Navigating America's China Challenge

When he served as Deputy Secretary of the Treasury, Harvard President Lawrence Summers frequently stitched into his opening remarks an excessively hubris-laden assessment of American power. At one such speech, he asserted that the "world has never seen a nation such as the United States that possesses such unrivaled economic might...that the world has never seen a country such as the United States of America that had such a degree of global military power and global reach that a serious rival can not even be imagined."

Summers believed that a more integrated and efficient Europe as well as a rapidly growing China would become high impact players in the future but that neither would rival the U.S. on any serious front for a very long period. Today, just a short six years after Summers' triumphalist commentary, America's current account balance has rocketed from roughly 2.5% of GDP to nearly 7%, or roughly $700 billion a year or about $3,000 per capita, with the fastest growing and most significant part of that imbalance associated with China specifically and Asia more broadly. In contrast, China now possesses nearly $800 billion in currency reserves, has overtaken the United States as the largest trading partner of key American allies Japan and South Korea, is spawning free-trade agreements with global stakeholders at a faster clip than the U.S., has more than 2 million individuals with wealth greater than $40 million each, and is preparing Beijing to show itself off to the world in the 2008 Olympics.

In addition, China is pouring great sums into a modernized and enlarged military force. To give a sense of scale, this newly empowered China has three provinces each larger than the entire population of Germany. The Chinese economy has grown 9% per annum since 1978. Its export growth the last two years has been a hurricane force 35% annually. Equally remarkable, while America is grappling with terrorism-induced security costs and the perception of military overextension, foreign direct investment into China the past two years has surged to 26% annually.

When China was a poor nation, mismanaged under the command economy edicts of Communist leadership, China was largely contained both by the challenges of maintaining internal stability and by an often vicious struggle with the former Soviet Union--at that time a convenient geopolitical assist to U.S. interests.

But today, China--while still managed by nominal Communist leadership--nonetheless is a rapidly developing market economy (or semi-market economy given the fact that non-market decisions still govern a significant portion of China's business sector). The Chinese are well on their way to becoming a richer nation--and one of the most serious and consequential questions facing America and the West is whether China will play by Western rules and abide by the international institutional arrangements that Europe, Japan and the U.S. have established--or, on the other hand, will seek to upend global affairs, refashion global arrangements to better suit its preferences, challenge U.S. hegemony not only in Asia but globally, and as part of its design--attempt to end its decades-old Civil War and forcefully compel Taiwan to submit to Beijing's control.

China has had a problematic few centuries--but it's back. Some used to joke that America fought the Cold War and Japan won. Now it seems that America is fighting the Global War on Terror, and China is winning. It has become an oasis of stability and high growth during a period of security crisis in the U.S. and Europe.

Managing China's rapidly growing pretensions as both a regional and global power is fraught with danger. Transitions such as this often don't go well--as they didn't when Western powers tried to contain the rise of Germany and Japan in the early part of the 20th century--and sewed instead seeds of national resentment.

In China's case, the potential historic grievances and national "chip-on-the-shoulder" attitudes about Western colonial exploitation run far more deep than what Germany or Japan experienced. Thus, historical metaphors should give us some reason to move cautiously and carefully with China and to make sure that we do all that is possible to avoid repeating mistakes that were made in the past. Isolating China has huge costs--but so too does robust embrace. Maintaining balance while incrementally integrating China with the rest of the global system should be among the highest priorities of the U.S.

China is a conundrum in America's future, and there are opposing currents within both American political parties as to the course the nation should go vis-a-vis China. Republicans are divided into several camps. One of these is the Kissinger/Scowcroft realist camp that believes that America must try to deeply embed China in global institutions and manage its emergence as a great power with an unsentimental calculation of economic and military interests that avoids front-on conflict and yields mutual prosperity. Others believe that deep economic integration between China and the U.S.--and fashioning China as a massive example of global middle class development may lay the groundwork for democratic self-determination. Then there is a neoconservative-inspired group led by the likes of William Kristol, Richard Perle, and Frank Gaffney who view such economic development ties between China and the U.S. as appeasement of anti-democratic Communist theology and enrichment of a likely foe and peer competitor against American interests. This wing of the Republican establishment sees collision with China as a near certainty and that America must marshal its resources to prepare for a global struggle against China and its pretensions.

In Democratic circles there is also a deep divide with, on one side, a neoliberal wing of pro-business Democratic Leadership Council types favoring robust economic engagement with China, while on the other, a group that elevates the importance of China subscribing to global norms of human rights protections and democratic choice over economic factors. It is more than ironic that in some causes, House Minority Leader Nancy Pelosi who has chided China on human rights abuses might find herself morally and politically aligned with Senator Sam Brownback or Senator John Kyl who think that America and the West should not reward what they have called a "thug regime" that oppresses its people and seethes at democratic practice and genuine civil society.

Given these realities, what might a roster of policy prescriptions for America look like that take into account both China's potential as a possible menace and threat to American interests--but also the possibility that China may evolve into a nation that does the world great good and which may generate significant wealth and new possibilities for the U.S. Already, for example, China has been a powerhouse in lifting more people out of dollar-a-day poverty than any other nation. China has put a man into outer space and is proving to be an important source for a new generation of original scientific technological innovation.

America's great success with China--which started with Nixon's brave trip there in 1971 and Kissinger's diplomatic genius--is that China's 1.2 billion people have become increasingly integrated into a global system of governance and accountability. This has happened rapidly--and the question is whether China can change at a fast enough pace to adapt to modern global norms--or whether the system will erode or collapse if China fails to make the necessary transitions. China used to be isolated. In the view of this author, we can't go back without a disastrous global convulsion. Alternatively, if we fail to manage our relations with China adequately, the world will pay a heavy price.

So, what to do?

First, we must recognize that America's love-hate, engage-disengage relationship with China is a problem. China is a major nation of consequence--so important to the future welfare of the U.S. and the world that it cannot be cut off completely, not without destroying much of America's economy. That does not require appeasement of Chinese misbehavior or tolerance of reckless objectives. It means that our nations will long be working out deals--and like the former Soviet Union--the smartest way to steady an important relationship is to move that relationship away from binary, on-off, all eggs-in-one-basket politics. We must build deep broad, complex networks of government and civil society interaction. We need robust institutional and people-to-people exchanges, multilateral efforts across all sectors of society. Why? Because if relations get explosive or testy in one sector of the relationship, there are other stabilizers built into the system--and diplomacy can continue to attempt to get most aspects of the relationship right. This can be called a "Shock Absorber" strategy.

This is a relationship characterized by an ascending Chinese "national ego" and a defensive, wary American ego. America needs to rid itself from unhelpful Cold War analogies that could make our experience during the Cold War with the Soviet Union--which had radically different ambitions and pretensions than modern day China--a self-fulfilled "unwanted reality in our future with China." China and the U.S. need to negotiate the terms of China's emergence--and part of America's acquiescence to that rise should be tied to obligations from China for responsible regional and global stewardship. China's key role in forcing North Korea to negotiate about its nuclear weapons program is heartening and should build confidence that China is committed to global stability.

Engage, engage, engage. America's distraction in the Middle East while China prospered has given powerful incentives to China to continue to try and maintain our distraction there--most likely in covert ways. While America organized much of the world to assist in our Global War on Terror, China went on a charm offensive and filled the vacuum of our absence with seductive and powerful diplomacy. China is now competing with America in Asia not in a head-to-head way but through brilliant multilateral initiatives such as the East Asia Summit/East Asia Community proposals it has pushed and other multilateral efforts in security and economic arenas. This "new multilateralism" by China is competing with America's penchant for bilateral deals between itself and other countries like Japan, Australia, and South Korea. While America is party to other multilateral efforts in the region--it relies on bilateral arrangements and has not strongly pushed multilateral institutions. The recent Six-Party Talks are one exception, but America's commitment to that process has also been frequently marked by inconsistency and ambivalence. So, America needs to be consistently engaged in Asia broadly and not leave vacuums for China to fill, which it will--not because it's a dangerous nation, but because any ascendant powerful regional power would do the same.

America needs to decrease economic dependency on China--but not too fast. China and the U.S. are playing a game of Russian roulette where both players know that at some point one or the other will pull a trigger that undermines the health of both. America is far too dependent on China for its economic livelihood. China, likewise, is exploiting America's binge appetite to grow its economy in structurally unsound ways. China must move some of its productive capacity to domestic consumption. America must stop blaming China for its current account deficit and cut consumption. In the long run, America can do this by modifying its tax structure to reward saving and investment and tax consumption. China, on the other hand, needs its people, who are saving at a rate of 50% of income, to trust their future enough to spend. China could move forward in creating greater health care provision, pension tools, and other sophisticated investment and financial instruments so that Chinese released cash to bolster domestic consumption.

The toughest item to deal with will be Taiwan, where preservation of the status quo is in the interests of the U.S.--but which powerful forces in Taiwan are trying to undo. Taiwan has geographic problems that America must be honest about. China, meanwhile, must feel that an unacceptable price will be paid not only by the punitive actions of U.S. forces but by relations with others in the region and around the world if it attacks and seeks to reunify Taiwan by force. America needs to continue to give Taiwan the wherewithal to keep China guessing about the high price that invasion would entail. At the same time, America can not countenance Taiwan hijacking the Pentagon or the helm of U.S. foreign policy to guarantee its sovereignty if Taiwan declares independence. America does not recognize Taiwanese independence--and this delicate balance must be maintained lest other major goals come apart.

Revaluation of the yuan against the dollar is important, but needs to be pursued in steps. Quick adjustments can be painful and create vast unintended consequences as they did after the yen-dollar revaluation in the 1985 Plaza Accord. A summit should be called by the President of the U.S. that does not hammer China for its economic success--but which makes clear the importance of "sustainable growth" on both sides of this key relationship. And China's currency should float up with the strength of its economy, but needs to be moved to full floating status in stages, perhaps by implementing higher ranges of float every two years for the next eight years. That will help prevent shocks from quick currency shifts.

The resource area is one of the most critical given Chinese energy demands as well as the fact that it has one-third the renewable water sources that is the average global norm. China is currently engaged in buying long-term oil contracts and futures. America needs to be doing the same--just to make sure that America does not take for granted the privileged role it has from most oil exporters today and find that tomorrow China has legal control of a significant share of global oil output.

There are many other aspects to a full policy roadmap for engaging China in the future. Such an exercise would be valuable within thoughtful Republican circles so as to prevent myopic interests and ad hoc policy formulations to erode the foundation for a long-term balanced strategy with China. The most important thing America can do is to work to show China the benefits of responsible behavior and rather than seeing its multilateralism, though mostly anchored in Beijing, as a threat, applaud it. Support China's aspirations for greatness--as long as these aspirations don't upend the global system. Applaud the lift of so many out of poverty in China as long as China can "sustain" this growth economically and environmentally.

If there is misbehavior or aggression, America should respond and not be timid in responding to Chinese aggression--but thus far, China is proving to be a worthy competitor with a vision of its stake in the world. The question is whether there can be competing versions of globalization as well as global and regional institutions--anchored respectively in Beijing and Washington.