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Sunday, April 25, 2010


Today's Buggy Topic Continues A . . .

. . . Series of late on overall US and Chinese relations with one another, economic, political, and --- so far played down, but to change soon --- military relations.    Click here for the lengthy bugged stuff.

Up to now, by posting at Economist's View where several threads were started by Professor Mark Thoma, the talented overseer of that laudable web-site, prof bug has concentrated mainly on the economic relationship . . . especially the huge Chinese trade-surplus with the United States in the last decade.  It soared from $89 billion in 2001, that surplus, to over $200 billion by 2005.   At that point, in July, the Chinese government  let its renmimbi --- the RMB, used for foreign trade and investment, but the same value as the Yuan --- rise 21% in US dollar terms by July 2008.  And yet, despite that rise in the RMB exchange rate, the Chinese bilateral trade surplus climbed another 35% with the USA.

Enter the Obama Era

Two changes in late 2008 brought the Bush-era indifference to the rising American trade deficit with China --- which owns about $1 trillion of our government's Treasury securities (directly or indirectly through third party banks in London and elsewhere), plus over $1 trillion more in its foreign currency reserves. 


*    The first change: the huge financial collapse in our banking system in the fall of 2008, which brought home to Americans that we had already been in the most serious economic recession since the 1930s ---- our recession and financial crisis soon world-wide.  In such circumstances, with the Federal Reserve keeping short-term interest-rates near its bottom (just above zero-interest) and limiting what monetary policy could do to stimulate aggregate demand --- and with the federal government undertaking soon afterward a huge fiscal stimulus to up national consumption, investment, and job-creation --- a number of specialists in and out of the government became more and more worried that China's continued high bilateral trade surplus with us, not to mention an almost equivalent dollar-size multilateral trade surplus with the entire world, would drain away a fair amount of domestic aggregate demand in the US economy to purchases of Chinese imports . . . in 2009, over $226 billion. 


*     Enter the second change: the election of President Obama.

The White House eventually began putting pressure on the Chinese government --- going so far as to warn about retaliatory tariffs against Chinese imports --- if China's CP leadership didn't let the RMB rise in value against the dollar by a notable if unspecified appreciation.   The problem here that limits our influence over the Chinese leaders is that short of instituting high tariffs, we have little economic leverage over their leaders, and additionally, we have no clear idea how much an appreciation of the RMB would be needed to seriously reduce our trade deficit with that country.  Remember, a 21% appreciation of the RMB against the dollar since mid-2005 did not only fail to bring about such a reduction --- only 2009's serious recession reduced it in this country and in China's multilateral trade surplus with the world --- the rise coincided with another 35% increase until 2009 in our bilateral trade deficit with China.

Click on "continue" for the rest of this buggy commentary

The Wider Problem Still Needs To Be Mentioned

China's epochal economic and political upheaval since 1979, the year the post-Maoist reforms began, singles it out as a potential great power: what with its long history as a great civilization and the dominant power in Asia until the 1850s --- which the Chinese call "the century of same and humiliation" that followed: Western and Japanese imperialism, the fall of the empire in 1911, warlord strife until the mid-1920s, the Nationalist government struggle with Mao's Communism, the Japanese invasion in 1936 and extraordinarily brutal occupation, and the civil war that ended in 1949 with Communist triumph --- not to forget the horrors of Maoism and China's huge and talented 1.3 billion people. 

In the 20th century, the disasters and tumult of WWI and WWII, plus 45 years of Cold War --- were all provoked by the rise of anti-liberal, anti-democratic militarized dictatorships: in Imperial Germany, later in Nazi Germany and militarized  Japan, and after 1945 with the Communist totalitarian regimes in China and the Soviet Union and their allies in North Korea and North Vietnam.  

 The British and French democratic regimes before 1914 found no way to accommodate the rapid economic and military rise of militarized Imperial Germany by peaceful means.  In the 1930s, the even more menacing rise of Nazi Germany wasn't blunted by Anglo-French appeasement, any more than American efforts at appeasing militarized Japan down to December 7th, 1941, succeeded.  The horrific global wars that followed underscored the problems of the status-quo liberal democratic great powers in dealing with the rapid economic and military rise and ambitions of profoundly anti-democratic, anti-liberal, anti-free market great powers.

And the Cold War?

The impact of nuclear weaponry and the growing realization in Moscow and Washington D.C. that whatever their huge political, economic, and diplomatic problems ---- including American wars with Soviet proxies in Korea and later Vietnam --- they shared an even larger common interest in avoiding mutually destructive nuclear war.  Eventually a shift after the Cuban missile crisis to arms control and new strategies of deterrence developed by the USA helped to keep the wider Soviet-American relationship peaceful.   Ultimately, by the late 1980s, the original "containment" strategy of George Kennan in the Truman era achieved its purposes: contain Soviet power on its periphery, and sooner or later its frighteningly incompetent totalitarian system, the irrationality of its planned statist economy, and the growing discontent of its non-Russian minorities ---- along with its failure to compete with the liberal democratic capitalist countries of West Europe and the English-speaking peoples (plus later democratic Japan) --- would bankrupt the system and lead to its collapse. 

Which, of course, happened between late 1989 and late 1991 --- the Soviet Union and global communism (already changed in China) disappearing into the trash-bin of history.

Can We Deal More Effectively with China?

That  has clearly been the aims of the two Bush administrations as well as the Clinton-years, only with a new and profound twist.  Namely? 

  •  President Obama has distanced the USA from the NATO alliance, disappointed as he and his advisers have been by the failure of our West European allies on the Continent to increase their military support for the war in Afghanistan, not to mention the reluctance of certain key European countries ---- especially Germany --- to adopt punishing sanctions on Iran for its nuclear programs.  


  • The White  House has also developed a closer relationship, diplomatic and military, with post-Putin Russia.  The Medeved government has generally reciprocated after years of strained relations of Russian-US relations over NATO expansion to the borders of Russia, and for a variety of reasons: a growing concern with China's rising power, a recognition by Medeved (an economist) that the Russian economy is a disaster aside from its petroleum exports and hence a need to integrate into the global capitalist order, including the WTO, and a desire to move closer to the liberal democracies generally.  (A further sign: to counter growing German influence in the EU and a snuggling economic relationship with Russia, France has recently begun selling advanced missile-carrying ships to Russia as well as moving closer to Obama's America.)


  • The big shift in American military strategy --- now underpinned by the recent nuclear-reduction accord with Russia --- away from the reliance on a nuclear deterrence to the use of precision-based missiles and more precisely unmanned aerial vehicles like the Predator, armed with up to 1000 pound conventional bombs. 


The Bush administration had flirted repeatedly with this shift in strategy.  It always backed down, though, because of Russian objections that Moscow could never be certain that ballistic missiles and unmanned aerial vehicles weren't armed with nuclear warheads.  The new arms control agreement with Russia has removed that problem.  Russian observers will be invited to investigate how, for each new conventionally armed missile or UAV, we will dismantle one nuclear warhead.


All This on the Deterrence and Military Side in Dealing with China's Rising Power

What remains is for the Obama administration to pursue the same objective that all Republican and Democratic administrations have pursued since the end of the Cold War: to deal with China's epochal rise as a potential great power by coaxing and ear-stroking its CP leadership to see Chinese ambitions as closely integrated into the preservation of the existing rule-based global order . . . the WTO, the IMF, the World Bank, regional economic organizations in Southeast Asia and wider Asia, the Pacific Economic Cooperation Council (including the USA), existing arms control treaties, and a workable, mutually beneficial bilateral economic and diplomatic relationship with the USA. 

And hence the dilemmas that the White House now confronts in dealing with the obvious problem that the economic relationship is lopsided.