Complacent Consensus on China

This piece originally ran in the Huffington Post.

Within the next few years, China will surpass the United States as the world’s largest economy.

Anticipating the impact of this milestone on our national psyche, the US policy class has been assuring Americans that there is nothing to worry about. Hardly a week goes by without a major media story suggesting China is an economic paper tiger: its economy is imbalanced, its leaders are corrupt, its banks are over extended, etc. Anyway, the stories routinely note, it will be decades before China catches up to us in per capita income.

Yet in the balance of global power, size matters. Many countries have higher per capita incomes than the United States (e.g., Norway, Qatar, Singapore). It is the large scale of the American economy that has made us the dominant political power in the world. Our big economy supports a big military, foreign aid, and allows policymakers to use access to our huge consumer and financial markets to buy allies and votes in the UN.

Unfortunately, it has also allowed us to borrow from the rest of the world to finance a chronic trade deficit. China, with whom we have the largest deficit, is as a consequence our largest creditor, holding over $1.2 trillion in US IOUs.

A short while ago, American pundits dismissed China as just a big pool of low wage unskilled labor. Yet last year, over one-third of the $315 billion of the U.S. trade deficit with China was in advanced technology products. The Chinese are graduating more engineers than we are. And multinational corporations are rapidly setting up research and development operations in China so they can be close to its production lines and its consumers.

Meanwhile, the Chinese are using their surplus dollars to secure raw materials and move into markets on every continent. Its huge dollar surplus also allows China to buy up American-based corporate assets, expanding their influence on our money-driven political system.

As enthusiastic promoters of unregulated global markets, US leaders have been indifferent to the effect of China’s expansion on the wages and job opportunities for the average American. But China, predictably, is also using its growing wealth to expand its military capacity, which only a few years ago, most American experts dismissed as feeble. China is now on the way to building a “blue-water” navy and technologically advanced missile, drone and satellite systems that will give it greater military capability in its immediate geographic region, and along the sea lanes that connect China to oil from the Middle East.

Is this a threat to the average American’s vital interests? No. But it is a threat to our foreign policy elites’ status as representatives of the global hegemon. As our economic influence shrinks, the tendency in Washington to use force to demonstrate America’s “credibility” is likely to grow.

So it is no surprise that there is bipartisan support for the Obama Administration’s current “pivot” from the Middle East to building up military forces in the Far East to keep China in its place. This could be the first step down a very dangerous path.

Washington’s assumption is that despite China’s growing economic power, it will have no choice but to accept US military supremacy in its own backyard. Although China‘s massive cache of dollars gives it the power to cause considerable damage to the US economy, the US policymakers happily conclude that the Chinese will never use it. Free trade has so integrated the two economies, goes the argument, that driving the US economy into crisis would shrink China’s biggest market, which they need for their export growth. Besides, what can they do with their dollars?  As one recent Pentagon report confidently concluded: “China has few alternative options for investing the bulk of its large foreign exchange holdings of U.S. Treasury securities.”

Perhaps. But Chinese leaders are driven by a fierce desire to restore national pride after a century and a half of humiliation by Western and Japanese occupiers. As their wealth and military capacity grow, they will hardly be content to rely on the US Navy to protect their global supply and distribution chains. And are as unlikely to accept permanent US dominance in the South and East China Seas as Americans would accept Chinese dominance in the Caribbean.

So it is not alarmist to see a potential clash between Chinese leaders’ desire to extend their regional power and American leaders’ determination to maintain their Post Cold War role as the world’s policemen. In todays complex global financial markets there are many ways the Chinese leaders might use their huge store of dollars to inflict major damage to the already weak US economy in a future showdown over their desire to elbow us out of their neighborhood.  And for a fee, there is plenty of Wall Street talent available to help them do it.

Yet, our foreign policy establishment seems unable to conceive of a future in which America is no longer everywhere the “indispensible” nation – and therefore in which they are no longer the indispensable people at global negotiating tables and forums.

Nor are they willing to acknowledge their own responsibility for policies that have systematically weakened the US economy at home and abroad.

China’s rise as a strong economic power was inevitable; the US decline in power was not. Pushed by lobbyists for globalizing corporations, both Republican and Democratic administrations have pursued trade and foreign investment policies that encouraged and even subsidized the transfer of jobs, technology and wealth to China in return for access by US corporate investors to cheap labor and overseas profits. Despite the clear evidence of the damage this has done to the US economic strength, both the Obama Administration and Congressional Republicans continue to pursue the same self-destructive policies.

History has not been kind to the ruling classes of a weakening hegemon who refuse to adjust to changed circumstances. The glib assumption that trade interdependence always supports peaceful relations misreads history. After all, most wars have been between neighboring countries, where most trade takes place. One vivid example is the years just before First World War – which spawned almost a century of violence and terror — when many in both countries were convinced that Germany and Great Britain would never fight because they were each others chief trading partners.

We cannot undo the harm that past follies have already inflicted on the US financial position in the world. But we can modify our behavior to reflect the shifting power relations those follies have created. Keeping our military nose out of China’s neighborhood would be a start. But the most important shift would be to refocus our international trade and financial policies from supporting the imperial ambitions of America’s elite to supporting the crumbing living standards of the average American.