Everyone who has been shopping for clothes or electronics during the past years cannot have missed the words ‘Made in China’. In the same period, the words ‘Fall of Dollar’ must have been noticed by every reader of newspapers worldwide.
These two simple sentences indicate a worldwide influence of two major economic powers, an influence that reaches much further than cheap products and exchange rates. In this context, the dialogue the United States and China agreed on last Wednesday is of global importance. Will the two super powers act as such, or are they more concerned with their national interest? After all, their economies do not only affect the world, they have at least as much impact on each other. Indeed, when Paul Kennedy asked himself “Whose economy will decline fastest, relative to such expanding states as Japan, China, etc.?”
[1] in his book
The Rise and Fall of the Great Powers of 1988, the United States already feared the answer.
In the light of China’s rise and its recent entrance to the WTO in 2001, the new agreement is a logical next step in the US-China relationship. China’s acceptance to the WTO came a long way, after years of resistance from Washington and negotiations about conditions. Today, many bilateral commitments made between the two economic powers in 2001, such as the sensitive issue of China’s intellectual property rights, have not been fulfilled yet.
[2] Both powers expect that an intensive high level dialogue will deal with their agenda more effectively. However, while Washington is determined to address China’s legal liberalisation, Beijing is mostly interested in economic benefits. Can the new dialogue overcome these clashing goals, as well as resolve other issues of conflict?
Even more questionable is the “long-term strategic view to managing this relationship” aimed for by US treasury secretary Hank Paulson.
[3] With the prospects of a Democrat mid-term victory and the ending of the Bush presidency in two years in mind, the Democrats’ China-policy might be at least as important for the future US-China dialogue.
What worries both Republicans and Democrats is the major US trade deficit, which is, as chart 1 suggests, largely caused by cheap Chinese export products. The solution, Washington argues, is a revaluation of the yuan. The Chinese government holds its currency artificially low, to prevent national instability in this time of spectacular economic growth.
[4]However, it is contestable whether revaluation will make much difference for the US trade deficit. As Doug Guthrie, professor at New York University, argues in his book
China and Globalization: it are the Americans themselves “who drive that deficit by shopping at Wal-Mart, which is the single-largest contributor to it.”
[5] In other words, rather than by unfair competition the US trade deficit is caused by America’s high consumption, and if China does not supply for it another cheap production country will.
A much more important, and less easy to change, issue in the present US-China relationship is the so-called “revived Bretton Woods system.” To keep its exchange rate pegged to the dollar, China has been buying US treasury bonds increasingly over the past years. As chart 2 shows, the PRC is now the second largest holder, only after Japan.
[6] By doing so, China largely finances the trade deficit it causes. In effect, the US and China economies are deeply interdependent.
To press for rapid change to this situation is not in anyone’s interest. By dumping parts of its bond holdings, China could cause an immediate fall of the dollar and a depression in the US economy. And because the global economy is attached to the dollar, the whole world would suffer from this, including China.
[7] The new US-China relationship cannot bring an end to this tension. However, an intensive senior dialogue might manage the situation, in order to let it develop gradually.
Dr David Williams, lecturer at Cardiff University, argues: “To understand where the US-China relation will go, you only have to look at the history of the US relation with Japan.” Indeed, only decades ago the US viewed Japan as a major economical threat and the cause of these fears fit the same pattern as the present US-China relation. The US relation with Japan cooled down, even though their interdependence through US treasury bonds did not change. What did change, and what will change in the case of China, is the state of the economy. According to Dr Williams, “No country can grow every year, and as China’s economy will ease, the US-China relationship will ease down as well.”
[8]What distinguishes China from Japan, however, is its significant influence on the global economy. Compared to other emerging economies, China is relatively open. The sum of China’s exports and imports is about 75 percent of its GDP, compared to about 25 percent in for example India and Japan.
[9] In effect, since China entered the world markets in 2001, it has a noticeable impact on global supply and demand. In short, this means that everything China supplies to the global markets, such as labour and manufactured products, decreases in value, while the prices of the products it demands, such as capital and raw materials, rise. China is now the second-largest oil consumer, only after the US, and its increasing demand has contributed to the risen oil price. Needless to say, oil has become a major factor of competition between the US and China.
[10] A more indirect result has been a global decrease in wages, but also growing profits, lower interest rates, and, because China’s export exceeds its import by far, low inflation.
[11] These effects would be counteracted by a revaluation of the yuan, which is likely to happen under pressure of the new dialogue with the US. So, ironically, many Americans might be damaged by Washington’s efforts to control China’s economy. And when the US economy suffers, the rest of the world will notice.
The new dialogue focuses on economic issues, but the US government will also use it to deal with political issues, such as further liberalisation. So far, China seems not in a hurry to answer these pressures. China values its strong state sovereignty, developed following Cold War containment and the PRC’s non-recognised status by the US until its entrance to the UN in 1971. Today, this translates in China’s ideal of ‘multipolarity’, which contrasts the American ideal of spreading its own system of democracy and capitalism. In the new context, ‘multipolarity’ means to cooperate to achieve common economical interests, while respecting each other’s different political cultures.
[12]China’s entrance to the WTO indicates that it considers its state sovereignty as complementary to free trade, and the country has made considerable concessions for this. However, the US government sees this as an encouragement to press China for more reforms. As argued, this is not likely to happen soon. And in the long term, the process will possibly be disturbed by the in power gaining Democrats. The more protectionist Democrat Party considers free trade with China a major threat to American jobs. A possible Democrat congress could argue for trade restrictions on China to protect the American market, despite of WTO rules.
[13] It might also draw more attention to social issues, or even restore the old link between China’s human rights record and economic relations. President Bush might have made calls for Christian rights in China,
[14] the US government no longer lets these issues determine economical relations. The sanction-and-isolation policy following the 1989 Tiananmen Square massacre made place for the more sensible idea that social change will follow economic engagement.
[15]Another concern of both Republicans and Democrats, which lies underneath the surface of all economic policies, is China’s military power. In
The Rise and Fall of the Great Powers, Paul Kennedy argued not only that economic strength is relative, but also that economic growth will be followed by military rise. Indeed, the idea of China as a ‘candidate Great Power’ has frightened Washington ever since the PRC’s establishment in 1949. The initial shock faded through the 1960s and 1970s when appeared that China had weakened rather than developed, but arouse again by China’s nuclear activities.
[16]The latest annual report by the Pentagon suggests that the US government views Beijing as a serious military threat.
[17] However, statistics show that these worries are unreasonable. China’s defence spending has risen in line with its economy and stayed around 8 percent of the national budget, against more than 16 percent in the US. Moreover, in 2001 America’s military spending was 17 times higher than China’s, and larger than that of all other countries in the world.
[18]Besides, rather than placing military bases abroad like the US, China uses ‘soft power’ to expand its authority in South East Asia and, since recently, Africa. Washington views this expansion as a threat to its own hegemony. However, in the light of their recent agreement, China’s diplomatic relations might prove useful to the US, that could use its stronger ties with Beijing as a foot in the door in South East Asia.
[19]Two things restrict a significant impact of the new US-China relationship on the global economy: the rising Democrats and the conflicting goals of the two super powers. The best potential the senior dialogue has is to manage the tensions between Washington and Beijing by taking up ruling misunderstandings on political, military and social issues. The more stable basis of their relationship this might create is of global interest. However, who expects directly visible and principle changes will be disappointed. The US-China economical interdependence will remain in place, Washington will stay suspicious towards its colleagues in Beijing, China will keep rising, and the rest of the world will feel the effects.
[1] Paul Kennedy, The Rise and Fall of the Great Powers. Economic Change and Military Conflict From 1500 to 2000 (London 1988), p.532.
[2] ‘U.S. Is Urged to Press China on WTO Obligations’, in: Wall Street Journal, 17 November 2006, p.8.
[3] ‘Dialogue with Beijing will lock in economic liberalization, says US’, in: Financial Times, 21 September 2006, p.3.
[4] ‘Asia: Mr Hu finally goes to Washington; China and America’, in: The Economist, 15 April 2006, p.64.
[5] Doug Guthrie, China and Globalization. The Social, Economic, and Political Transformation of Chinese Society (New York and Oxon, 2006), p.322.
[6] ‘From T-shirts to T-bonds’, in: The Economist, 28 July 2005, p.66.
[7] Guthrie, China and Globalization, pp.321-322.
[8] Interview with Dr David Williams, Cardiff University, 30 November 2006.
[9] Sources: WTO; Thomson Datastream; Economist Intelligence Unit, in: ‘From T-shirts to T-bonds’, p.66.
[10] Guthrie, China and Globalization, p.7.
[11] ‘From T-shirts to T-bonds’, p.66.
[12] Ronald C. Keith, ‘China as a Rising World Power and its Response to “Globalization”’, in: Ronald C. Keith (ed.), China as a Rising World Power and its Response to ‘Globalization’ (New York and Oxon 2005), pp.2-4.
[13] www.democrats.org [30 November].
[14] Caroline Daniel, Richard McGregor and Guy Dinmore, ‘Few Gains for Bush in China’, in: Financial Times, 20 November 2005.
[15] Guthrie, China and Globalization, p.311.
[16] Rosemary Foot, Practice of Power: US relations with China since 1949 (1997), electronic book on:
http://www.oxfordscholarship.com [19 October 2006], p.262.
[17] ‘Asia: Out of their silos; China and America’, in: The Economist, 10 June 2006, p.64.
[18] Guthrie, China and Globalization, pp.309-310.
[19] ‘Meeting the superpower; China and the West’, in: The Economist, 19 November 2005, p.12; ‘Aphorisms and suspicions – China’s world order’, in: The Economist, 19 November 2005, p.24.