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Why America and China cannot afford to fall out
By Martin Wolf
Published: October 8 2003 5:00 | Last Updated: October 8 2003 5:00
Will the US view China as the new Japan, the new Soviet Union, or both? And will China see the US as a supporter or as an opponent? The world's fate may depend on the answers to these questions.
In the late 19th and early 20th centuries, the failure to cope with the rise of Germany, Japan and the US led to two world wars and an economic calamity. After the second world war, the US confronted a communist superpower, the Soviet Union, and the rapid rise of its new ally, Japan. While the first conflict was much the more dangerous, some Americans worried as much about the second. In 1991, a book entitled The Coming War with Japan became a disturbing successor to Ezra Vogel's 1979 hit, Japan as Number One.
China seems suited to a future role as public enemy number one. It is a dictatorship and ostensibly a communist one. It has the world's largest population, growing military capacity and the world's most dynamic economy. According to Goldman Sachs, China's gross domestic product, in dollars, may surpass that of the US in 2041*. It is close to displacing Japan as the world's third largest exporter. In the 12 months to July 2003, the US ran a bilateral trade deficit with China of $116bn (£69bn), while its deficit with Japan was just $69bn (see charts). China also has the world's second largest foreign currency reserves.
September 11 2001 turned a country regarded by many Americans as a "strategic competitor" into a partner in the war against terror. In its National Security Strategy of September 2002, the White House stated: "Today the world's great powers find [themselves] on the same side - united by common dangers of terrorist violence and chaos." But this could prove to be just an interlude. Already, Congress is responding to complaints about China's rising bilateral surplus and undervalued currency. Further ahead, geopolitical conflict could readily return, over Taiwan, North Korea or supremacy in east Asia.
Yet these threats are manageable. To see this, we need to distinguish the two aspects. Economics is a positive-sum game: everybody can become richer together (unless resource constraints limit growth), something that is too often misunderstood. Political power is a zero-sum game, since only one country can be the most powerful. But outright conflict is almost always worse than co-operation.
How then is this potential for friction to be managed? The answer is to keep a firm grasp of shared interests. In a world of economically interdependent, nuclear-armed great powers, 19th-century approaches to conflict and 18th-century attitudes to commerce are potentially ruinous. As the status quo power, the US needs to demonstrate that it internalises the principle of mutually beneficial management of the world's economy and security.
Unfortunately, this may well not happen. The Bush administration has stressed its desire to "build and maintain our defences beyond challenge". To do so, the US must "dissuade future military competition". Yet the US also warns that "in pursuing advanced military capabilities that can threaten its neighbours in the Asia-Pacific region, China is following an outdated path that, in the end, will hamper its own pursuit of national greatness". In other words: "Do as we say, not as we do."
The Chinese will believe military superiority is far from outdated if the US is determined to retain it. It is also plausible that China will possess the resources to match US military spending by the middle of the 21st century, though it is unlikely to match its technological sophistication even by that date.
The US will find it easy to sustain overwhelming military superiority in the medium term. But its doctrine is likely to generate an arms race as soon as China begins to be able to match its spending. Since China is not under the sway of an ideology aimed at global domination and does not need more territory, the US should prefer accommodation to such a race.
Now turn to the economics. China's rapid economic rise is certain to exacerbate tensions, as Japan's did. In the case of the latter country, this was partly because of "the bow wave effect", created by the speed of its advance. But it was also because of the widespread view that Japan limited imports of competitive products and inward direct investment by sundry underhand means. It broke the spirit, if not the letter, of the global economic rules.
Both worries are relevant to China. Its growth is already creating a sizeable bow wave effect. Moreover, if it was easy to accuse Japan of unfair trading practices, how much easier would it be to accuse China, with its semi-reformed economy, high state ownership and defective legal system, of wilful failure to abide by the terms of its membership of the World Trade Organisation?
Yet in economics, too, mutual accommodation is the right way ahead. Already, in important ways, China has departed from Japanese mercantilism. In particular, it has been far more welcoming to inward foreign direct investment: in 2002, the stock of FDI in Japan was only $60bn, compared with $448bn in China. Moreover, while China has a huge trade surplus with the US, its overall trade is not so far from balance: in the 12 months to April 2003, its overall surplus was $36bn. According to the International Monetary Fund, its current account surplus this year will be only some $19bn. Meanwhile, the Americans must remember that their current account deficit reflects the excess of domestic spending over output. Equally, it should recall that bashing Japan was largely a waste of time. China-bashing is likely to prove still more counter-productive.
Friction between the two powers is inevitable. But it can also be managed. While making clear to China its points of disagreement over human rights, democracy and economic reform, the US must also engage China ever more closely in management of the global economy and security. To do so, it must convince China that it does not view engagement as a zero-sum game. Shared interests in peace and prosperity are vastly more important than the reasons for conflict. As long as that remains understood, on both sides, the two countries should manage to live together, however uneasily.
* Dreaming with BRICs: The Path to 2050, Global Economics Paper No 99, October 1 2003 martin.wolf@ft.com
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