On the Record

China’s Emergence and its Implications for the United States

Jeffrey A. Bader

This presentation was given at a breakfast for the Brookings Council, held at the Hay-Adams Hotel in Washington, D.C.

The subject I’ve been asked to talk about today is the modest one of “China’s Emergence and its implications for U.S. policy.” I don’t intend to give a comprehensive statement on the subject, since that would take about 30 days and not the 30 minutes I’ve got. Also, our gracious and generous host, Kay Enokido, asked me if I could spin the topic a bit toward China’s relations with Asia. With our distinguished audience including a number of Japanese guests and diplomats from throughout the region, I think that is an especially useful suggestion. In that regard, I’d like to acknowledge in particular the presence here of three good friends from the diplomatic corps: Ambassador Zhou Wenzhong of China, Ambassador Chan Heng Chee of Singapore, and Minister Nobu Kanehara of the Japanese Embassy.

Americans are just beginning to catch up to the significance of what’s been happening in China, and I don’t believe they’ve caught up yet. We’ve seen China appear in different guises in the U.S. in the last 50 years. From 1949-1971, it was a totalitarian dictatorship behind the “Bamboo Curtain.” From 1971-1989, it was a Cold War partner. Its opening to the West was welcome, but it was seen by Americans primarily as a one-way flow—ideas and goods flowing into China that were supposed to transform life in China. And they did, by the way, massively.

From 1989 until about 1995, attention to China in the U.S. focused primarily on its human rights record. Some attention began to be paid to the earthquake in the Chinese economy that was triggered by Deng Xiaoping’s trip to the south in which he called for a rapid acceleration of reform and marketization. But even then the interest in these events mostly had to do with how they were affecting China—its development and prosperity and the liberation of ordinary Chinese in their daily lives from the personal and social constraints of the Maoist era. By and large, the debate in the U.S. over the developments in China between China-admirers and China-skeptics was about whether socio-economic liberalization would lead to political and personal liberalization, not about the impact of a transforming China on the world—except of course during the Cold War when the “China card” was seen as providing useful leverage as a junior partner to the U.S. in regions of conflict.

That brings us to the present. Our perception of China has gone through another transformation. That perception reflects some serious economic realities, which I’d like to describe briefly.

We all know something about the Chinese economic performance in the last quarter century, but it’s worth repeating the bare outlines, to remind ourselves of how far China has come and the impact it is now having:

· Its economy has grown 9.5% annually for a quarter century.

· GDP has quadrupled from 1980 to 2000.

· 400 million people have been lifted out of poverty in a quarter century.

· It has risen from the number 30 trading country in the world in 1977 to number 3 today, and will be number 1 within a decade.

· It has become the largest or second largest recipient of foreign direct investment in the world.

· It has accumulated $819 billion in foreign exchange reserves, and running a $148 billion current account global surplus last year.

· China has developed a staggeringly open economy. China’s trade is 80% of GDP; inward FDI is 36% of GDP, 18 times as high as Japan, this in an economy that was essentially closed to the world till the late 1970’s.

As I said, until recently people looked at these developments through the lens of what they meant for China. Now, Americans are beginning to look at what they mean for the United States. They have brought a mixture of positive and worrisome effects. On the positive side,

· China is overwhelmingly the fastest growing export market for the U.S., up over 300% in the last decade. Since 2001, U.S. exports to China have grown 5 times faster than to the rest of the world.

· American corporations have invested over $50 billion in China, with benefits to their profitability and their shareholders.

· China has purchased over $200 billion in Treasury instruments, which has helped allow us to finance our debt and keep interest rates low.

· China’s exports to the U.S., including $15 billion last year to Wal-Mart, have helped keep the U.S. inflation rate low and eased burdens on poor and middle-class American consumers.

· The Chinese and American economies are largely complementary, and have been competitive in a relatively small number of areas.

On the worrying side,

· Last year the U.S. ran a $200 billion trade deficit with China, by orders of magnitude our largest in the world.

· China’s violations of Intellectual Property Rights have cost American manufacturers of entertainment products, automobile parts, pharmaceuticals, chemicals, and other manufactured products billions of dollars each year.

· China is increasingly competitive in items higher up the value chain where the U.S. excels. A Chinese worker earns between 5% and 10% of an American worker’s wage. Already at the labor-intensive end of the scale—textiles, footwear, and electronic products—the U.S. has ceased to be competitive with China. The same competition those sectors have faced will be encountered in more capital-intensive sectors in the coming years, including in products like automobiles. That is why the value of the renminbi has become a hot button issue.

· China’s appetite for energy, and in particular imported oil, has been growing at a pace faster than any other country in the world. The consequences have been manifold, but of particular interest to the average American consumer and automobile driver, China’s oil demand has contributed to the rise in crude oil prices in the last couple of years.

This balance sheet, which different segments of the American economy will interpret in different ways, means that the benefits and debits of China’s economic emergence will be the subject of intense debate for years, perhaps decades, to come. With that debate will come trade actions, and trade frictions, bouts of protectionism, cries of foul from one side or the other, and calls for trade wars.

Let me add one important dimension to the discussion that changes the picture, and indeed makes it unlike the situation between the U.S. and Japan in the 1980’s that it otherwise resembles in many respects. In economic terms, China is not just China. China has become the center of a remarkable, unprecedented integration of East Asia’s economy. China’s trade with the countries of East and South Asia has grown in leaps and bounds. From 1993 to 2003, two-way trade between China and Japan grew over 250%; with Taiwan over 300%; with Korea 670%; with Malaysia 1025%; with Singapore 350%; with the Philippines 1800%; with Thailand 835%; and with India 1025%. All of these countries are running massive balance of trade surpluses with China. So what we have seen is the countries of Southeast Asia exporting commodities, energy resources, and unassembled products to China, where they feed China’s exploding manufacturing sector that is itself selling to the U.S. and Europe and piling up huge trade surpluses. Related to these flows have been alterations in investment patterns. In 1990, China drew 18.7% of Asia’s foreign direct investment, while ASEAN drew 66.4% to Japan’s 9.4% (and India’s 1.3%). By 2004, the China and ASEAN numbers virtually reversed. China drew 58% of Asia’s FDI, while ASEAN’s share had shrunk to 22.2%. India’s had risen to 5.1% and Japan’s fallen to 7.5%.

These trends illustrate several important changes in the world that policymakers need to understand. First, the percentage of the U.S. trade deficit coming from the Asia-Pacific has not risen in the last decade and a half. Its origin has simply moved north and west, from Japan/Korea/Taiwan/Hong Kong/ASEAN to China. Second, any trade actions the U.S. might take will not only strike China. They will cause immediate ripples, or worse, throughout the region among countries whose economies are now intertwined with China’s. China is now the largest trading partner of Japan, Taiwan, Korea, and soon to be of India.

So we can see that China’s impact on the United States in the economic sphere has been real and marked, with the likelihood of becoming more so in the years to come. Its impact on American security in the last few years has been felt less in the lives of ordinary Americans, but it has gained the attention of security specialists. China’s military expenditures have been growing at about 12% per year for the last eight years. Its military capabilities were described in the Defense Department’s Quadrennial Defense Review released 10 days ago, which sees China as “having the greatest potential to compete with the U.S. and to field disruptive technologies that could over time offset traditional U.S. military advantages.” The report goes on to project continued Chinese investments in ballistic and cruise missiles, advanced submarines, strategic nuclear strike capabilities, unmanned aerial vehicles, and other advanced military technologies.

China’s military planning is overwhelmingly directed at one target—use of force in the Taiwan Strait to prevent formal Taiwan independence. Beijing has no apparent intention to retake Taiwan by force in the foreseeable future, and its leaders have explicitly stated they do not intend to use force unless Taiwan does assert independence, or effectively rules out the possibility of reunification. The showdown in 1996 with American carriers deployed to the region to counter PRC missile tests was sobering for Beijing, and it has built up its capabilities for a variety of contingencies short of a wholesale amphibious assault.

China has other security concerns, but it is not pressing other territorial ambitions. It has settled its long-standing border dispute with Russia and the Central Asian states. It has begun negotiations to settle its border dispute with India. It has cooled disputes over competing claims in the South China Sea.

At the public launch of our Brookings China Initiative, former CINCPAC Admiral Blair stated unequivocally that he did not foresee China “being able to conduct any decisive military campaigns within the next decade that it cannot conduct now.” For example, it could not have “a high-confidence ability to take and hold Taiwan,” “to take and hold any inhabited Japanese island,” or “take and hold pieces of territories from India or Russia.”

China has ample reasons of its own not undertake foreign adventures. While the economic achievements I described earlier are very impressive, the remaining domestic challenges it faces are daunting. For all of its progress, China’s GDP is expected to only reach Japan’s 2004 level by 2020, which would still leave it at 10% of Japan’s GDP per capita. It has an array of internal problems that could overwhelm even the most astute leadership—10-13 million people per year moving from the rural to urban areas and overwhelming infrastructure, a water table that is falling a meter per year in some places in north China and a potable water supply of only ¼ of the total, over 200 million people still in poverty even by the World Bank’s standard of $1 per day, the absence of an effective social safety net and health care for ordinary Chinese, a reported 74,000 protests per year, and an energy demand that will make China 70% reliant on foreign imports of oil by 2015, to name just a few. The Party leadership will need to concentrate on addressing its internal problems if it is to assure that it meets its number one and two priorities, namely its maintenance of power and of the stability and economic growth that it sees as key to assuring it.

The Bush Administration has pursued a generally pragmatic and sound approach to relations with China after a rocky start. It has kept the Taiwan issue from escalating. It has worked well with Beijing on the North Korean nuclear negotiations. It has continued to expand trade in leaps and bounds with bearable frictions. It has attracted modest support from China in the war on terror, recently inducing China to provide $80 million in reconstruction aid to Afghanistan. Five months ago, Deputy Secretary of State Robert Zoellick articulated a new principle for U.S.-China relations by suggesting that China become “a responsible stakeholder” in the international community, sustaining and strengthening the international system from which it has been benefiting. Zoellick laid out a number of benchmarks for measuring China’s achieving of “responsible stakeholder” status, and recently China’s support for the decision to refer the Iran nuclear issue to the UN Security Council suggested that it is paying attention and taking steps that deserve notice. The Defense Department’s QDR Report and the “top to bottom” trade review released today by the U.S. Trade Representative both referred to the goal of China becoming a “responsible stakeholder,” so it appears that the term and the concept now have broad Administration support. On a leadership and diplomatic level, the Bush Administration deserves high marks for its handling of the China relationship.

I am worried, however, about the precipitous decline in what Joe Nye referred to as U.S. “soft power” in its relationship with China as elsewhere, meaning the power of our ideas and values, their attractiveness to other peoples, the desire of others to emulate our system and way of life. That has been the primary story of the U.S. impact on the world in the last 60 years, as the world has adopted what is best, what is ordinary, what is trivial, and sometimes what is not so good from the U.S. In the case of China, that process began later, around 1979, but it has been a powerful engine of transformation in China. Americans who travel to China or speak to Chinese counterparts do not find hostility nowadays, but do find that their admiration for the U.S. is not so unvarnished as it was in the Reagan, Bush I, and Clinton years, when we could speak the language of freedom, protection of human rights, and respect for the international system without eliciting smirks in response. This observation is based on anecdotal experience and describes what I hope is only a transient phenomenon, but it is deeply troubling nonetheless, not only for the U.S. but as an indicator that the cause of political reform in China will be harmed. When the world’s prime symbol of human rights and democratic values does not inspire the people of China, it is not surprising that the values that we hold dear lose some of their potency there as well.

I would like to talk briefly about the transformation of China’s relations with the rest of Asia and what it might mean for the U.S. There has been much talk in the last few years of the development of a “Sinocentric Asia,” seen by some as a place where China will exercise a kind of Chinese Monroe Doctrine and drive the U.S. to the periphery. Much of this hypothesizing comes from the remarkable integration of the economies of East Asia that I alluded to earlier, which finds China at the center of an East Asian manufacturing hub. China also has negotiated a Free Trade Agreement with ASEAN, with Hong Kong, and has said it is studying one with India. On the political/security side, China has exercised influence through its role as the convenor of the Six-Party talks on the North Korean nuclear issue, and as host of the Shanghai Cooperation Organization grouping China, Russia, and four Central Asian states. China’s leader now meets annually with his counterparts from ASEAN, Japan, and Korea in the ASEAN Plus 3 meeting, and met with the same group plus India, Australia, and New Zealand in the November Asian summit in Kuala Lumpur. The U.S. is present only in the Korea talks.

China unquestionably has seen a rise in its prestige and popularity in the region compared to the U.S., partly as a consequence of these growing commercial and political ties and partly as a result of the general decline in respect for America not very different from what we have seen elsewhere in the world. But it would be going too far to see in these short-term developments a long-term trend threatening to American interests in the region. First, it is wrong-headed to see America and China as engaged in a kind of zero-sum game. China is not seeking to create a series of pliant satellite states in its own image, à la Soviet Union. It has not sought to damage U.S. alliances in the region. Second, the peoples of the region well understand that the U.S. presence is a valuable counterbalance to the growing Chinese presence. On this subject, I’d like to quote three panelists at our Brookings China Initiative launch. Ambassador Kishore Mahbubani of Singapore, who offered a generally positive view on China’s emergence, said “we want America to maintain a strong and sizable presence in the region because it is a balance of power that creates the support of opportunities that the countries of the region need?.The peoples of the region do not want better relations with China at the expense of their relationship with America.” Dr. Raja Mohan of India said, “I think the U.S. interest should be to provide for a local equilibrium.” And Ambassador Kim Kyung-won of South Korea said, “As China grows as a military power?Korea will be compelled to search for a more stable equilibrium in the NE Asian region and without the U.S. continuing to play a significant strategic role in East Asia, it is not possible to create a balance of power system in the region.” These clear perceptions of long-term national interests are likely to outlast the temporary weakening in the U.S. image in the region.

Finally, I would like to close with a few words about the most troubling development in the region in the last year: the deterioration in relations between China and Japan. The reasons for the frictions are well-known. On the Chinese side, there is resentment above all over Prime Minister Koizumi’s visits to Yasukuni Shrine, with what is seen as implicit glossing over Japan’s historical acts of aggression against China; and over some textbooks that make light of that aggression. On Japan’s side, there is bewilderment that the $32 billion in ODA provided over the last quarter century has received no gratitude; anger over China’s blocking of Japan’s bid for a permanent membership in the UN Security Council; and irritation over attacks on Japanese shops and facilities in China last spring. There is competition for energy resources by the world’s number two and three importers of oil for product coming from Siberian pipelines and from drilling along the mid-point in the East China Sea. Underlying all of these is a rivalry that seems inevitable in the 21st century between East Asia’s two dominant countries, both strong economically and militarily arguably for the first time in history. On the Japanese side, there is a sense of anxiety about what the future holds. On the Chinese side, there is more of a sense that “now it’s our turn,” with a bit of unsettling swagger. One immediate consequence is that China’s top leaders refuse to visit Japan and will not welcome senior Japanese leaders in China, prolonging the current “cold” political relationship.

We at Brookings have been troubled by these trends, which we believe are not only contrary to the interest of Japan and China but of the U.S. The U.S. does not wish to have to choose between our desire to maintain a strong relationship with our ally, Japan and the world’s fastest growing power, China. Escalation in tensions between the two could force us to do so, to the detriment of our interests. An Asia with high tension between its two strongest powers will not be a place of stability and prosperity. That is why we organized a trilateral conference of scholars among our three countries in Beijing last July, and we intend to hold another such conference in Tokyo. It is not simply a matter of getting the two squabbling sides talking to each other. As the three major powers in the East Asia-Pacific, greater consultation and coordination among our three countries will be necessary if we are to keep the peace and develop a prosperous region in the 21st century. The region certainly deserves better than the experience of the last one. A sound U.S.-China-Japan relationship would be a key cornerstone of the foundation of such an Asia.