Sunday, 29 May 2011

America’s war with China

(This is reposted from earlier, to correct some infelicities of style and some minor inaccuracies.) 

“Today, we’ve shown that our governments can work together, as well, for our mutual benefit … And that includes this bit of news: Under a new agreement, our National Zoo will continue to dazzle children and visitors with the beloved giant pandas."
President Obama’s toast to President Hu and the Chinese delegation at a state dinner in Washington DC, 19 January 2011

Obama’s welcome for another extended loan from the Chinese – this time, two giant pandas for another five years – says more about America’s problems than he might realise. The US is finding itself with less to offer than the Chinese, and it is unlikely relations between the two countries will be smooth enough to accommodate the pandas in five years’ time. While America is head, missiles, jets and shoulders above all its rivals, China is catching up fast. Fast enough for China to be the centrepiece of US military and economic planning. This article reviews the key elements of the rivalry between the US and China, and the analysis suggests that the rivalry will lead to some form of war. Under imperialism, that is how rivalry plays itself out. This is not a prediction of direct war between the US and China in the year 20XX. It is a prediction that the economic tensions between the US and China cannot be resolved through cooperation between the two powers.

1. Who’s the biggest on the block?

China’s global economic status has risen dramatically. In April this year, the IMF predicted that China’s economy would overtake the US by 2016, or panda renewal time. Although there were arguments about the method used for projecting this outcome, nobody could doubt that a country growing around 10% per year, more than three times as fast as the US, would catch up pretty quickly.[i] It is this prospect, and the growing Chinese ‘footprint’ in the global economy, which worries the US. Never mind that per capita income in the US would remain higher than in China for a much longer period. Even that comfort for the US would be at risk if the economic privileges it holds as the main imperialist power came under threat.

2. US-China trade symptoms

The US has had a trade deficit every year since the mid-1970s, long before China became a key player in the global economy. But today China provides America with a vast array of cheap imports that keeps living costs and company wage bills down. US corporations operating in China import a lot of the goods. The imports also boost the profits of the importing companies, like giant retailer Wal-Mart. However, US politicians are far from seeing trade with China as a blessing. Instead, like Butch Cassidy & the Sundance Kid, the all-American robber heroes look down from the hilltop at the hostile trackers who cannot be shaken off, fearing for their lives, and they ask themselves: “Who are those guys?”

Last year, trade with China alone was responsible for 42% of the US deficit in goods: $273bn out of a total of $647bn. The percentage has doubled from a decade earlier. On top of the trade flows, there are other big payments crossing the Pacific. The most striking is that China gets around $46bn per year in interest payments from the US government, because China owns a large mountain of US Treasury debt. Even the business deals that usually provide the US with valuable foreign income – services payments and direct investment revenues – don’t help much in the case of China. Add all these payments up and the result you get is that China accounted for nearly two-thirds of the US current account deficit in 2010, or $302bn out of $470bn. This is up from a fifth in the year 2000.

American politicians moan about ‘unfair trade’, but the reality is that they are losing the competitive war with this adversary.[ii] Even though the total US deficit has now dropped – the recession cut demand for imports and the weaker dollar helped exports - net US payments to China have barely fallen (see Chart 1). This shows how much the US has become dependent on Chinese imports. More worrying for US economic pride is that in 2010 the biggest US export to China in 2010 was soybeans, while the biggest import from China was computers![iii]

This does not mean the US has become a peasant society, having to export agricultural commodities to make a living. Nor does it mean that China has become Silicon Valley. But you get the impression that this can’t go on much longer. When America’s domestically-owned auto industry is bankrupt, when a major electronics corporation (GE) makes half its revenues from financial services, when its principal IT companies (Apple and Microsoft), pharmaceutical and oil companies all rely on monopolistic premium pricing, when its banks are dependent on the continued global status of the US dollar and huge government guarantees, and when they all stand, sponsor forms ready, for a share of this year’s $685bn of Pentagon funds, the image of a vibrant, dynamic US capitalism is as real as Homer Simpson’s work ethic.

Chart 1: US current account deficit, 1999-2010

Source: US Bureau of Economic Affairs, author’s calculations.

3. Not best friends

America’s worries about China have been building slowly. Just after the Second World War, the US was in a dominant position, with overwhelming military and economic power. The European imperialist countries and Japan were defeated or decisively weakened. They were brushed aside as America began to set up a new system of domination. But the US strategy did not achieve its goals in Korea. As hard as they could try, the US only managed a stalemate in the Korean war of 1950-53, because the northern part of the country was backed by China.[iv] America still smarts from the defeat. Ever since, the US has had a problem with China, the country that could prevail with manpower despite lacking in firepower.

Fast forward to the present, beyond the Nixon-Kissinger rapprochement with China in the 1970s, and the old US-China problem is revisited today in a more challenging form. In the past couple of decades, China has been the world’s fastest growing economy, with an ability to deliver vast volumes of cheap exports to the rest of the world. China has also made use of the cash from its trade surpluses in order to invest abroad. For example, China’s government now owns a staggering $3 trillion in foreign exchange reserves that are invested in foreign bonds (roughly half in US Treasuries alone). If all the dollars China owns in its reserves were dollar bills, and these bills were placed end-to end, they would reach a distance from here to the sun and almost back again. I don’t suggest that you try doing this, nor that China’s expanding space programme is going to try it either. But the huge reserves are how China earns tens of billions from foreign interest payments from the US and other countries.

However, it is not the Chinese ownership of US Treasuries or other assets that concerns America. This is partly because the yields are low, and also because the interest and principal payments, ultimately, are at the discretion of the US. America relies on the old dialectic of debtor-creditor relations: ‘Owe the bank $100,000 – your problem; owe the bank $1,000, 000,000,000 – the bank’s problem’. US research has also shown that the appetite of foreign central banks for US bonds has allowed US long-term interest rates to be as much as 1% point lower than they would otherwise have been. This has reduced funding costs and mortgage rates for the debt-ridden republic. Furthermore, the US is not that worried that China would ‘dump’ US Treasuries, leading to a collapse of the dollar and higher US interest rates. It realises that the odds are stacked against this because China would be devaluing its own assets.

What we have seen instead of a rush to the exit is that China has slowly reduced the risk it has to US dollars in its rising foreign exchange reserves. It has also switched its investments into more strategically valuable and lucrative areas. China has reduced its dollar risks through buying other currencies than the US dollar and by hedging against the risk of a fall in the dollar’s value.[v] It has also used several hundred billions of dollar assets to recapitalise its banking system. Most decisively, the money has funded its expansion overseas. It is the latter course of action that has caused alarm for US imperialism.

China has been scouring the world for raw material resources and has done deals with dozens of countries to take a stake in future supplies. The Committee on Foreign Investment in the United States has often pushed China back from buying US companies, including stopping a bid for Unocal, the US oil group, in 2005. But many developing countries see advantages in getting cheap Chinese finance, development assistance and what the London Financial Times calls China’s “grand infrastructure-for-resources deals”.[vi] These are the kinds of attractive deals that have not been forthcoming from the major powers, least of all the US. Alongside raw material supplies, such deals build strong political relationships for China.

In 2010, China bought some $55bn of foreign assets, including outright acquisitions and taking a share of companies, especially in the fuel and raw materials industries. The pace picked up in 2011, with about $15bn of deals in the first quarter alone.[vii] By March 2011, the Financial Times could quote US Secretary of State Clinton’s frustrated statement to a Congressional hearing:

“Let’s just talk, you know, straight realpolitik. We are in a competition with China. Take Papua New Guinea: huge energy find ... ExxonMobil is producing it. China is in there every day in every way, trying to figure out how it’s going to come in behind us, come under us … I might also mention China has about a $600m development programme for these Pacific island nations. And what do we have in a response? Zero.”[viii]

It was not only Papua New Guinea, and it wasn’t just oil, that risked falling under growing Chinese influence. The Wikileaks-released US embassy cables from recent years have showed US diplomats fretting about Brazil, Sri Lanka, Thailand, Algeria, Ethiopia, Kenya, Nigeria, Sudan and Kazakhstan, among others. The cables did not appear to mention the 75 Chinese companies and 30,000 workers in Libya. In another leaked cable, the US assistant secretary of state for African affairs opined: “China is a very aggressive and pernicious economic competitor with no morals.” The moral integrity of the US is, of course, taken for granted.

4. A bigger splash

In early May this year, on one of those late spring days in Washington DC that has birds singing in the trees and the imperial machine refining hypocrisy to ever more noxious levels, the little noticed third annual US-China Strategic & Economic dialogue took place. Secretary of State, Hillary Clinton, proclaimed: "China and the United States face a wide range of common regional and global challenges … How our two countries work together to meet those challenges will help define the trajectory, not only of our relationship going forward, but the future peace, prosperity, and progress of the world."[ix] Beneath the vacuous abstractions, this had the air of a mafia don inviting in a rival for a business discussion, worried that the old division of territory was breaking down and that there could be ‘misunderstandings’.[x]

The US is all too aware that China’s growing strength represents a ‘security’ threat to US interests as well as an economic one. A special China Economic and Security Review Commission every year provides the US Congress with an examination of all the current issues. The November 2010 report was 324 pages long, covering US-China economic relationships (mainly US indebtedness to China), China’s ‘growing air and conventional missile capabilities’, its activity in Asia (especially in relation to Taiwan) and examples of China’s ‘cyber attacks’ on the internet. The report pointed to the ‘intensification of a number of troubling trends’. It worried most about China’s improved military capability:

“Beijing has expanded the PLA Air Force’s focus in recent years from solely concentrating on territorial defense operations to now include extraterritorial offensive operations … Beijing has also strengthened the PLA’s ability to conduct conventional missile strikes … As China’s air and missile modernization efforts progress, Beijing’s ability to threaten US forward deployed forces and bases in the region is improving. Any PLA missile strikes and air raids against US bases, if successful, could force the temporary closure of regional US bases and inhibit the US military’s ability to operate effectively in East Asia.”[xi]

China is far behind the US in military power, but it is catching up fast here too. The US seeks to hold back growing Chinese influence, trying to make the most of tensions between China and other countries worried by its rise, especially in Asia. But they have to put up with the mockery from a new global power that taunts them. Back in 2008, after the financial crisis had hit the US and shortly after the collapse of Lehman Brothers, Gao Xiqing, president of the China Investment Corporation, the $300bn sovereign wealth fund, in an interview with an American journalist said: “The simple truth today is that your economy is built on the global economy. And it’s built on the support, the gratuitous support, of a lot of countries. So why don’t you come over and … I won’t say kowtow, but at least, be nice to the countries that lend you money.”[xii]

Being laughed at is bad enough when you are used to being the top dog. What makes it worse is that China’s rise is an important factor undermining America’s ability to direct global politics in its own interests. From sanctions against Iran to dealings with African, Asian and Latin American countries, China offers an alternative to US power that the US will find it ever harder to live with.

5. Conclusions

Most media reports focus on the US-China trade deficit as the key issue. But the deficit is a sign of the relative economic decline of the US, and this is the real problem for America. The dollars America pays for its excess imports, or as interest on its endless borrowing, are dollars that are not available for power projection. The irony is that American military spending has been financed, at least in part, by Chinese buying of US government securities! But China’s appetite for this kind of ‘investment’ has slumped. Instead it is buying up real overseas assets and resources directly with the revenues it earns. It is going to get harder for the US to borrow to maintain its status, and it is going to get harder still to stop shrinking relative to China. Already, the American cash available for bribes and persuasion now looks puny compared to China’s, and a deal that offers ‘infrastructure for resources’ looks far more attractive to many countries than the US-led model of growth that imploded with the financial system in 2007-2008.

This is a recipe for some kind of war between the US and China. That is a deliberately vague phrase, because there are many opportunities for conflict and it is not possible to highlight which one might trip the wire, or how a conflict might start, whether directly, or very indirectly, through proxies. Each power can use its many allies and relationships around the globe to cause trouble for the other: America has (had?) lots of allies; China is building many more. But a minimum kind of trouble is already being produced: the implicit denial of access to resources that comes with bilateral deals and investment links. This not so very far away from the next step: closing off an economic territory to others by force of arms, as was prevalent in the 1930s and before 1914. As one US Congressman put it in a 2007 report to Congress on China: “The PRC’s air and naval forces have dramatically improved their capabilities to extend the battle space beyond Chinese territorial waters and [are] increasingly focused on anti-access and area-denial capabilities.”[xiii]

In common with all other US reports, this one also characterises China as the potential aggressor. The US by contrast is considered to be using its naval and other military bases around the world to advance the ‘peace, prosperity, and progress of the world’, as Clinton might say. This rather overlooks the fact that the US had foreign direct investments worth $4,303 billion around the world at the end of 2009, not far short of 20 times China’s $230bn.[xiv] But the establishment of this US footprint on the global economy is considered ‘natural’. To challenge it is an aggressive disruption of common sense, law and agreed institutions, while China’s growing footprint is an intrusion on the imperial territory and will likely soon be described as a threat to ‘world peace’.

Even though China’s military is currently well behind the potential destructive power and scope of America’s, that China might restrict or inhibit US operations in even a few areas is a serious threat since it challenges the image of America’s global omnipotence. Report after report, from almost every institution or department of the American government, testifies to the obsession with the rise of Chinese influence and power. You don’t have to be a catastrophist to think that this will not end with more smiling exchanges of pandas.

Tony Norfield, 29 May 2011

[i] See the discussion (15 February 2011) by Professor John Ross on relative US-China growth rates and assumptions that lead to a central prediction of 2019 for when the US economy will be eclipsed by China’s.
[ii] The regular US complaints centre on the proclaimed ‘undervaluation’ of the Chinese currency, the factor supposedly responsible for the US deficit in trade with China and the loss of domestic jobs. This topic will be examined in another article, but it is worth noting that the US has freely used currency manipulation itself since the 1970s to try and gain competitive advantage.
[iii] In 2010, US exports of soybeans were $10.8bn and accounted for 11.8% of goods exports, the largest category of export listed. US imports of computers from China amounted to $39.3bn, or 10.8% of total US goods imports, also the largest category. In addition, China exported $28.2bn of computer accessories, peripherals and parts to the US. Statistics are taken from the US Bureau of Economic Affairs international database.
[iv] The Soviet Union’s support for China at this point was a key factor dissuading the US from using nuclear weapons against China in the Korean War.
[v] China is generally believed to have had around 90% of its foreign currency reserves in US dollars in the early 2000s. Since then the proportion has fallen to more like 60-70%. A bit over half the US dollar assets are Treasury securities; other dollar assets mainly comprise Fannie Mae and Freddie Mac bonds. The euro, especially, but also sterling, the Japanese yen, the Canadian and Australian dollars have made up an increasing proportion of currency reserves. China’s hedging of some US dollar currency risk has been done through Chinese banks overseas, mainly using currency options, so that even if underlying dollar bond assets are not actually sold, there is less damage from a fall in the dollar’s value.
[vi] Tom Burgis, ‘China builds friendships downstream in its Nigerian oil feeding frenzy’, Financial Times, 17 May 2010.
[vii] Helen Thomas, ‘China lights a fire in global dealmaking’, Financial Times, 5 April 2011
[viii] See ‘The China syndrome’, Financial Times, 3 March 2011.
[x] The fear of ‘misunderstandings’ is pervasive in a number of US political reports on relations with China. Many recommendations from these reports argue for dialogue with and questions to Chinese counterparts to ensure there are no misunderstandings. However, it is patently clear what China is doing and what the US does not like. It does not take much understanding. The most that can be said for such recommendations is that they might help neutralise a ‘mistake’ that otherwise would lead to war. Meanwhile, each side is preparing for a future conflict.
[xi] It is almost amusing that the report can talk about the extensive US military bases abroad, but see the existence of these as nothing worthy of question. See the ‘2010 Report to Congress of the United States-China Economic and Security Review Commission’, p5.
[xii] James Fallows, ‘Be Nice to the Countries That Lend You Money’, Atlantic Monthly, December 2008.
[xiii] See p215, ‘China’s Military Modernization And Its Impact On The United States And The Asia-Pacific’,
[xiv] The data here are taken from ‘World Investment Report 2010: Investing in a Low Carbon Economy’, United Nations Conference on Trade & Development, July 2010, available on their website.

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