China and Globalization



Summary



China has transformed itself from the world’s greatest opponent of globalization, and


greatest disrupter of the global institutions we created, into a committed member of those


institutions and advocate of globalization. It is now a far more open economy than Japan


and it is globalizing its institutions to a degree not seen in a big country since Meiji


Japan. Adoption of the rule of law, of commitment to competition, of widespread use of


English, of foreign education, and of many foreign laws and institutions are not just


updating Chinese institutions but transforming Chinese civilization.


All of China’s economic successes are associated with liberalization and globalization,


and each aspect of globalization has brought China further successes. Never in world


history have so many workers improved their standards of living so rapidly. Thus


popular support for globalization is greater than in Japan, where postwar recovery


occurred in a highly managed economy, or with the former Soviet Union, where shock


therapy traumatized society. In consequence, China has effectively become an ally of


U.S. and Southeast Asian promotion of freer trade and investment than is acceptable to


Japan, India and Brazil.


____________


1 The opinions and conclusions expressed in this testimony are the author’s alone


and should not be interpreted as representing those of RAND or any of the sponsors of its


research. This product is part of the RAND Corporation testimony series. RAND


testimonies record testimony presented by RAND associates to federal, state, or local


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Nonetheless, rapid Chinese globalization has required stressful adjustments. State


enterprise employment has declined by 44 million. China has lost 25 million


manufacturing jobs. 125 car companies are expected to consolidate rapidly into 3 to 6.


China’s globalization successes are profoundly influencing its neighbors. India has


learned from China the advantages of a more open economy. Asians schooled in


antipathy to foreign investment and Latin Americans with protectionist traditions are


going to have to be more open to foreign investment and less dependent on loans in order


to compete with China. This will transform third world strategies of development and


create broader global opportunities for our companies.


Contrary to early fears, China’s rise has stimulated neighbors’ trade and foreign


investment rather than depriving them. Indeed China’s recent growth spurt revived


Japan’s economy and saved key neighbors from recession, possibly averting a dangerous


global downturn.


Chinese growth has brought American companies new markets. The flow of profits from


China to the U.S. is as disproportionate as the flow of goods. Inexpensive products have


substantially improved the living standards of poorer Americans. Inexpensive Chinese


goods and Chinese financing of our deficit have kept U.S. inflation and interest rates


down and prolonged our economic booms. At the same time, it has caused trade deficits


and social adjustments. Chinese misappropriation of intellectual property creates losses


for many of our companies. A manic construction and transportation boom has raised


global raw materials prices, to the great benefit of producers and a great cost to


consumers.


China’s success is one of the most important developments of modern history, but


projecting from current growth to Chinese global dominance or threats to our way of life


is just wrong. Unlike the old Soviet Union, reformist China does not seek to alter any


other country’s way of life. Its economy faces world history’s most severe combination


of banking, urbanization and employment challenges, and by 2020 a demographic


squeeze that will have few workers supporting many dependents. The best outcome for


us would be a China that is eventually like Japan, prosperous, winning in some sectors,


losing in others. Signs that China is making rapid progress in that direction should be


welcomed, not feared.



China and Globalization


Before reform, China was the world’s most important opponent of globalization. It had


an autarkic economy. It opposed the global economic order. It opposed the global


political order and the major global institutions such as the IMF and the World Bank. It


believed that global disorder was a good thing, and under Mao Zedong it actively


promoted disorder throughout the world, including promotion of insurgencies in most of


China’s neighbors, in much of Africa and Latin America, and even in our universities.


Accompanying foreign policy disaffection was domestic cultural despair on a scale the


world has seldom witnessed. In the Cultural Revolution, 1966-1976, China’s students


and others, under the guidance of Mao Zedong’s peasant chiliasm, humiliated a majority


of senior government and party leaders, attacked the country’s major educational, social


and political institutions, destroyed much of China’s cultural heritage, and in general


tried to smash the country’s establishment.


For two centuries Chinese had tried a range of ways – socialism, capitalism, empire,


republic, warlords, religious fundamentalism, and others. All failed. Alienation was so


severe that, along with students, much of the country accepted that the world economic


and political order, and the Chinese economic and political order, were so stacked against


them that any path to success had to start with destruction of the existing order.


The Cultural Revolution was actually just one small episode in the problems that Chinese


impoverishment and political division created for the world and specifically for us. Had


China been prosperous and unified throughout the twentieth century, we would have had


European War II rather than World War II and World War I would have been quite


different. China would have been able to deter or defeat Japanese aggression. The cost


of those conflicts to the U.S. would have been radically smaller because Pearl Harbor and


much else would not have happened. We and the world, not to speak of a billion Chinese


citizens, have paid a horrible price, over more than a century, for China’s weakness. The


world needs a healthy China.


Because of China’s successful globalization we no longer have such problems. China is


no longer a vacuum that sucks the world’s great powers into gigantic conflicts. China no


longer sponsors insurgencies in Southeast Asia and Africa and Latin America. China no


longer seeks to undermine the global financial institutions. We obtain benefits from a


China that supports stable capitalist democracy in Thailand and the Philippines; that joins


the IMF, World Bank, and WTO; and that counsels its neighbors about the benefits of


political stability, free trade, and free investment.


From the beginning of the Cold War, it has been the central tenet of U.S. foreign policy


that, if we could engage as much of the world as possible in successful economic growth,


through domestic reform and what came later to be called globalization, we could


stabilize Europe and Asia, win the Cold War, and create a stable global order. Our


military protected this process, but from the Marshall Plan to our aid missions in Asia


and Africa, the core long-run strategy of our country has been to engage the world and


stabilize it by enmeshing other countries in a web of institutions and successful economic


practices that constitute the kind of world we want.


This strategy has proved to be one of the most successful geopolitical strategies in human


history, so much so that it has entangled our former enemies as well as our allies in the


web we wove. Throughout, it has stimulated many controversies, and occasional waves


of fear in this country. Key industries, including especially textiles and shoes, have


successively opposed liberal trade with Japan, South Korea, Taiwan, Southeast Asia,


China and Latin America. We had a wave of panic over whether Japan was going to take


over all manufacturing and buy all our most important assets; after all, if they could


triumph in steel, cars, and televisions, and buy Rockefeller Center, wasn’t everything in


our economy at risk? Elsewhere, weren’t we sponsoring horrible dictatorships by


encouraging the development of Taiwan and South Korea? Each time, our fears have


proved excessive, and each time our strategy triumphed. The results have been good for


our security, good for our prosperity, good for political liberalization overseas, and good


for the people of our trading partners. Our concerns about China are the same.



China’s globalization


What we never expected from our strategy was that it would entice our former


adversaries, including China, into our web of economic institutions and our commitment


to geopolitical stability.


Although joining late, China has joined the globalized system much more enthusiastically


than Japan. China’s economy is much more open than Japan. China’s trade in 2004 was


equal to 70% of its GDP, Japan’s to 24%. China received .6 billion of foreign direct


investment in 2004, while Japan, with an economy several times larger and in a phase of


restructuring that should have attracted disproportionate foreign investment, received


only .1 billion.


China’s globalization is not confined to opening the economy but more importantly to


globalization of institutions. Here the development strategy of contemporary China bears


a striking resemblance to that of early Meiji (mid-nineteenth century) Japan, when the


Japanese government was sending missions around the world to choose for emulation the


best foreign navy (Britain), the best foreign education system (Germany), and so forth.


In the intervening century and a half, Japanese practice has become more inward-looking,


while China has evolved from Qing defensiveness and Maoist peasant xenophobia to an


assimilative cosmopolitanism.


Today China is the country that sends missions throughout the world seeking best


practice. It adapts not just foreign technology and foreign corporate management


techniques but also a wide variety of foreign institutions and practices: international


accounting standards; British, U.S. and Hong Kong securities laws; French military


acquisition systems; a central bank structure modeled on the U.S. Federal Reserve Bank;


Taiwan-style regulations for foreign portfolio investment; an economic development


strategy adapted from South Korea, Singapore and Taiwan; and many others. Among the


most important of these changes are the decision to adopt the Western concept of rule of


law; adoption of competition as a centrally important economic practice; and adoption of


English language as virtually a second language for the educated Chinese population.


Today I can lecture in Peking University and interview senior officials in Beijing and


Shanghai without a translator. Perhaps most importantly, China has sent its elite youth


abroad for education in an exercise of internationalism comparable to the Romans turning


over their children to the Greeks.


Of course, such changes occur gradually; you can’t instantly introduce Western


accounting or Western law in a country that starts with no professional accountants or


lawyers. But the changes are startlingly fast compared with what other countries do.


More importantly, these are not technical adaptations in the manner of the old dynastic


efforts to pursue “Western technology, Chinese culture.” These are transformative


processes that in cases like rule of law and promotion of competition repudiate core


aspects of traditional Chinese civilization that go back for millennia.


China is also experiencing globalization of tastes. The exposure of the Chinese


population to foreign brands has been incorporating them into global culture. To take


one example, I spent many months studying the Chinese car industry. One of the


questions we were asked was whether China might develop indigenous car models in a


closed-off market like that of South Korea in the 1970s and 1980s. What we discovered


was that the Chinese people have been so much more exposed to global culture than


South Koreans of a generation ago that no car could succeed in China unless it


incorporated global designs and prestigious foreign technologies. Ten to thirty years ago,


when South Korea was at a phase of car industry development more comparable to China


today, one virtually never saw a European or American car on the road, and they are still


very rare today. But in China the roads are packed with Volkswagens and Buicks.


China has come to believe in globalization more than most third world countries and


many first world countries. China’s successes have all coincided with “reform and


opening,” that is, with globalization. In contrast, Japan’s and South Korea’s successes


occurred in an era when, although they were globalizing, they employed far stricter


controls on trade, foreign investment, and domestic economic activity than today’s


China.


Globalization has required extremely painful adjustments by China. Employment in the


state enterprises has declined from 110 million at the end of 1995 to 66 million in March


2005. Those who think there has been a simple transfer of U.S. manufacturing jobs to


China will be surprised to know that manufacturing jobs in China have declined from


over 54 million in 1994 to under 30 million today. Even these striking numbers


understate the adjustments China has had to accept due to greater competition and lately


from WTO membership. For instance, while employment in the car industry has


remained relatively constant, the number of car manufacturers is expected to decline from


125 at the peak to somewhere between three and six. Meanwhile, foreign joint ventures


have come to dominate much of the market.


It is hard to overstate the social adjustment Chinese are experiencing. But because China


has been willing to accept such adjustments, no large country in human history has ever


experienced such rapid improvements in living standards and working conditions. When


reform began, workers in Shanghai all wore the same clothes, looked tired and listless,


and seldom owned basic appliances like televisions or even watches. In the countryside


malnutrition was widespread. Today Shanghai workers wear colorful clothes and look


confident and energetic. Today the average Chinese family owns slightly more than one


television. Malnutrition has vanished. As a result, Chinese overwhelmingly support


further globalization.



China’s globalization and other countries


China’s globalization has of course strongly influenced other countries too. The most


important impact has been on India’s economic policy and performance. Since


independence India’s economy had been hobbled by extremely protectionist trade


policies, an antagonistic stance toward foreign direct investment, and a remarkable


network of domestic socialist economic controls called the license raj, combined with


strong foreign economic and political ties to the old Soviet Union. A 1991 foreign


exchange squeeze and neighboring China’s success shocked India and also showed that


abandoning the old hostility to globalization could lead to prosperity. While India started


later than China and moved more slowly, India’s economic growth rates have doubled.


The number of people in absolute poverty has declined sharply. Exports have boomed


and foreign exchange reserves are ample for the first time in modern history. Visit India


today, as I did last month, and you find the kind of hope and confidence and energy that


once seemed confined to East Asia.


As happened earlier with China, India’s newfound economic dynamism has shifted the


balance of leaders’ priorities from conflictful geopolitical goals to mutual economic


interests. India’s relations with its neighbors, sometimes including even Pakistan, and


most notably with both China and ourselves, are much better than previously. Indeed,


Indian-Chinese relations are better than at any time since the conflicts of the 1960s, and


India’s business community has shifted from terror about competition with China to


confidence in India’s competitive advantages and even some celebration of India’s recent


trade surplus with China.


China’s influence on India’s economic policies is just one example of a much wider


phenomenon that is probably just beginning. Until recently, most of the third world plus


Japan has taken a relatively hostile attitude toward foreign direct investment. Difficult


licensing requirements, high taxes, unfair judicial treatment and an negative opinion


climate have faced direct investors from Japan and South Korea to the Philippines and


Thailand to India, not to mention most of Latin America. Instead of accepting foreign


ownership, countries typically relied on foreign loans (South Korea, Southeast Asia,


Latin America) or domestic loans (Japan), frequently creating an excessive burden of


debt. Thailand imposed very high taxes and then reduced them for selected foreign


investors; Indian groups attacked Kentucky Fried Chicken with distorted hygiene


allegations. Now such tactics are waning.


The success of China at balancing debt with equity, building upon the previous successes


of Hong Kong, Taiwan and Singapore, is gradually changing the way much of the world


manages economic development. This Chinese influence is going to be transformative,


particularly in Asia. The old pattern has been to avoid dependence on foreign investment


by taking domestic and foreign bank loans. Governments then controlled the


development of industry by channeling the bank loans. This made companies and


countries overly dependent on banks, leading to periodic financial crises. It gave


governments too much control over industries, encouraging mismanagement and


corruption. It gave unfair advantages to large, politically favored companies over smaller


companies and foreign companies. Importantly for us, it limited the opportunities for our


own companies. Now competition with China will force most companies to open


themselves to foreign investment. American companies will benefit not just in China but


throughout the world.


At the beginning of this decade, there were widespread fears that China’s success would


suck the trade and investment away from its Asian neighbors, impoverishing them. In


the event, the opposite has happened. Wherever rules have been changed to welcome


foreign direct investment, as in India, South Korea, and Japan, such investment has


boomed. China has taught others to attract foreign investment, and in response the total


pool of foreign investment has greatly expanded.


Amid the global slowdown following the tech bust, countries like South Korea and the


Philippines found themselves saved from recession by Chinese demand. Most


importantly, Chinese demand provided the stimulus that lifted Japan out of recession. It


is difficult to overstate the risk the world economy faced from the Japanese situation,


where mountainous debt created the risk of a domino-like collapse inside Japan and


subsequent rippling collapses around the world. That risk seems to have passed, helped


by a critical margin of stimulus from China. Few books are written about global


depressions that never happened, but it is quite possible that China’s globalization saved


us from beginning the new century with a drastic global economic squeeze.


Many other peoples have benefited from Chinese demand that rose just as the world


economy was slowing. Raw materials producers had become inured to terms of trade that


deteriorated inexorably year after year. Suddenly our ally Australia found that its terms


of trade have improved to the best in its entire history, largely because of Chinese


demand. Many of the world’s poorest countries, including Laos, Papua New Guinea, and


much of Africa, benefited just when they needed it most. No aid programs, no IMF gold


sales could have come close to providing the improved livelihoods that resulted from


increasing, sustained demand for their products.


In short, the most important results of China’s rise are the same as the results for the


world of America’s rise or of the recoveries of Japan and Europe: you are always better


off with a rich neighbor than with a denizen of the slums.



Benefits and costs for the U.S.


China’s globalization has had numerous impacts on the U.S. Most obviously, China has


become a vast market for U.S. goods. Arguments that this is a mythic “China Dream”


have proved false. Coca Cola has long since surpassed the fabled goal of selling a billion


Cokes. General Motors, once ridiculed by the China Dream theory, sells many Buicks in


China, and, despite a current cyclical pause, profits from China have been a critical


margin for GM during a difficult time. We gain from billions of dollars of profits


remitted back to our country and from the improved health of our most successful


companies as they compete against other foreign companies.


Lower prices for basic goods have contributed significantly to American standards of


living, particularly for our less prosperous citizens. While we do not yet have definitive


studies, indications are that lower-income Americans achieve improvements in their


standards of living of perhaps 5% to 10% as a result of being able to buy lower-priced


imports from China. That impact is undoubtedly expanded by the fact that competition


from China drives other countries to produce less expensive goods for our consumption.


Inexpensive Chinese goods have kept down our inflation rates and enabled us to prolong


the upswings of our business cycles because the Fed doesn’t have to raise interest rates so


quickly in order to slow inflation. Similarly, Chinese purchases of U.S. Treasury bonds


have helped to finance our budget deficits. Without those Chinese purchases we would


either have to raise interest rates, slowing our growth, or we would have to run


comparable trade deficits with other countries so that they could buy our bonds.


We are just beginning to see another layer of benefits. The Chinese are beginning to


invest here. Haier is now manufacturing refrigerators in this country. When China’s


Lenovo bought IBM’s personal computer business, it saved jobs in a moribund division,


freed IBM to move up into higher-tech markets, and helped finance that IBM move up.


So far, this trend is small, but it will grow quickly. China’s goal for this year is to spend


-40 billion buying resource and distribution companies.


We also benefit indirectly from China’s boost to foreign economies like Japan and


Australia. Having a prosperous partner is invaluable to the U.S. economy. We spent the


1980s fretting about Japan taking over the world, but we spent the 1990s worrying that


Japan wasn’t doing its share to boost global growth. Those who worry about China’s


success would have far more to worry about if China’s growth slowed drastically.



Adjustment problems


China’s globalization and growth also cause stresses for us. Some of these are politically


eternal but economically and strategically tired. As countries get rich, the manufacture of


textiles, and shoes, furniture and basic consumer electronics mostly migrates elsewhere.


The manufacture of socks migrated from here to Japan, from Japan to South Korea and


Taiwan, and thence to Southeast Asia and now China. That adjustment will continue. It


has been gradual over many decades. We have had ten years to get ready for the current


round of textile adjustments. We knew what was coming and we agreed to it, in return


for China so stressful that they are virtually beyond Americans’ imagination. Our own


adjustments are smaller than those of virtually any other country.


These adjustments are smaller than we tend to believe, because China gets blamed for


much that it does not cause. Virtually all of our job loss has been caused by productivity


improvements. In fact, productivity gains have been sufficiently large that we should


have experienced more job losses than we have. It is conceivable that our job losses have


been smaller than they “should” have been because China has helped us adapt. We don’t


know, because no lobby has been interested in paying for the research to find out how


many jobs have been saved by partial moves to China decreasing the costs of endangered


companies. And China is, of course, just part of a global readjustment caused by China,


India, and the former Soviet Union joining our economic system.


A more serious policy problem is hyper-competition created by cheap financing in China.


The irrationalities of the Chinese financial system mean that in key sectors like steel


China builds too many factories, and props up too many moribund companies, causing


massive overcapacity. In recent years Chinese financial vagaries have led to excessive


construction and huge demand for steel, aluminum, cement and others. For a while this


has buoyed the global steel industry, including ours. But it has also led to construction of


so many steel factories in China that soon China will have half of all world capacity.


That means overproduction and eventually a steel price bust.


This cycle creates problems for our industry, just as our Internet mania and tech bubble


created problems for much of the world. It is fair for us to complain about such


problems. It is fair to pressure the Chinese to reform their financial practices. It may be


fair in some cases to view Chinese bank lending practices as constituting an inappropriate


subsidy. The tone of our complaints and the substance of our policies needs, however, to


reflect three facts. First, the Chinese are trying to reform their banks and put them on a


market basis. Second, our financial vagaries cause them problems too. Third, the biggest


price for their financial mismanagement will eventually be paid by them, because


inappropriate lending eventually makes troubled banks much more troubled. China


making steel today looks like Japan buying Rockefeller Center two decades ago; if you


project their excesses indefinitely into the future, first the Japanese and now the Chinese


look as if they are about to take over everything in the world. But when you look at their


underlying finances, you see a black hole. The Japanese spent the 1990s in their black


hole and are still trying to climb out. China will feel the pain of its recent spree for many


years. Having said these things, some excesses may require a policy response by us.


Chinese theft of intellectual property has become a major issue. The IPR problems


presented by China are similar to those presented by other developing countries. In the


1930s, Japan built cars that were half Ford parts and half GM parts, with DeSoto styling.


In the early days of Japan’s postwar takeoff, a high proportion of its electronics exports


infringed Texas Instruments’ patents. I, like numerous others, accumulated a library of


knockoff books from Taiwan in the 1970s, and Taiwan still has the best knockoff


watches. When I lived in Singapore in 1998, I could get knockoffs of most Hollywood


movies at a six-story building within five minutes’ walk of my office, and indeed well


into the 1990s official U.S. government briefings credited Singapore for some 70% of the


knockoff computer software in Asia – at a time when China was getting most of the


blame. China’s IPR practices today are not very different from those of India and


Russia. But the scale and efficiency of China, and the extent of foreign direct investment


in China, make the issue a larger one. Indeed, the IPR losses caused by Chinese practices


are probably on a scale with those of other major emerging markets, like for instance


American youth. It is appropriate for us to make very strong representations about IPR


abuses. It is appropriate for us to implement policies that punish bad behavior and


reward better behavior. It is also useful to maintain a certain historical perspective.


The other side of the benefits Australia, Africa, Latin America, and other resource


providers (including part of our own economy) have received from Chinese demand is a


rise in prices for consumers, and we are more consumer than producer of raw materials.


For many key materials, the biggest part of recent price rises has been cyclical. The


Chinese mania for steel, aluminum and cement has peaked. In the case of petroleum, the


cumulative increase in demand caused by China, India, Russia, and other developing


countries may soon push against long-run supply constraints. This may compel us to


make new, potentially urgent decisions about conservation, the kind of energy we use


and the degree to which we compete or collaborate with the other major users. This


would have happened eventually even without the rise of China, but China is certainly


accelerating the issue.


Finally, the rise of China raises questions about whether we face a major challenge to our


role in the world or to our way of life. One part of this is easy. We do not face a


challenge to our way of life. Unlike the Soviet Union, and unlike China under Mao


Zedong, reformist China does not seek to change the way we organize ourselves or the


world, but rather to join the world system we have created.


Geopolitical competition raises more complicated issues. Like South Korea, as China


grows it gets stronger. Its military becomes more modern. In one particular area, the


Taiwan Straits, maintaining our dominance will become increasingly difficult. That is a


serious and difficult and legitimate challenge for our military to cope with. But theories


that China is going to take over the world suffer from the same flaws as theories two


decades ago that Japan was going to take over the world. The Chinese military has to


defend 11,000 miles of not-always-friendly borders, and its growing military is far from


excessive for the tasks it faces. Economically, China is not going to manufacture


everything in the world; no country can have a comparative advantage in everything.


In the medium term China faces daunting challenges. Its banks are the worst in the world


that we know about. In each generation a population about the size of the United States


will move from China’s countryside to its cities. Each year 12-13 million new workers


join the work force. The impact of productivity on employment in manufacturing is


much more severe than in our country. All these people need jobs. For a considerable


period China’s high growth can be sustained, but only through heroic reform measures by


China’s leaders. If somehow China powers through these problems, by 2020 its aging


population will have the worst ratio of workers to non-workers of any population in the


world, including Japan’s. That is to say, without some miraculous new policies the


Chinese economy may well hit a wall in that period. In 2020, they will still be a very


poor country by our standards. Even if their success continues until then, they will not be


taking over the world.


The emergence of China as a principal advocate of globalization and stability creates a


complex geopolitical situation for us. On issues of free trade and investment, and on a


variety of economic issues like GMO crops, China is our principal ally. On North Korea,


despite differences over tactics, we share the same goal and China is our only effective


partner. On terrorism and crime, China is our principal Asian ally. We are now in a


novel situation where Japan is our military ally and partial ideological soulmate, but


China is effectively our ally on the important political and economic issues, with Japan


either ineffectual or in opposition to us. This is a novel historical situation.


Where Chinese influence has increased greatly at our expense, other than the unique


situation in the Taiwan Straits, it has been because we and our traditional allies created a


vacuum, not because China has aggressively asserted power. But there have been


important shifts, and we need to be very conscious of them. On the dangerous North


Korean issue, we have been divided at home, and our allies, most notably South Korea,


have disagreed with our tactics. We have demanded that China play the central role, and


China was hesitant to accept the invitation. In Southeast Asia, we have traditionally


earned loyal support by organizing our policies around a core value of economic growth


through liberalization and globalization. Today we are perceived as having abandoned


that priority in favor of a more military focus on the war on terror, while China is seen


having abandoned its Maoist geopolitical priorities in favor of a priority for mutual


economic development through multilateral liberalization. Within our economic policies


we are seen as having abandoned multilateral liberalization in favor of highly politicized


bilateral free trade agreements, while China has become the principal supporter of


multilateralism. China carefully joined ASEAN on trade, rather than asserting its own


vision. Without exception, Southeast Asian (and many other Asian) elites see the 2003


APEC summit as a watershed that marked the U.S. and Chinese reversal of roles. The


result of these Korean and Southeast Asian developments is a sea change in Asian


geopolitics, but we are the ones who made the changes, not China, and we still can take


the initiative if we wish to do so.


We Americans must be very clear about the difference between success and failure.


When our system of institutions and relationships pulls the unstable China of 1870 and


the destructive China of 1970 into coherence, prosperity and support of the major global


institutions that we have created, it is success for us, not failure. In fact, it is one of the


great successes of history. When we have a prosperous economic partner, at the cost of


historically minor adjustments, that is success for us, not failure. Of course, our


successes to date provide no absolute assurance that China will always be friendly or


supportive of our institutions. But if we welcome China’s prosperity, we maximize the


chances of an auspicious outcome. If we reject it, we ensure the worst outcome.


The best outcome for our relationship with a globalized China is that China becomes like


Japan, a prosperous competitor with whom we have a mutually beneficial division of


labor. Hopefully China will absorb useful political lessons from its Asian neighbors, and


hopefully Japan and South Korea will learn the economic lessons of China’s superior


openness to our investments. China’s turn to globalization has been one of the greatest


foreign policy triumphs of American history.


My first boss was Herman Kahn, who wrote a book called “The Emerging Japanese


Superstate.” Japanese experts constantly worried that, if their economy really succeeded,


we would intervene to put them down. Herman Kahn invariably replied, “You don’t


understand Americans. We won’t attack you. We’ll take credit for everything you


achieve.”  was a great American strategist and a great American patriot.




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