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China’s Tough Approach and a Changing Economic World Order

Geplaatst op mei 31, 2014 in News

The international spotlight is on China again, as its behavior in the South China Sea has led to violent protests in Vietnam, rising regional tensions, a flurry of media coverage, and questions about where this is all heading.

We put a few of those questions to Ian Bremmer, president of Eurasia Group and author of Every Nation for Itself: Winners and Losers in a G-Zero World. An edited version of our conversation is below.

Do you see the recent actions by China as typical and consistent with their past behavior, or do you think it’s a change, something new and different?

It’s escalatory. The Chinese are dramatically increasing their naval and air capacity in the South and East China Seas. They’re not expanding as a land power, but they see naval power as critical for facilitating their economic ambitions in the region. Their long-term concern is the potential for a Southeast Asian multilateral security framework, potentially aligned with the United States. They see that as dangerous, especially if US/China relations start getting worse.

So they feel there’s a window over the next couple of years to probe and change the status quo ante in the region, and that’s what is happening with this military escalation – and they’ll see what kind of response they get.  Recent incidents with Japan and the air defense identification zone resulted in a very significant US response: trips by Secretary Hagel, President Obama, announcements on the US Defense Treaty pertaining to the Senkaku/Diaoyu Islands issue – ultimately leading to the US and Japan developing a much closer relationship. But the US has made no statement on the South China Sea, where we do not have any defense obligations.  And so what I see here is China, vastly bigger than the Philippines and Vietnam, with not only more military capacity, but much more economic capacity and influence over those markets, seeing if they can improve their situation on the ground, and not minding so much if the cost is that a couple of noses get bloodied.

What do you think China’s more aggressive approach means for Western economies and for the world economy?

Look at China 30 years ago and the role it had in global GDP. It was around 2%. Look at it now, and it’s something like 13%. China is close to becoming the world’s largest economy. But when it becomes the largest economy, it will still be poor. It will still be state capitalist. It will still be authoritarian. In other words, it will not share the values and priorities of the United States or our allies in advanced industrial economies. That is an enormous challenge to the economic order.

There’s no question that China is reforming, and that Xi Jinping is engaged in politics of economic transformation that, if successful, will make us cooperate much more closely with the Chinese over the medium to long term. But China is getting bigger faster than it’s reforming, and there is also uncertainty around whether reform will be successful.

All of this means that the challenges that China poses to America and its like-minded allies, from an economic and political perspective, will absolutely grow larger. That can be mitigated – by smart policy, and by the United States having a lot of economic success. But there are also issues between the US and China that are already getting much, much worse. Security for one, because of the rise in the Chinese military and the economy, and their willingness to push. But the second, of course, is cyber, where the Chinese and the Americans are actively at war against each other, and the Americans have had no ability whatsoever to get the Chinese to engage in meaningful dialog in trying to reduce those tensions. So as a consequence, the US has taken the unilateral step of going to the Department of Justice and actually filing charges against five members of the People’s Liberation Army. That will only lead to further escalation, it’s very clear.

You have noted elsewhere all the media hoopla around China becoming the largest economy. But you have also said that this benchmark is not so important to the Chinese, that they have no desire to engage in economic triumphalism. Instead, they prefer a quieter kind of economic expansion. Isn’t that in tension with what they’re doing in the South China Sea, which seems very much like 20th century hardball expansion? 

I don’t think those things are inconsistent. The Chinese want to become the largest economy in the world as quickly as possible. They want the rewards and benefits of that to accrue to them as quickly as possible. What they don’t want is to have everyone out there saying, “Oh my God, China’s the largest economy! We’d better do something about it!” Right? So they absolutely want to change the rules of the road through their real power and influence. But they don’t want a bunch of reports publicly saying, “Hey everyone, look. China’s number one.” They understand that they’ve got to be more responsible. They have to play more of a leadership role. They’ve got to put money into dealing with climate. They have to put money into dealing with collective security issues.

Now if it were Russia, that would be different. If someone did a report and it claimed that Russia was the largest economy, you’d have Putin touting that all over the world out of insecurity. The Chinese aren’t insecure. The Chinese want to get as big and powerful as possible before the folks that could stop them might start taking measures that could be damaging to them.

You recently tweeted that the clear winner from the US/Russia fight over Ukraine is China. How so? 

The Russians and the Chinese have been negotiating the recent huge energy deal for over ten years. It went on and on and didn’t get done. Now it’s done. The reason it wasn’t getting done for all that time is they weren’t coming together on price, and the Russians were not willing to compromise. What’s changed? The Russians are now under a lot more pressure – from the Americans in particular, but also from the Europeans – and they want to show very strongly that the American policy of isolating the Russians is going to fail. So it was extremely important, politically, for Putin to get this deal done with the Chinese. And it is a massive deal: $400 billion, providing natural gas over 30 years. It definitely shows that the American policy has failed on Ukraine. It also shows that the Chinese are clearly in the driver’s seat here.

[Making money is] not the reason the Russians are doing this. They’re doing it because they feel like they need to show strength, and tying this knot with the Chinese is a wonderful way to do that.

How does China view international economic development differently than we do in Western economies?

The Chinese have absolutely learned that providing lots of money for development-related activities in poor countries is a great way for them to build goodwill and for them to get outcomes that they want. But unlike American development, this is not conditionally linked to democracy or economic advancement or modernization. Chinese development money – and there’s a lot of it, the Chinese development bank, UCDB, gives more money internationally than the IMF and the World Bank combined –constitutes a quid pro quo for decision making that supports Chinese economic objectives directly. So they’re going to help you build a stadium. They’re going to build hospitals. They’re going to build roads. They’re going to give you a power grid. But this is what they want in return. And it’s a very clear list.

So there is no pretense towards development for poor countries and their economies to become strong and self-standing?

No, the Chinese are not, in my view, trying to make these countries strong and self-standing. Now, of course, the Americans don’t always do that [either]. The argument I’m trying to make here is, the fact that the Chinese don’t do as we do doesn’t mean that the Chinese are bad. It means that the Chinese are at a very different level of development with a different economic and political system, and it should surprise us very much for the Chinese to act any differently than they do. So, for instance, when we tell the Chinese we want them to be responsible stakeholders in the global community, the logical Chinese response is: Wait a second. So you want us to act like a rich country, even though we’re a poor country, and you want us to support rules and norms that you created to benefit like-minded countries, of which we are not one. It makes no sense for China to do that.

So in light of what’s been happening in Southeast Asia specifically, and some of these broader dynamics more generally, how should people who are running companies be thinking differently in terms of the risk profile in the region?  Is the threshold rising for a destabilized environment there?

I don’t see war between China and Vietnam, or China and the Philippines.  As I said, I think the Chinese are pushing and probing in this new phase, and if they get whacked, then they’ll recalibrate. I don’t think this will have a huge impact on investors or multinational corporations on the ground in the near term. Longer term, as China continues to grow, if reforms fail or if they become more antagonistic towards the West, then I expect the ability of Western multinationals to do effective business on the ground in these countries will deteriorate greatly.

The biggest problem I see is a growing paradox: not only is China going to be the world’s largest economy, but out of the top 20 economies in the world, China likely has the largest variance in terms of how attractive it will become for Western investors over the next, say, ten years. At the same time, the Chinese are engaging in fundamental economic transformation, unleashing forces that might lead to a China that can work well with us, or could possibly lead to the collapse of the system, or enormous xenophobia and nationalism. The vast majority of American and Western multinational CEOs are unwilling to think about this, and are just not investing. They don’t think they’ll be in their corporations that long, and they don’t want to deal with that core uncertainty and its implications.

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