Coming to Grips With a Rising China

The strategic implications of China’s rising power have prompted ambivalent reactions from the U.S. and western democracies.  Unlike the quick coalescence on the containment strategy for the Soviet Union after World War II, there is still no real consensus on how the United States should deal with China in the 21^st century.  Some see its ascension as aggressive and dangerous, calling for a firm balancing response led by the United States and its allies, but avoiding what Graham Allison calls Thucydides Trap, the war between an established and rising power.  Others on the spectrum are less certain, pondering whether strategic patience and positive diplomatic and business engagement is the answer, giving time for China to evolve into what many hope will ultimately be a comfortable fit with the free market global system.

The United States will only be able to do so much to punch above its weight in any long-term economic competition with China.  Size matters.  A market economy of 1.4 billion educated people controlled by authoritarian values will have inevitable advantages over the United States with a population one quarter the size, no matter how talented and dynamic.

Instead of accepting these emerging realities, however, the reaction by many in the United States has been denial.   Some quibble over which statistical measures to believe.  The IMF GDP ranking is based on purchasing power parity, the measure favored by economists for comparing national economies as it tracks the purchasing power of each country using its own currency. These deniers point instead to nominal GDP figures which are based on market exchange rate conversion of local currency into U.S. dollars.  Under nominal GDP, the U.S. does remain technically number one for the moment, but given China’s rate of growth, the U.S. will be surpassed even under this less accurate measure by 2029, or earlier.

Others are total deniers, arguing that China will never reach economic parity with the United States.  They believe that China’s rapid growth is unsustainable, creating mountains of debt that will inevitably cause collapse.   Others outright deny China’s numbers, arguing that they cook the books with lies, with real GDP and growth less than what is officially reported.  Deniers also point to China’s diminishing labor supply, caused by low fertility rates and an aging population.  Another school of deniers even claims that the problem is not China, but rather the United States, itself.  Superior Chinese entrepreneurs, who are more open to bold risk and initiative, have outperformed the U.S.  The U.S. should not blame China but get its own house in order.

If the fundamental premises of any arguments put forward by deniers is correct, the United States should have nothing to worry about, time is on its side, particularly if the U.S. rebuilds its infrastructure and pursues successful domestic policies to strengthen its ability to meet China business competition.  Building a 21^st century policy on such assumptions, however, is at best unwise.  If wrong, the U.S. will face the day when China is a unipolar, authoritarian hegemon.  The risk is too great.

Arguments by deniers also have substantive pitfalls.  Inevitable economic collapse is not a sure thing. The Chinese yuan is not freely convertible.   Western investors cannot swiftly convert the yuan into dollars as a correcting mechanism if they become uncomfortable with rising Chinese debt.   China, through its Communist Party, also has ironclad control over its population and press.  They will not challenge the Party’s debt creation policies.  With an extraordinarily high savings rate, quadruple that of the United States, the Chinese government can also take advantage of hundreds of billions of annual free cash flow, giving them far greater flexibility to finance debt.  Moreover, China can always play its ultimate card.  The government exercises total control over its banking system, enabling it to swiftly shuffle debt to equity as it has done when expedient in the past.

The very psychology of U.S. attitudes about China must change.  The core assumption that the United States has, and will always have the upper hand based ultimately on its economic power has to give way to a new reality.  Political, diplomatic and military power inevitably flows to a country that manages to double the size of its economy at least every decade, if not at its more recent pace of every five years.   The United States became the world’s largest economy, surpassing Great Britain, in 1822.   Over 100 years later, it is likely China’s turn to take over as number one.

The challenge for the United States is unprecedented.  Unlike the Soviet Bloc during the Cold War, China has not been isolated as a player in the global market.   It is a fully integrated partner in the WTO system, enjoying broad access to the Western economy, and reaping the wealth it creates for itself as the world’s largest trading nation.   Despite all the successes of the Soviet system in building military and diplomatic power, it never established itself as a major economic power. The Soviet Bloc’s economies were isolated from Western markets, and choked by Marxist Leninist doctrine, imposing state ownership on all business with pricing awkwardly set by central planners.  The Soviet Bloc economy was also limited by lack of access to advanced technology because of the COCOM export control system that was implemented by NATO allies at the start of the Cold War.

China has none of these limitations.  While the Communist Party ultimately controls its economy, it does not follow Marxist Leninism for its management. Chinese businesses are not all state-owned with prices dictated by central planners.  Instead, market forces are harnessed, but with the Communist Party deftly holding the reins; steering to promote the expansion of Chinese power and influence.  While designed to appear benign on the surface, the ultimate goal is a world system in which Chinese authoritarian values play a central if not the leading role.

Ironically, China’s form of totalitarianism more closely follows the old fascist model of Germany, Japan and Italy than it does Soviet communism.  China systematically stifles political dissent and free speech at home, while managing a non-transparent market economy.   

Its advanced facial and voice recognition systems have been used to create the world’s largest domestic surveillance network and were used recently to locate and apprehend a BBC reporter in just seven minutes. 

China seeks to avoid military confrontation with the United States, but mines the open market and global system to buy, hack or steal advanced Western technology.  China’s new stealth fighter jet, the J-20, bears an astonishing resemblance to the U.S. F-22 fighter, while China’s FC-31 Gyrfalcon in development looks like a knock-off of the U.S. F-35 fighter.   Earlier this year China sponsored in Xiamen a technology conference for international space planes and hypersonic systems.  Top American scientists were invited to participate and submitted papers, including, according to reports, one on  “A Review of Uncertainty Analysis for Hypersonic Inflatable Aerodynamic Decelerator Design.” Benefiting from such scientific exchanges, China is actively developing hypersonic weapons capable of penetrating missile defense systems and producing stealthier submarines.   Over three hundred thousand Chinese students are enrolled in American universities, many of them concentrating in scientific and engineering fields, gaining access to top American knowhow.  To allow such a number of Russian students a similar privilege during the Cold War would have been unthinkable.

The South China Morning Post has reported that Chinese scientists have been allowed to work for decades on advanced military projects in the Department of Energy’s National Laboratories.  Many have been lured back to China to work on its defense projects.  In fact, so many Chinese have returned to their home country from Las Alamos that they have been nicknamed the “Los Alamos Club.”

One example is Professor Chen Shiyi who was deputy director of the Los Alamos Center for Nonlinear Studies when he was recruited in 1999 to move back to China in 2001.  He became director of the State Key Laboratory at Beijing University.  There, he is believed to have been involved with developing a Chinese hypersonic glide vehicle that could reach speeds ten times the speed of sound.  Such vehicles could deliver nuclear warheads anywhere in the world at speeds which would be too fast for any current anti-missile defense system to counter.  Professor Shiyi is also believed to have been involved in designing a hypersonic wind tunnel testing system in China; the only tunnel of its kind known to exist outside the United States.  He is now leading China’s Southern University of Science and Technology whose aim is to become “China’s Stanford.”

China’s assertion of military presence in the East and South China Seas has strategically preoccupied the United States and placed enormous strain on its military resources, particularly the Navy.  Less attention has been paid to the looming strategic threat posed by China’s surge of foreign economic development programs, including the colossal One Belt/One Road project.   When accomplished, One Belt/One Road will create a fully integrated Eurasian infrastructure for trade and commerce, stretching from China’s eastern coast all the way to Europe, the Middle East and Africa.  Port development projects of huge scope are also underway toward the south in Pakistan and Myanmar.  China is funding the construction of a port in Gwadar, Pakistan, whose ultimate aim is to offer port facilities on the Indian Ocean that dwarf those of Dubai.  When these projects are complete, they will bring China historically unprecedented maritime southern access to the Indian Ocean and sea routes to Africa.  The amount of money that China is spending on all this is staggering, more than $1 trillion.  

On top of that, China is also building a “Digital Silk Road” which will provide a state of the art, closed telecommunications and even space communications system for the entire Eurasian landmass.  Combined with its formidable technological advances in artificial intelligence, and state-controlled electronic security systems, it is hard to see how China will be anything less than the ultimate global hegemon, uniting much of the Eurasian continent in a closed economic infrastructure centered on nontransparent Chinese governance values, antithetical to Western democratic principles. 

China also quietly uses its vast cash resources to preach the superiority of the Chinese model in media, think tanks, universities, and international organizations.  China’s Confucius Institutes have created what Rachelle Peterson has called a “Trojan Horse” in the heart of American higher education, disseminating favorable Chinese narratives under the guise of building closer cultural relations.   Ultimately funded by the Chinese Government, hundreds of these Institutes operate in universities across the United States, but their outreach comes with financial strings attached, pressuring self-censorship on professors, and undermining academic freedom and independence.   The University of Chicago and Penn State recently severed their relationships with Confucius Institutes.

China’s initially favored client states have been other authoritarian countries, including Iran, Russia, and North Korea. Increasingly, weaker democratic nations such as Pakistan and Iraq have been enticed to climb into the web lured by China’s markets and capital investment. Its economic clout is even beginning to produce political influence in the heart of the EU and NATO.

China is buying Greek debt and investing billions in the port of Piraeus to make it “the dragon head” at the western end of the One Belt One Road project. In June, Greece blocked an EU statement at the UN that would have criticized China’s human rights record.  That Greek veto came immediately after a summit meeting in Beijing where Greek prime minister Alexis Tsipras signed billions in new investment agreements with Chinese companies.  China has also promised to invest billions for a railway for Hungary, and that country recently voted to block an EU statement on the South China Sea.  As Chancellor Merkel, has said, “Seen from Beijing, Europe is an Asian peninsula.”

During the Cold War, the Soviet Union aggressively used diplomacy, foreign aid, and military threat to compete with the West.  The Chinese approach is more subtle and benign on the surface but more dangerous.  If countries are to avoid falling under the sway of the closed Chinese economic system, the United States will have to fashion a new approach that relies as much or more on economic national security strategies, as on military alliances and classic diplomacy.

Key elements will have to include an array of policy initiatives. Much discussion has already focused on the need to address Chinese restrictions on foreign direct investment into China; on Chinese intellectual property theft; on China’s acquisition of strategically important businesses, and on its use of unfair trade practices generally to compete with western countries.  The need for the U.S. to build strategic, free trade agreements with other regions, and to update its aging infrastructure has also been recognized.  Less attention has been given, however, to such issues as technology transfer control, immigration and foreign aid. 

The United States and its allies must consider bringing back a new version of Cold War, Soviet Bloc-style export controls. China’s open access to dual-use technology, adaptable to military use, must be addressed and regulated.

The United States will also have to rethink its immigration policies. Currently, approximately over 300,000 Chinese students are enrolled in American universities, gaining broad access to cutting edge know how.  Access to education on scientific knowledge with military applications and related employment in the U.S. defense industry must be controlled.

On foreign aid, the United States no longer has the long-term economic wherewithal necessary to match China’s aid and development programs.  Since the start of the 21^st century, China has already matched the United States as a classic foreign aid provider, although its programs are opaque and far harder to track.  The vast American wealth that produced the Marshall Plan to resuscitate Europe after World War II and save it from Soviet envelopment no longer exists.

U.S. aid programs have been criticized as insufficiently coordinated with the accomplishment of immediate geopolitical interests.  Many projects focus on general goals, including the humanitarian elimination of extreme poverty, pandemic disease, “poor governance,” and food insecurity.  African countries are beginning to vote more and more as a bloc in support of China at the United Nations.  Latin America countries are beginning, as well, to move in that direction.  U.S. aid programs need to be specifically targeted to help reverse such trends.

To counter China’s rising power and influence, the United States must also find ways to leverage the dynamism and wealth of the U.S. private sector into competition with the closed Chinese business model across Eurasia, Africa and Latin America.  U.S. taxpayer cash for classic humanitarian projects will not be enough. As Justin Muzinich and Eric Werker have suggested, one solution is to create investment tax credit incentives to promote sound U.S. private investment in strategically designated countries.  The program could adapt from one that was successfully developed in 2000 to promote investment in poverty-stricken U.S. communities. The idea has worked so well that it has created more U.S. private sector applicants for tax credit projects that can be doled out.  The same approach could be adapted to tax credits by private businesses for foreign aid.

Ultimately the United States must come to grips with the reality that China’s economy is already as large as the United States and will only get bigger.  The permanent shift in power dynamics that this is causing is only beginning to be understood, much less accepted.  The post-World War II era of American economic predominance is eroding, and a new balance of power with China is rapidly forming.  As Secretary of Defense James Mattis has noted, the United States will have to work with its allies to acknowledge these realities, developing realistic foreign policy strategies that will rely as much on economic tools and diplomacy as on “more ammunition.” 

Ramon Marks is a retired New York international lawyer.