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 UN 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 behaviour – 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 per cent 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 behaviour 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 USD2 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 behaviour 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.
This article originally appeared here in the Korean Times, on March 14, 2010.
Joseph Nye is Chairman of the Pacific Forum CSIS Board of Governors and a former US Assistant Secretary of Defense. He is also currently University Distinguished Service Professor at the Harvard Kennedy School.
After reading the article I looked at the credentials of the author and noticed that “Joseph Nye is Chairman of the Pacific Forum CSIS Board of Governors and a former US Assistant Secretary of Defence. He is also currently University Distinguished Service Professor at the Harvard Kennedy School.”
I would like to make a few comments as follows.
Firstly, a few variables in elementary physics in terms of speed, acceleration and different momentums. It is not enough to just discussing the speed of an object, but its acceleration that is the rate at which its speed changes. I am sure Nye had this in mind or not when he is talking about a number of things.
Secondly, many economists and commentators talk about the yuan versus $US as if the issue was just between China and the US and ignore or are ignorant about a wider international context. In fact, as some economists and commentators have pointed, the matter is much more complex than the former group or people naively think it was. It involves, I would argue, mainly competitions between China and other countries than the US. Yes, if the yuan was appreciated that will have an effect on the relative competitiveness between China and the US, but it is unlikely to change the imbalances the US has been having, because others would simply take the vacuum vacated by China and increase their surplus with the US.
Thirdly, some of the historical events that Nye has mentioned were obviously true, but has he noticed and considered the differences now and the past, that is, between China and the USSR, as well as Japan? Don’t the huge differences in sizes of population and potential economic power and its implications ring a warning to Nye’s analysis and simply and mechanically use historical examples? Will history will always simply repeat itself like natural mechanics, or new history can be made? Are humans still as primitive as many thousand years ago? Don’t those people also need to catch up with reality?
I do not wish to comment on the decline of the US. It is still the sole superpower in the world now. But it has had problems with the Iraq and Afghanistan wars. Its military capabilities can be very powerful in destruction, but not necessarily very constructive. If taking into account the sizes and powers of those two countries, the US, as that powerful as it has been, is not that invincible as some people might think it is. That is an irony and respected perhaps. Maybe the first point that I have just made has some relevance here. Einstein’s relativity will work in static and dynamic senses.
Fourthly, the role of the $US internationally should never be underestimated, but at the same time many people have realised the limitations of the current or the past arrangement or state of play. In economics, people take expectations very seriously. In that context, what expectations will people have, if a model of the world economy is taking into account? What implications will that have for international currencies?
However, I don’t want to leave people with a impression that I have nothing in common with Nye. I do want to reach an agreement with Nye, that is, the cooperation between China and the US will be win-win and beneficial to both countries and the world as a whole. That is human spirit. We have come a long way in terms of globalisation and human beings should not move backwards toward barbarous state where power rather than rationality prevailed.
It is funny that an American sees China in the way that Professor Nye does. I wonder whether his is a typical or mainstream Western perspective of what China is about? The American-centred viewpoint: seems to be that ‘if you are with me, you are good; if you are against me, you are bad’. First, ‘ample precedent’ in dealing with Dalai Lama and Taiwan does not justify an approach as the correct one. Second, on the meeting Nye mentions in Copenhagen, Chinese Premier Wen told the truth at the press conference a couple of weeks ago when he politely observed that ‘it is a mystery’ why China was not invited to the meeting. Many in China thought the meeting was a some kind of conspiracy. Third, Professor Nye’s reflections on Chinese hubris hardly reflect the reality on the ground in China. Perhaps they have more to do with its plentiful supply in America. Meanwhile I think that China’s energies are overwhelmingly directed at developing a co-operative relationship with America and that the Chinese leadership is acutely aware of all the problems it has to confront.
I have some profound agreement with Prof Nye. First of all, I dont think the Chinese are overconfident. In fact they still feel very insecure and it is this insecurity that explains a lot of their behaviour. China is a very poor country with many many problems. On the other hand, I think the West and the US particularly really have to come to terms with the fact that you cannot just keep on dominating the world forever. It is not just China, there is Russia, India, Mexico and a whole lot of other countries in Africa and the Middle East. You can bully some people some of the time but you cannot bully all people all the time. I actually dont think the Americans are less powerful now, at least not yet, perhaps for a long time to come. But that does not mean that China will do just what the US wants it to do.