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Implications of China’s rise for the US

December 19, 2010

IT was Napoleon Bonaparte who famously remarked about two centuries ago that China was a sleeping giant. “Let her sleep, for when she wakes up, the world will be sorry,” the great French general is reported to have said.

China has awakened and arguably no other country is watching the rise of the once sleeping giant with greater interest and apprehension than the United States, with which the former is competing for political and economic supremacy.

Few will disagree that more than any other factor, Sino-America relations (G-2 as they have been referred to) will shape the current century.

The Economist, London, in a recent issue has discussed the implications of the rise of China with special reference to the US. One view is that Beijing and Washington are condemned to be rivals, because a rising China will seek to shape the world in its own way, which will be seen by the US as a threat to its pre-eminence.

China looks upon the US as a waning power, which will try to obstruct its rise. Another view is that Washington and Beijing are not necessarily enemies, partly because both have stakes in preserving the current international economic order and therefore maintenance of global peace, and partly because China, unlike the former USSR, has no ambition to export its ideology or create colonies. Trust-building, the British weekly concludes, holds the key to peaceful Sino-America relations. China has to believe that the US will, in no way, hinder its rise, while Washington must believe that Beijing will not fundamentally threaten the way it is running the world. But is this possible?

To begin with, the economy is the mainstay of China’s power and it is conscious of the fact that economic growth predicates a peaceful, predictable and stable environment.

Accordingly, China has acceded to the Comprehensive Test-Ban Treaty (CTBT), is a member of the six-party talks designed to tackle North Korea’s nuclear programme and is a major contributor to UN peacekeeping operations in different parts of the world.

What is even more important is the fact that China, like the US, is a beneficiary of economic and trade liberalisation and has no alternative economic model to espouse.

Politically, there are quite a few issues between the US and China. Arguably potentially the most explosive is the Taiwan issue. China claims Taiwan to be its province, which has to be united with the mainland. Officially, the US is committed to the one-China policy recognising Taiwan to be part of China.

So far the status quo remains intact, with China exporting civilian goods to Taiwan and the US supplying arms to it. However, problems may crop up in case Taiwan formally declares independence and China resorts to the use of force to avert that and the US steps in on the side of Taiwan leading to a direct military conflict between the two great powers.

Economically, the Sino-America relations are at once competitive and complementary. The US and China are the world’s largest and the third largest economies and the largest and second largest trading nations respectively.

China has already overtaken Germany to become the globe’s top exporter of merchandise goods. The bilateral trade has gone up from $302 million in 2005 to $378 billion in 2009. China is the US third largest export market and the largest source of its imports. America is China’s top export market and the third largest source of its imports. American multinational corporations (MNCs) have invested billions of dollars in the enormous Chinese market. On its part, China is a major source of financing of US current account deficit through huge investment in the American bond market. On the other hand, American firms are finding it exceedingly difficult to successfully face competition from their Chinese counterparts at home. The US trade deficit with China has risen from $218 billion to $240 billion during last half decade.

This has happened at a time when the US economy is in straits and is facing double-digit unemployment. The current account deficit increased to $669 billion in 2008 before falling to $378 billion in 2009, while budget deficit was registered at $1.42 trillion at the end of 2009. In 2009, the US economy contracted by 2.6 per cent and is projected to register a modest growth of 2.6 per cent this year and 2.3 per cent next year (IMF’s World Economic Outlook, October 2010).

By contrast, China is booming: the economy grew by 9.6 per cent in 2009, when most of the world was in grip of recession, and is projected to expand by 10.5 per cent and 9.6 per cent this year and next year respectively. In 2008, China registered current account surplus of $436 billion, which dropped to $298 billion in 2009 due to global recession. The foreign exchange reserves have reached $2.6 trillion.

Faced with increasing economic competition from Beijing, the response of Washington has been two-fold: to take trade defence measures on Chinese products, notably textile and clothing, which remains a highly protected sector in the US; and to pressurize China on such issues as human right and intellectual property right (IPR) violation, subsidisation and an under-valued currency.

Since China’s economic growth is largely dependent on its export performance—exports constitute more than 40 per cent of the GDP—the Chinese government is reluctant to let the yuan appreciate significantly. As a result, the currency remains undervalued making China’s exports cheaper than they would be if left to market forces.

At a time when the global currency issue is heating up, pressure is mounting on China to set its foreign exchange regime in order. During a G-20 meeting in Washington in October 2010, the allegation was renewed that China has maintained its currency artificially low to increase exports at the expense of competitors (US, EU and Japan).

China is also being urged to focus on domestic demand, as increase in it will create space for exports as well as make Chinese firms sell more at home than abroad.

Chinese trade policy has come in for adverse criticism at the hand of the US for creating obstacles to enhanced market access for its firms. China is often charged with “inadequate” protection of intellectual property rights (IPRs) by America.

Since IPRs, such as copyrights and patents, are a key to the America’s competitive advantage in high value manufacturing, lack of adequate protection of these intangible assets in China represents a pressing challenge for its enterprises operating there.

The American Congress is mulling to clamp countervailing duty on Chinese exports for alleged subsidisation.

However, there are quite a few factors which warrant against such option. One, American based MNCs have invested heavily in China and a good deal of Chinese GDP is produced by the subsidiaries of these MNCs.

Hence, punitive action against China will also penalize these mega businesses and have a backlash at home. The influence that MNCs exercise on policy-making is brought out by a dispute between US and European Union in the WTO in which the USA had challenged the EU’s regime for banana import.

The USA does not export bananas to the EU. However, some US-based MNCs export bananas to the EU from Latin America. It was at the behest of these MNCs that Washington had lodged a complaint with the WTO—much to the annoyance of the EU.

In the second place, punitive measures against China would harm consumers in the US, who are getting inexpensive goods. At present, the US is facing a rather weak consumer demand, the largest component of the GNP, and needs inexpensive goods to push up the consumer demand.

In the third place, in China, the US gets a credible source of funding for its current account deficit. Imposition of duties may force China to disinvest part of its holdings of US government securities thus pushing the dollar down and causing great inflationary pressures on the US economy.

Governments in the West including the US are eyeing huge Chinese foreign exchange reserves to bail out their beleaguered financial firms.

Though Beijing has not ruled out the possibility of lending a hand to western governments, it has made it subject to certain conditions, such as softening of criticism of state of human rights in China, an attenuated US support to Taiwan, and removal of “discriminatory” trade restrictions on Chinese exports and businesses.

On its part, China is mindful of the repercussions of the economic slowdown in the West on its own economic performance. Chinese economic growth is mainly export-led and the US accounts for the bulk of China’s trade surplus of $196 billion. The economic crisis in the West will reduce demand for China’s exports and hamper its growth momentum.

In fact, this has already happened, as in the wake of global recession, China’s exports were reduced to $1.20 trillion in 2009 from $1.43 trillion in 2008.

To conclude, it is in the interest of both China and the US to work closely with each other and enjoy the fruits of globalisation.

However, paradoxically the very process of globalisation contains within itself the seeds of Sino-America conflict.