Issues 2012

The Issue

The relationship between the United States and the People’s Republic of China (PRC) is one of necessary cooperation and intense competition. The U.S. must maximize the benefits of the economic relationship, even as it maintains the forward-deployed military, alliances, and partnerships to balance China’s aggressive bid to displace it as the Asia-Pacific’s preeminent power.

China and the United States, as the rising power and the current dominant power, are constantly competing with each other throughout East Asia, even as the two economies increasingly intertwine. As China’s strategic center of gravity has shifted to the coast, Beijing’s views of its “core interests” and fundamental national concerns mandate dominance, if not outright control, of the region lying within what it calls its “first island chain” stretching from Japan through Taiwan and the Philippines to the Malacca Strait. That the various East Asian states along that line are U.S. allies as well as major Chinese trading partners only highlights the complicated situation confronting U.S. decision-makers in East Asia.

The American economy depends far less on China than the Chinese economy depends on the United States. To function efficiently, China’s investment-driven economy relies on the open global system created by the U.S. The relationship is highlighted by trade and investment. The U.S. buys more goods from China than any other nation and is by far China’s largest national trade partner. China’s total balance of payments surplus has continued to balloon as manufacturing fuels the nation’s continued growth. However, without such a willing export outlet as the United States, constant oversupply would generate crushing deflation and cripple genuine Chinese growth.

Complementing our large trade imbalance with China is an investment imbalance. China’s huge reserves leave many leaders wary of China’s influence on the United States as a creditor, especially when our nation’s debt poses such an increasing threat to our financial security and solvency. China has business contracts and financial investments across the globe, but the bulk of its money can be found in U.S. dollar assets, as the American market is the only one large enough to absorb China’s giant foreign currency reserves. The lack of investment choices and China’s overriding interest in security and return on investment severely limit any influence China’s debt holdings have on the U.S.

Without the U.S. dollar as the world’s reserve currency and the American bond market as a safe haven, China’s exchange rate and balance of payments regime could not function.

The PRC gains considerably from the American consumer but relies utterly on the American-led system. It has used this system to become the world’s second-largest trader (after the U.S.) and to invest tens of billions of dollars in Australia, South America, and sub-Saharan Africa.

China is indeed a growing economic powerhouse, but serious structural economic and even political issues hamper its further development and potential for economic leadership. These weaknesses have been exacerbated in important ways by renewed state intervention in the economy beginning around 2004.

For example, the reliance on state-directed investment has led to a profound economic imbalance and could threaten future growth. Frantic spending in response to the global recession has brought huge amounts of waste and distorted resource allocation. This is manifested in inflation, debt pressures, and even a slowdown in growth. China’s own numbers indicate that its economic growth has slowed for five straight quarters, and that trend is likely to continue.

Critics claim that the increasingly close economic ties between the U.S. and China have cost American jobs. China’s exchange rate policies in particular are said to be harmful. China’s exchange rate has been appreciating, and its currency policy is not to blame for lost American jobs. The U.S. should not abandon its free-market approach to China and retreat into protectionism. For the government to interfere with purchases, sales, and other economic decisions made voluntarily by American consumers and American companies can only hurt our economy. It would also be a clear abandonment of America’s global leadership.

Although China has permitted more individual economic freedom over the past three decades, it is still a one-party authoritarian regime governed by the Communist Party. The Party continues ruthlessly to suppress any group, or even lone individuals, who might threaten its monopoly on power. The government is struggling to manage environmental degradation and demographic instability, including the world’s largest migration from rural to urban areas. These contribute to social unrest. The one-party bureaucratic system, which answers to no outside authority, breeds corruption and leads to much administrative waste within the political system.

In addition to its internal conflicts and human rights abuses, there are concerns that China’s rise is aimed at displacing American preeminence in the Western Pacific. China’s military has modernized steadily at a pace that often defies foreign expectations as economic growth has allowed the Chinese leadership to acquire both guns and butter. Official Chinese defense spending figures indicate annual double-digit growth for most of the past two decades. The People’s Liberation Army (PLA) has introduced new fighters, anti-ship ballistic missiles, space systems, and now an aircraft carrier faster than predicted. The Chinese military is also believed to be engaged in computer network attacks worldwide. These efforts are supported by reforms in Chinese military doctrine and training to allow the PLA to get the most from its new acquisitions.