US China Economic Relations: Kissinger’s Views – Analysis

By Kandaswami Subramanian

In his book On China Dr. Henry Kissinger has a vision of the future of U.S. China economic relations. Indeed, it is very tempting, coming, as it does, from a diplomat who was a cold realist all along his life and who did not hesitate to take unconventional or contrarian views on many issues. Naturally, the book is all about America’s relations with Beijing.

The present is a time when the U.S. faces no important external challenges; nor is it likely to face in the foreseeable future. Therefore, as Kissinger notes, “The relationship between China and the United States has become a central element in the quest for world peace and global well-being.”

As a part of this quest, Kissinger articulates a vision of a “Pacific Community,” which he describes as “a region to which the United States, China and other states all belong and in whose peaceful development all participate.” The concept has its historical parallel in the Atlantic Community formed after the Second World War. Further, he feels that the emergence of a Pacific community would “reflect the reality that the United States is an Asian power” and also respond to “China’s aspiration to a global role.” Indeed, by this argument he tries to hold a balance between the current strategic expectations or goals of the U.S. and the claims (demands!) of emerging nationalist Chinese.

Mr. Kissinger may not be accused of being a utopian in his assessment. He is cautious and tentative and his hopes for the future of Sino-American relations are more about what should not happen than about what should. These are based on the current template of relations between the two countries and the seeds of tensions and potential conflicts. What are the conflicts?

The contentious issues read more like a laundry list and to summarise selectively are: Currency rate for Yuan; Financial and market opening by China; WTO issue such as those on subsidies and the non-market status for China; China’s Innovation policy which causes consternation among MNC investors; IPR issues; Standards policy of China which tends to restrict trade volumes with MNCs; Public procurement policy; supply chain maintenance; hurdles to Chinese investment in the US, especially by its sovereign wealth funds and China’s Rare Earth Elements policy. Each issue has its historical baggage and newer developments complicate them by the day. And yet, negotiations are ongoing in various forums, especially in the Strategic Economic Dialogue (SED). These do not include security or strategic issues like China’s South Sea forays, its naval expansion to safeguard transportation of oil and raw material, its footprints in Africa and Latin America. These strategic issues stemming from the rapid growth of China get surcharged and create the potential for clashes.

In the background of these conflicts, actual or potential, Kissinger’s first fear is that the relations between the two countries should not degenerate into a zero-sum game. He devotes many pages to analyse what happens when great nations compete without inhibitions. The rise of Germany after its unification unsettled the European balance and led inevitably to war. Though he notes that “even the most precise analogy does not oblige the present generation to repeat the mistakes of its predecessors,” he is uneasy about the postures of the U.S. and China.

Many foreign policy analysts believe that the conflicts between the U.S. and China are real but they will not necessarily turn into war. “Most scholars agree that the conflict between the two countries include their political incompatibility, economic competition, and military competition, but there are disagreements on what is the fundamental conflict between the two countries.”[i]

Among many neo-conservative analysts “regime change”, including issues like ‘democracy’, ‘human rights’, etc. (the usual bandwagon!) become dominant and create excessive heat and rhetoric. Kissinger does not share this view and feels that Washington should not seek to change the nature of the Chinese state. This flows from his deep reading of China’s history and his relations with Chinese leaders and the public over the last forty years. He has undertaken more than seventy trips to China and some of them were personal. The only other person who can make a similar claim is Hank. Paulson, former U.S. Treasury Secretary.

He wonders whether the U.S. will be able to change the Chinese political (state) structure or is ready to pay the price for such a regime change. Though Kissinger does not mention it, the U.S. misadventures in Iraq and Afghanistan should inform future policy makers. He goes along with the view that while dealing with the Chinese leaders, other countries should recognize that China’s policies on national security, including economic security, are strongly influenced by “China’s formative and developmental experience, particularly its negative treatment at the hands of the members of the international community, China’s exploitation by other states during the ‘century of shame’ from the mid-1840s to the time of the establishment5 of the People’s Republic in 1949.” [ii]

In short, some of these issues are sensitive and create sharp reactions from the Chinese authorities. It is also significant that, perhaps for the same reasons such as his deep understanding of the Chinese polity, its psyche and the attitudes of its leaders, he does not condemn the Chinese over their suppression at Tiananmen Square, as many U.S. analysts habitually tend to do. He pleads for a combination of “realism” and “idealism” in dealing with future relations with the Chinese to ensure the “best outcome.”

Indeed he is not dreamy eyed about a Pacific Community or “a partnership” between Washington and Beijing. A more likely development is what he calls “co-evolution,” which means that “both countries pursue their domestic imperatives, cooperating where possible, and adjust their relations to minimize conflict.” This implies that the two sides should “attempt to elevate familiar crisis discussions into a more comprehensive framework that eliminates the underlying causes of the tensions.” There are many as listed earlier.

This takes us on to the issues of economic interdependence and the changes in their relationships. The changes have come about partly in response to developments and mostly in the growing interaction between the U.S. and China themselves which had become dominant economic powers. Economists like Niall Ferguson could coin pithy names like Chimerica to describe the newer relations.

China which was isolated and shut out from the global trading system in the fifties and sixties has turned into the second most important power. The estimates of the IMF suggest that it will overtake the U.S. by 2016. As Arvind Subramanian put it, [iii] “When the presidents of China and the United States met last week in Washington, neither was likely to be aware that measured in terms of purchasing power, it is Hu Jintao, and not Barack Obama, who represented the world’s largest economy.”

For years, the American public had viewed China as a poor developing country which was rising due to the helpful hand extended by the U.S. in the post Nixon years. During the cold war years, it was one of “engagement.” Indeed, China was transforming and emerging as a member of the international community. China could enter many international organisations including the WTO. It was the assurance of access to U.S. market that led to economic reforms and catalysed China’s attempts to modernize its economy. The export oriented development was based on the new found relationship with the U.S. It led to large flows of foreign direct investment and a greater role for U.S. companies to enter the Chinese market and create export platforms, supply chains, etc. which began to feed the western mills. It was truly a part of the new wave of globalization and the ascendancy of the Washington Consensus as a philosophy of economic development.

It has to be noted that in all its efforts, unlike many developing countries including India, China did not depend on western or American assistance for its development. It has given them policy autonomy to decide issues based on national priorities and not on terms set by others. They drew upon their own national savings and directed state-owned banks (all banks were state-owned in the early years!) to fund the construction of massive infrastructure which has made China the envy of all developing countries and turned that country into a hub of global manufacturing. This is not the place to describe the phenomenon of “China price” which attracts most MNCs to set up shop in China. There is a premium of at least 30 to 40 per cent when companies produce in China.

Moreover, China is obsessively concerned about “comprehensive economic security” for the country and its people. They continue to rely on state-owned enterprises to enhance productive capabilities and assure employment to the labour force.

Their policy governing the exchange rate for their currency Yuan is holistic and seeks to preserve economic and social stability. This is not appreciated by the U.S. or other governments in their disputes with China.

We refer to these to establish the hypothesis that differences in perception between China and other governments often lead to misapprehensions. In a rare interview Kissinger [iv] explained the decision making process in China. He said, “American business leaders tend to think of their activities as a series of episodes to be managed by legal process and predictable norms. The Chinese manage their internal affairs by relationships, not by processes. So when one operates in China, one has to understand how the social and cultural network operates.” He went on to elaborate how “the Chinese for centuries managed to keep their internal decision-making process untransparent.” He expressed the hope that the process would become more transparent as it evolves.

Unfortunately, an average citizen in the U.S. does not have the experience or prescience of Kissinger and is given to irrational fears. It is an area where economic interdependence creates misgivings. Even by 2007, a Report [v] of an Independent Task Force sponsored by the Council on Foreign Relations detailed the sources of unease governing U.S. China relations. It noted: “China’s rapid economic development, accompanied by an enormous and growing trade surplus with the United States, is a major factor. The economic challenge posed by China has become synonymous with the larger challenge of globalization, especially the pressures created by competition with low-wage economies.” Trade deficit is estimated at $270 billion during 2011 and has gone on unabated since 2003-4. That is not the only part.

The other part is the growing debt of the U.S. which rose to $14 trillion in 2010 and is expected to cross $15 trillion this year. At the same time, China has built a foreign exchange reserve of over $3.4 trillion and has invested around 60 to 70 per cent of it in U.S. Treasuries or Agency papers. The financial crisis has put paid to the claims of the superiority of the U.S. style capitalist model vis-à-vis the Chinese. The S&P downgrade of U.S. Treasuries was a psychological blow to the Americans. There are fears on both sides: the fear on the U.S.’s side that the Chinese could pull out the Treasuries and bring down the dollar; the fear of the Chinese that U.S.’ monetary policies, in particular Quantitative Easing could destroy the value of their assets. In fact, the current economic crisis seems to have led to a new relationship – one of “balanced terror” as in the cold war era. Fortunately, both sides are restrained by their assessment that victory, if any, would be pyrrhic.

American people increasingly feel that China is catching up to the U.S. According to a survey conducted by the Washington-based Pew Research Center for the People and the Press in 2011, about 47 per cent of participants say China, not the U.S., is the world’s top economic power, while 31 per cent continue to name the U.S. Though the survey does not fully suggest ground realities, it reflects that American people feel anxious with China’s growing power and influence. There is a fear among U.S. officials of losing global influence compared to China. President Obama had to declare repeatedly that the U.S. would remain the number one economic power.

The fear of becoming or remaining a ‘declining power’ could affect policies and global strategies. As one of the Financial Times columnists explained, [vi] “America must manage its decline.” Even if American analysts deny the reality of its declining status, it may influence their policies in an unintended way.

As explained by Zhou [vii] realists believe that the relationship between the two will basically be stable and peaceful. However, pessimists suggest that “rising states usually want to translate their power into greater authority in the global system in order to stand up by taking assertive strategy toward the U.S. In fact, they begin to wonder whether China is departing from Deng Xiaoping’s foreign policy of tao guang yang hui (hide brightness and cherish obscurity) toward the U.S. Elizabeth Economy of the Council on Foreign Relations wonders whether the consensus of the Deng era has begun to fray and Beijing has begun to expand its influence to the rest of the world.

There are sober analysts who see current trends differently. Joseph Nye Jr. presented [viii] a different perspective. Referring to asymmetries in economic interdepence which limit the powers of the partners and to the formation of Groups like G20 to share power he takes this view: “Neither side is in a hurry to break the asymmetry of their vulnerability interdependence, but each side continues to jockey to shape the structure and institutional framework of their market relationship.”

Prof. Boutin of Deakin University takes a more realistic view [ix] on the current situation. He adds, “The common ground is eroding the most where the United States is concerned. The greater salience of national economic security means that regional economic and political trends are having the greatest impact in this case. American authorities are experiencing the greatest difficulties accommodating their national and comprehensive economic security objectives, and are likely to be faced with increasingly difficult choices. For the present, they are responding by limiting transnational collaboration by American industry in key sectors. A strengthening of this tendency has considerable potential to undermine the extensive economic interdependence which has developed in the Chinese and American economies, with a negative impact on comprehensive economic security in both the cases.”

Needless to add, both the countries have much to gain by greater cooperation. Unfortunately, they are caught in a trap. As Nye Jr. puts it, [x] “.. hubris and nationalism among some Chinese as well as unnecessary fear of decline among some Americans make it difficult to assure this future.”

Economic interdependence need not necessarily bring about greater welfare among countries. They could create tensions, loss of trade, investment, etc. Policymakers should learn to manage or direct the relations to serve agreed priorities. On date, such an agreement on priorities is lacking and Kissinger’s vision of a Pacific Community is wishful.

(The writer is a Former Joint Secretary, Ministry of Finance, Government of India)

[i] Jinghao Zhou (2011), American Perspectives versus Chinese Expectations on China’s Rise, International Journal of China Studies, Vol.2, No.3, December 2011, pp.625-645.

[ii] Boutin, J.D. Kenneth (2011),Beyond interdependence: The Challenge of Economic Security in a Changing Political and Economic Landscape, Deakin University available at www.deakin.edu.au/arts-ed/shss/events/fulbright/boutin.pdf

[iii] Arvind Subramanian (2011), Is China already number one? New GDP estimates, East Asia Forum available at http://www.eastasiaforum.org/2011/02/03/is-china-already-number-one-new-gdp-estimates

[iv] Henry Kissinger: China then and now at http:/finance.fortune.cnn.com/2011/09/08/henry-kssinger-china-the-and-now/

[v] U.S.-China Relations: An Affirmative Agenda, A Responsible Course, Report of an Independent Task Force, Council on Foreign Relations, 2007.

[vi] Gideon Rachman (2011), America must manage its decline, Financial Times, October 17, 2011.

[vii] Ibid Note i above.

[viii] Nye, Joseph (2010), American and Chinese Power after the Financial Crisis, The Washington Quarterly, October 2010.

[ix] Ibid Note ii above.

[x] Ibid Note viii above.