Author: Ryan Manuel

There has been a big shift in the structure of world power, away from the unipolar world, towards a world in which there are at least four major players including China.

This was the headline premise in the roundtable that launched the ANU’s China Update yesterday. What follows is a window on the main issues raised in the first round of discussion. There will be posts elaborating on these and other issues over the next week. Those wanting the full analysis should go straight to the famous book that traditionally accompanies the China Update each year.

The global economic system is going through a particularly complicated period of structural change.
The three major elements are:

• the US financial crisis
• the specific post-Bush domestic US challenges: trade imbalances and a weak dollar
• rising worldwide energy and food prices.

The third point is contested– largely due to an inability to pin down exactly what these high prices are driven by. Are they temporary supply and demand imbalances and speculative behaviour in markets or do they reflect emerging long term structural constraints?

The judgment is that while, the short term market behaviour interacts with longer term structural constraints, we now have to deal with fundamental changes in the structure of the world economy.

These changes are occurring in the context of other uncertainties. The need for energy security clashes with the need to deal with climate change. Economic growth in China (India and other developing countries) is a major factor in both. Complications arise from the interaction between domestic policy and international affairs, intertwined in a more open and globalised world.

The balance between economic growth and environmental degradation is undoubtedly the most pressing among these tensions. A shortage of water, China’s worsening air quality (and whether, as per an environmental Kuznets curve, this would improve) and calculating the costs the difficulties of environmental protection are real and pressing issues for China and the world.

The steady shift in economic power from the US to China adds depth to the challenges of managing global security and resource security.

These structural shifts are affected by the US financial crisis and post-Bush era challenges. A long period of economic stability created a higher appetite for risk, excess demand, increased sophistication of financial deals and these elements have led to greater risk in the financial services markets.

The impact of these forces upon China is expected to be considerable. More foreign capital is expected to flow into China seeking a ‘safe haven’ as a result of a downturn in the investment climate in the United States and Europe, an expected appreciation in the RMB, and continued high returns on investment in China. The capital inflows are mostly ‘hot money’ and not investment in fixed capital which imposes on the Chinese policy makers some big challenges. There are significant risks of adverse inflationary and other macroeconomic effects.

A more fundamental problem is that China has lost an “economic role model”, with the US in financial crisis, and this could lead to loss of confidence in liberalisation for example by Chinese policy makers.

What do these factors mean for US-China relations and global security in general? Is China a status quo power? China’s interest is in maintaining the current global system and structure but its rise means this is not possible however much it might wish. In the short term for US-China it will be “business as usual” regardless of the winner of the forthcoming election. In the long term there are big challenges for both partners.

One view is that the ‘complicated’ global economic situation and the steady shift in strategic power balances from a unipolar global order to a more multilateral one means that the ‘status quo’ is itself bound to change. Asia is clearly the greatest global challenge for a new ‘status quo within the international community and order. China’s rise, rather than leading to a concert among powers in a new multilateral order, might lead to a less stable era in which there is a competition in seeking a new balance of power. The new political security environment might begin to impact on China’s economic trajectory.

What is required is nothing less than a new paradigm in dealing with China (not only in the US but globally) and in China’s dealings with the rest of the world. Continuity might work over the next US presidential term but not over the next two.

There has to be deeper political and security engagement, not only between the United States and China but also the other major players. A Union European-style in Asia and the Pacific is unlikely for many years to come, and nobody has suggested otherwise, but Australian Prime Minister Rudd’s idea on direct dealings on political and security affairs in an Asia Pacific Community is relevant to managing dealings with China as an equal, despite the continuing transition in both economic and, more importantly, its political system.

Related articles:

1. Australia’s China policy – Weekly editorial
2. North Korea’s latest missile launch – Weekly editorial
3. The Google news: China enters its Bush-Cheney era
4. The old and the new in Japan’s latest money politics scandal

1. Burma in 2008
2. India’s role in East Asia: lessons from cultural and historical linkages
3. Deepening regional trade links in the Island Pacific

This entry was posted on Monday, July 14th, 2008 at 7:59 am and is filed under Economic Policy, Events. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.