jobs are being destroyed by China’s
intervention in currency markets to maintain an artificially low value for the
yuan.

A second issue was
China’s decision not to cooperate at the United Nations conference on global
climate change in Copenhagen last December. Not only did China resist measures
that had been under negotiation for the preceding year, but Prime Minister Wen
Jiabao’s decision to send a low-level official to meet with and point a finger
at Obama was downright insulting.

China behaved
similarly when the five permanent members of the U.N. Security Council (plus
Germany) met to discuss sanctions against Iran for violations of its obligations
to the International Atomic Energy Agency. Again, China sent a low-ranking
official.

What happened to
those promising early signs of cooperation? Two reasons for the change in
Chinese behavior – seemingly inconsistent at first glance, but in fact perhaps
mutually reinforcing – seem possible.

First, a political
transition is expected in 2012, and, in a period of rising nationalism, no
Chinese leader wants to look softer than his rivals. This helps to explain the
recent crackdowns in Tibet and Xingjian, as well as the detention of human
rights lawyers.

In addition, China
may be approaching an economic transition. Some Chinese argue that anything less
than 8 percent growth would be inadequate to ensure sufficient job creation and
fend off social instability. But, as America’s savings rate begins to rise,
China’s export-led growth model, which has promoted employment in China at the
cost of global trade imbalances, may no longer be possible. If China responds to
entreaties to revalue the yuan, it may need to look tough on other issues to
appease nationalist sentiment.

The second cause of
China’s recent behavior could be hubris and overconfidence. China is justly
proud of its success in emerging from the world recession with a high rate of
economic growth. It blames the US for producing the recession, and now holds
some $2 trillion in foreign-exchange reserves.

Many Chinese believe
that this represents a shift in the global balance of power, and that China
should be less deferential to other countries, including the US Certain Chinese
scholars are now writing about the decline of the US, with one identifying the
year 2000 as the peak of US power.

This overconfidence
in foreign policy, combined with insecurity in domestic affairs, may combine to
explain the change in Chinese behavior in the latter part of 2009. If so, China
is making a serious miscalculation.

First, the US is not
in decline. Americans and others have been predicting decline regularly over the
years: after the Soviets launched Sputnik in 1957; again when Nixon closed the
gold window in 1971; and when the US rust-belt economy seemed to be overtaken by
Japanese manufacturers in the 1980s.

But when one looks at
the underlying strength of the US economy, it is not surprising that the World
Economic Forum ranks the US second (just behind Switzerland) among the most
competitive, while China ranks some 30 places below.

Second, the fact that
China holds so many dollars is not a true source of power, because the
interdependence in the economic relationship is symmetrical. True, if China
dumped its dollars on world markets, it could bring the US economy to its knees,
but in doing so it would bring itself to its ankles. China would not only lose
the value of its dollar reserves, but would suffer major unemployment. When
interdependence is balanced, it does not constitute a source of
power.

Third, despite
Chinese complaints, the dollar is likely to remain the major global reserve
currency, owing to the depth and breadth of US capital markets, which China
cannot match without making the yuan fully convertible and reforming its banking
system.

Finally, China has
miscalculated by violating the wisdom of Deng Xiaoping, who advised that China
should proceed cautiously and “keep its light under a
basket.”

As a senior Asian
statesman told me recently, Deng would never have made this mistake. If Deng
were in charge today, he would lead China back to the cooperative relations with
the US that marked early 2009.

© Project
Syndicate (www.project-syndicate.org).

 

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