The Post-American World: Release 2.0 (16 page)

Until recently, memories of China’s revolutionary foreign policy—which in practice meant using the Chinese diaspora to foment trouble—lingered. Beijing’s invasion of Vietnam, its claims in the South China Sea, and its border disputes with Russia and India had given China the image of a prickly and troublesome neighbor. By the late 1990s, however, China had adopted a very different regional policy, which became especially clear from its constructive role in the region after the East Asian crisis of 1997. Since then, Beijing has become remarkably adept at using its political and economic muscle in a patient, low-key, and highly effective manner. Its diplomacy now emphasizes a long-term perspective, a nonpreachy attitude, and strategic decision making that isn’t bogged down by internal opposition or bureaucratic paralysis. It has taken a more accommodating political line, provided generous aid packages (often far outstripping those provided by the United States), and moved speedily on a free-trade deal with ASEAN. Having long avoided multilateral associations, it has more recently gotten involved in as many as possible—even creating one of its own, the East Asian Summit, which pointedly excludes the United States. China is now welcomed by the Southeast Asian nations as well. The seemingly pro-American president of the Philippines, Gloria Arroyo, publicly proclaimed, “We are happy to have China as our big brother.”
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This change is reflected in Beijing’s relations with governments throughout its neighborhood. The Vietnamese, for example, have no particular love for China. As one official there said to me, “We are clear-eyed. China has occupied Vietnam for a thousand years. It has invaded us thirteen times since then.” But he also acknowledged, “it is a huge presence, our biggest exporter”—which means that their governments and peoples must approach the relationship pragmatically. Bookstores I visited in Vietnam prominently displayed the collected speeches of the Chinese leaders Deng Xiaoping, Jiang Zemin, and Hu Jintao.

Before arriving in Vietnam, I had been in Tokyo, during Chinese Prime Minister Wen Jiabao’s 2007 state visit, and I heard a similar refrain. Wen finessed the many points of tension between the two countries and instead accentuated the positive—their booming economic ties. This détente, however, is fragile and points to the principal danger in Beijing’s foreign policy—its effort to co-opt nationalism for its own purposes.

In the past, Beijing insisted on keeping relations with Japan tense. Japan’s wartime atrocities and reluctance to acknowledge guilt have been a large part of the problem. But Beijing also seemed to actively cultivate tension—bringing up Japan’s wartime behavior whenever convenient, refusing to accept Japanese apologies, and teaching a virulently anti-Japanese version of history in its schools. In April 2005, the Chinese government appeared to encourage anti-Japanese protests over history textbooks, only to find them mushroom into mob demonstrations, riots, stone throwing at the Japanese embassy, and widespread calls to boycott Japanese goods.

In strategic terms, assuming a “peaceful rise” policy, it makes little sense for Beijing to be as uncompromising toward Tokyo as it was in the past. Doing so would ensure that China will have a hostile neighbor, one with a formidable military and one of the world’s largest economies. A wiser strategy would be to keep enmeshing Japan with economic ties and greater cooperation, gaining access to its markets, investment, and technology—and achieving dominance over time. There is even an argument for genuine reconciliation. Japan has not behaved perfectly, but it has apologized several times for wartime aggression and paid China more than $34 billion in development aid (reparations, effectively)—something never mentioned by the Chinese. And clearly, a desire for reconciliation was on display when Premier Wen went to Japan in 2007. But it might not last. For China, a domestic problem gets in the way. Having abandoned communism, the Communist Party has been using nationalism as the glue that keeps China together, and modern Chinese nationalism is defined in large part by its hostility toward Japan. Despite his many catastrophic policies, Mao remains a hero in China because he fought the Japanese and unified the country.

The Chinese government has generally assumed it could manage popular sentiment, but it is losing that confidence. Not being a democracy, it has little experience doing so. It deals with public anger and emotions cagily, unsure whether to encourage them or clamp down, for fear of where they might lead. It has no idea what to do with a group like the Patriots Alliance, an Internet-based hypernationalist group that organized the anti-American protests after the 2001 EP-3 plane incident and the anti-Japanese protests of 2005. Both actions were at first encouraged, only to become much more intense than the regime expected. Those incidents appear to have spurred some rethinking, and Beijing has more recently toned down its support of nationalism, more fully embracing a quieter approach to diplomacy and politics.

The danger of external crisis plus internal nationalism looms largest over Taiwan. Beijing, long obsessed with Taiwan, has been uncompromising, as have some Taiwanese politicians—a sometimes combustible combination, as when President Chen Shuibian of Taiwan provoked a flurry of outrage by proposing a national referendum on Taiwan’s independence in 2002. For the most part, Beijing has pursued its long-term plan of “normalizing” relations with the island’s main opposition party and smothering it with conciliation. But not always. In March 2005, Beijing passed an “anti-secession” law, threatening Taiwan with military force if it dared to anger China in any way. As a result, among other things, the European Union postponed its plan to lift an arms embargo on China.

Taiwan offers the most vivid and important example of how the economic incentives for integration and the political urges for nationalism diverge and yet can be managed. The rational decision making that guides economic policy is not so easily applied in the realm of politics, where honor, history, pride, and anger all play a large role. In recent years, Beijing has switched to a smarter, less aggressive course with regard to Taiwan, recognizing that time is on its side. Thus it has made several clever moves that have increased Taiwan’s dependence on the mainland—most significantly the reduction of tariffs on farm products that come from the most independence-minded parts of Taiwan. All the while, of course, China’s military has grown rapidly, its principal strategic objective being to prevail quickly in any conflict over Taiwan. In other words, economic growth and globalization have made Beijing plan for integration and yet given it the power for military and political confrontation.

The Dragon and the Eagle

The importance of China’s relations with every country in the world is dwarfed by its relations with one—the United States of America. Or, to put it differently, none of the potential problems that China faces matter unless they trigger the involvement of America. Without U.S. involvement, a war over Taiwan might be bloody and tragic, but only if it turned into a Sino-U.S. confrontation would it have far-reaching global consequences. The China challenge also has greater implications for the United States than for other countries. Historically, when the world’s leading power is challenged by a rising one, the two have a difficult relationship. And while neither side will admit it publicly, both China and the United States are worried and planning for trouble. For three decades, Chinese foreign policy has been geared toward satisfying the United States for a variety of practical reasons. First it was anti-Soviet strategy, then a desire for markets and reform, then rehabilitating the country after Tiananmen Square, membership in the World Trade Organization, and finally the Beijing Olympics. But increasingly, China’s younger elites believe that their country needs to think of itself as a competitor to Washington in several senses. In Washington, there have always been those who see China as the next comprehensive threat to American national interests and ideals. To say this is not to assume war or even conflict, but merely to note that there is likely to be tension. How the two countries handle it will determine their future relations—and the peace of the world.

The nations are so entwined that even basic economic activities like borrowing and saving assume globe-altering dimensions. Chinese households and corporations tend to be cautious. They bank about half their earnings, always preparing for the metaphorical rainy day. Such extreme thriftiness in combination with high growth led China to accumulate vast new pools of capital over the last decade or so. But this was not simply a Confucian cultural trait. The Chinese government discouraged spending and encouraged savings, in part as a way to ensure that inflation stayed low and the currency stayed undervalued—which made Chinese goods cheap and attractive to the Western consumer. In addition, countries like China were soured by the Asian crisis of 1997, when Asia’s economies fell and Western bankers came to the rescue but demanded onerous terms. After they recovered, Asian governments—and others outside Asia as well—decided to accumulate their own reserves, so that the next time around, they wouldn’t have to rely on the kindness of strangers.

So, instead of reinvesting their ever-growing savings in their domestic economy, Chinese authorities stashed it away. But how should a government hoard its money? By buying what was then—and still is now—considered the safest investment in the world: U.S. treasury bills. Through their accumulation of massive quantities of American debt, the Chinese ended up subsidizing the behavior that caused it—American consumption. They financed our spending binge and built up a vast hoard of dollar IOUs. The Chinese oversaved, the Americans overconsumed. The system seemed to balance out.

It wasn’t just China, of course. Eight other emerging-market countries have accumulated war chests of $100 billion or more, mostly in dollars. But China alone sits on foreign-currency reserves of $2.5 trillion, again most of it in dollars. In September 2008, China became America’s largest foreign creditor, surpassing Japan, which no longer buys large amounts of U.S. treasuries. (With 10 percent of all currently outstanding T-bills in its possession, China is likely America’s largest creditor, period, but the U.S. Treasury doesn’t track domestic lenders.) China now holds the world’s largest IOU slip, and it carries the signature of Uncle Sam.

Oversaving is as much a problem as overconsuming. The Harvard economist Dani Rodrik has estimated that sending so much money abroad instead of investing it productively costs the Chinese roughly one percentage point of GDP a year, or more than $40 billion annually. China’s lending was also essentially a massive stimulus program for the United States. During the go-go years of the mid-aughts, it kept interest rates low and encouraged homeowners to refinance, hedge fund managers to ramp up leverage, and investment banks to goose their balance sheets. China’s lending created cheap money, says the Financial Times columnist Martin Wolf, and “cheap money encouraged an orgy of financial innovation, borrowing and spending.” It was one of the major contributors to the global financial crisis, and the cycle continues even in its aftermath.

Everyone agrees the status quo is unsustainable. “There can be no return to business as usual,” Wolf wrote after the financial collapse. But in the short term, we seem destined for more of the same. President Obama has warned of the prospect of “trillion-dollar deficits for years to come,” as his administration boosts spending on everything from green technology to health care; most of that money will have to be borrowed from China. The Chinese also have their own economic problems to sort through, and they are spending $600 billion—a whopping 15 percent of their GDP—to combat them. We are, in effect, asking China to simultaneously finance the two largest fiscal expansions in human history: ours and its own. And the country has every incentive to continue its T-bill shopping spree. Without it, China’s exports will suffer, and its lofty growth rates will fall to earth.

The Chinese do, however, have options. Joseph Stiglitz, the Nobel Prize–winning economist, explains that “they will certainly try to keep American consumption going, but if it becomes clear that it isn’t working, they do have a Plan B.” Plan B would be to focus on boosting China’s own consumption through government spending and increasing credit to its people. As the historian Niall Ferguson writes, “the big question today is whether Chimerica [China plus America] stays together or comes apart because of this crisis. If it stays together, you can see a path out of the woods. If it splits up, say goodbye to globalization.”

For now, the forces of integration have triumphed, in both Beijing and Washington. The Chinese-American economic relationship is one of mutual dependence. China needs the American market to sell its goods; the United States needs China to finance its debt. It’s globalization’s equivalent of the nuclear age’s Mutual Assured Destruction. (And to add to the forces of stability, the Chinese and American nuclear arsenals also act as deterrents.) The best scenario would be for China and the United States to work together to slowly unwind their suicide pact. China would benefit by having more money to reinvest in its domestic economy. The United States would benefit from being forced to make some hard economic decisions that will ultimately make it better off. Since at least the 1980s, America has recognized that it could spend with abandon, forever delaying the date of repayment. This has not been good for its foreign or domestic policy. It has made Washington arrogant, lazy, and careless. If the free ride comes to an end, U.S. leaders will find it far more difficult to put off painful but necessary reforms.

Stopping the China-U.S. lend-and-spend cycle would also give Washington more freedom in its international dealings. The Bush administration was strikingly accommodating to Beijing over Taiwan. George W. Bush was probably the most ideologically hostile president ever to handle U.S.-China relations. He spent his entire term in office praising democracy, denouncing dictatorship, and promising to use American power to further his goals. But despite all of this, Bush repeatedly sided with Beijing over Taiwan and warned Taiwan not to attempt secession, a more anti-Taiwanese statement than any ever made by an American president. That’s why, despite Bush’s speeches on liberty and his meeting with the Dalai Lama, Beijing was largely content with his administration. On the issue it cares about, Bush was an ally.