China and Globalization

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

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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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