Hard choice for hardliners

Asia Times

BEIJING - The hoped-for containment of China by hardliners in the United States a la the Union of Soviet Socialist Republics (USSR) during the Cold War is based on two legs - military and economic confrontation.

Even before the final rush of the arms race in the 1980s, there was much military friction and very little economic contact between the two blocs. They were in fact largely independent economic entities, so much so that the collapse of the Soviet Union coincided with the boom years of the New Economy in the United States.

However, employing this strategy with China is impossible. Despite the fact that China is still quite low among US trading partners (eighth overall), cheap imports play an important role in keeping the American inflation rate low, especially as the US economy moves into difficult times and needs to lower interests rates and cut taxes. These measures, especially if coupled with costlier consumer goods - as would become the case with higher tariffs on Chinese imports - could lead to strong inflationary pressures, as some economists in Europe fear.

These concerns could change with more imports from India and an improved economic performance from Japan. But it is not clear whether this will take place any time soon. It took China more than 20 years of fast economic growth to achieve its present role in the American economy, and thus optimistically, and without considering Chin's responses, it would take five to 10 years for Indian imports to replace Chinese imports. By that time the United States would have a problematical relationship with India, similar to the one it has with China now, while China would again have almost doubled its gross domestic product (GDP), thus making the overall marginalization of the Chinese economy even more difficult.

The Indian economy is far from healthy in comparison to China's. In many areas, rural reform, widely considered the most fundamental base for rapid development, is still unknown. There is a huge gap between rich and poor and only a very thin middle class. Great religious and linguistic differences criss-crossing the country, which hamper the effective unification of the national market.

Furthermore, and in contrast to those Asian economies that are thriving, India's current and trade accounts remain in deficit and budget deficits for last year and this year are hovering at around 10 percent of GDP. These issues will put further pressure on the rupee, which has been sliding since the 1997 Asian financial crisis. In addition, the internal market is basically far more regulated than China's.

This is hardly the stuff to make one envision the Indian economy surpassing that of China in the foreseeable future, let alone replacing China in the world market.

Things are possibly even more difficult to predict with Japan. After a decade of stagnation, the new government promises far-reaching changes, yet the numbers are extremely ominous. Tokyo claims US$400 billion of nonperforming loans (the International Monetary Fund estimates the total is closer to $792 billion). Government debt on balance sheets is 146 percent of GDP, while there are some 150-360 percent of further off-balance sheets claims on the state. About 132 percent of GDP is in bank loans to private firms or households, and a further 52 percent is in other forms of corporate debts. This brings us to something like 480-590 percent of debts on the GDP.

It is fair to say that this mountain of debt is totally internal and hefty reserves of $360 billion guarantee the economic stability of the country. However, this trade surplus proves Japan's dependence on external trade. If compounded with the internal mountain of debt, it reveals that the internal market will be hard to stimulate and it will be tough to replace the dependence on external markets, mainly the US, which finances Japan through imports into America. In sum, in Japan it is even less clear if and when its economy will start growing again.

In this situation, in the foreseeable future it is clear that not only the United States needs China, so too does East Asia. Thus the economic leg of the two-legged anti-Soviet containment approach does not apply. Even Washington's former friction with Japan was based on two legs - commercial and technological issues. Japan created what was later called a bubble economy by over-evaluating its real estate to finance its market expansion abroad and its industrial research and development. The premise was that future returns would pay for high interest on the money borrowed. When, however, technology developed better and more rapidly in the United States, Japanese products couldn't sell and thus today's huge burden was created.

However, the Japanese example does not hold with China's situation. Beijing is not vying with US high-tech (and high-return) products. It exports low-end goods, and will continue to do so for a number of years. Further, unlike Japan in the 1980s, China is subject to a de facto high-tech embargo that will prevent high-tech competition between Washington and Beijing - even by the definitions of the staunchest anti-China "Blue Teamers" within the US government. In fact, the United States is likely to maintain its technological dominance for most of this century.

On a commercial level, China has been tackling its internal debt since 1993 when then vice premier Zhu Rongji, well ahead of the Asian crisis, spotted the problem of nonperforming loans in the banking system. Here the situation is improving and will improve further in the next years. Chinese exports are immensely important, but at closer look they are in a way "internal" as about 70 percent of them are concentrated in Asia. Thus it will be very difficult to curtail Chinese exports without affecting those of Washington's Asian allies keen on trading with Beijing.

Even the tension point of Taiwan looks very different under close examination. Last year, Taiwanese investment on the mainland doubled. The largest and strategically most important Taiwanese company, Formosa Plastics, signed a landmark agreement with Jiang Mianheng, the son of the Chinese president, to build a $1.6 billion chip factory in Shanghai. Chips are Taiwan's strategic production.

Moreover, the number of Taiwanese businessmen investing in the mainland increased by nearly 18 percent compared with an year earlier, and the percentage of Taiwanese businesses that have yet to consider investing in the mainland has been cut from 52 percent three years ago to 21 percent in 2000. Seventy-two percent of Taiwanese businesses on the mainland are mainly involved in manufacturing and production.

Here neither leg of the US-Japanese "friction policy" - commercial and technological pressure - appears to apply in the containment approach of the United States towards China. This leaves very little else.

Washington could stall China's entry in the World Trade Organization (WTO), but differences on agricultural subsidies appear minor in justifying a complete U-turn on China's entry, which is so dear to many American companies eager to do business with China, despite the concerns of the "Blue Teamers". Further, stalling China's entry in the WTO could push Beijing into bilateral agreements with its neighbors. These would benefit China while hurting American business interests.

There is no real alternative then but to let China into the WTO, and once it is there a wave of confidence is widely expected for at least the next couple of years, which will set its economy booming.

And there is the issue of the capital markets. China presently puts just 5 percent of all its savings into the stock markets. The savings are increasing by about $400 million a year, so if only 25 percent of these increased savings went into equities, the stock market would grow by $100 million a year. The problem at present is that the bourses in China have been dogged by problems, such as regulatory and transparency issues, but the government appears determined to solve them. If it does so in the next couple years, China's equity markets, including Hong Kong's, could well overtake Tokyo as the trading center for Asia.

So, what can be done to contain China's development, which so scares American hardliners?

The United States could use several political pressure points to put Beijing on the spot: Taiwan, the Dalai Lama, the Falungong, human rights, alleged espionage, lack of democracy and military confrontation with more surveillance flights near China's territorial waters.

But the effect of raising these issues is growing weaker, as the recent exclusion of the United States from the UN human rights commission proves. Also, in almost all of these issues China is improving, something that is ill served by its poor public relations skills.

Moreover, on a practical level, many Chinese wonder what the Americans really want to do as they keep China under pressure on these issues while at the same time allowing trade to grow. In theory, political pressure should reduce the business predictability of a country, making business more risky. But President George W Bush appears not to really want to affect this predictability, as illustrated by his recent support for the extension of Permanent Normal Trade Relations (PNTR) to China this year.

In other words, hardliners in Washington can keep China on its toes, but they cannot seriously hurt her economy. Yet the pressure exists, and it is undeniable, such as friction over human rights and espionage. When a French or Israeli spy is arrested in the United States, Washington tries to keep a lid on it and, within a couple of days, everything is forgotten. With China, everything is different.

The result of this American pressure on China in Beijing appears to mean only one thing: the erosion of the bank of confidence the United States has had with China for over a century.

The United States was the cornerstone of Chinese foreign policy with the early republic, the nationalists and even the communists, who, when they had the opportunity, sent their children to study there. The Chinese remember that it was the United States which brought China into the United Nations, and it was Washington that opposed the partition of China, as favored by Britain and the Soviet Union after World War II. The Chinese also remember US assistance in the anti-Japanese war, and the enthusiasm of many reporters for Mao Zedong and his fellow communists.

Many Chinese went to the United States in the 1980s and 1990s with starry eyes, dreaming the American dream. They have returned, and are now dissatisfied with the manner in which the United States is treating China. In reality, the United States is still more interested in China than Europe, yet often US rhetoric clouds this reality. The volume of trade and investment between the two countries bears testimony to this.

Yet in the first five months of the Bush administration, Washington has reinforced the discontent of dissatisfied Chinese. Accusations and declarations of principle against China, with little real consequence in the hard world of economy, have soured relations, but little else.

Unless, of course, this month Congress does not extend PNTR for this year. Then it will be a different ball game in which China will suffer a lot, but the United States will not go unscathed - and the world will be sucked into a huge black hole from which there will be no easy way out.

    Part 1: US-China: Cooperation, not containment (May 31) ( (2001-06-01 Asia Times)


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