Business Insight Zone

If you care at all about relations between the United States and China — and in my book, you should — do yourself a favor and read anything James Fallows writes on the subject in The Atlantic Monthly. Fallows has been living in China for the past couple of years, filing story after story on the commercial, economic, and political realities at work in the world’s most populous country.

Particularly interesting is this article from the beginning of this year, in which he discusses the strange financial relationship that prevails between the two powers:

The $1.4 Trillion Question

The whole thing is worth a read, but here’s the nut graf:

Through the quarter-century in which China has been opening to world trade, Chinese leaders have deliberately held down living standards for their own people and propped them up in the United States. This is the real meaning of the vast trade surplus — $1.4 trillion and counting, going up by about $1 billion per day — that the Chinese government has mostly parked in U.S. Treasury notes. In effect, every person in the (rich) United States has over the past 10 years or so borrowed about $4,000 from someone in the (poor) People’s Republic of China. Like so many imbalances in economics, this one can’t go on indefinitely, and therefore won’t. But the way it ends — suddenly versus gradually, for predictable reasons versus during a panic — will make an enormous difference to the U.S. and Chinese economies over the next few years, to say nothing of bystanders in Europe and elsewhere.

Like Fallows, I fear that demagoguery will overwhelm clear thinking in the diplomacy between China and the United States. Fallows’s article shows just how dangerous that would be. When the current financial arrangement eventually ends or mutates, it’s in the best interests of both countries — and Europe, and Africa, and the rest of Asia — to make sure that the next phase is a fruitful one rather than some new horror in human affairs.

Consider this, from the last page of the article:

China can’t afford to stop feeding dollars to Americans, because China’s own dollar holdings would be devastated if it did. As long as that logic holds, the system works. As soon as it doesn’t, we have a big problem.

What might poke a giant hole in that logic? Not necessarily a titanic struggle over the future of Taiwan. A simple mistake, for one thing. Another speech by [cantankerous Chinese politician] Cheng Siwei — perhaps in response to a provocation by Lou Dobbs. A rumor that the oil economies are moving out of dollars for good, setting their prices in euros. Leaked suggestions that the Chinese government is hoping to buy Intel, leading to angry denunciations on the Capitol floor, leading to news that the Chinese will sit out the next Treasury auction. As many world tragedies have been caused by miscalculation as by malice.

My own study of the history of foreign affairs leads me to add emphasis to that last sentence — a sentence that I’ll surely be quoting for a long time.

Often we think that nations have views that are either all inimical to our own interests or else all amenable to our own interests. For some Americans, China belongs in the “inimical” camp, along with countries like North Korea and Iran. Meanwhile, countries like Britain, Japan, and Australia belong in the “amenable” camp. But in truth the relations of nations are much more complex than this.

For starters, saying “our own interests” presumes the existence of a shared set of interests that most Americans can believe in. But such a consensus is only a comforting illusion. The fact that it doesn’t exist has been illustrated time and again by the deep divisions in U.S. politics and policy over the course of this decade.

No, instead we have the same sort of complex relations between countries (and between regions, religious cultures, etc.) that we expect to see in relations between complex individuals. And demagoguery won’t work to settle the disagreements that arise, any more than two old individual rivals with strong but conflicting opinions can settle their disagreements with simplistic formulas — much less assertions of their rightness.

Especially considering the gigantic commercial ramifications of a potential break in U.S.-Chinese economic relations, it pays to be studious, cautious, and anti-ideological as we move forward. The American way of life, which may have to be amended in any case because of economic and environmental realities, can’t stand the sort of shock that a break with China would imply. But the vast population of the poor in China’s interior would suffer even worse from such a shock, which ought to give us pause as we consider how to formulate the next version of relations between the “City on a Hill” and The Middle Kingdom.

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(Photo by ** Maurice **.)

Category: Economics, Globalization